Freddie Needs 13.8 Billion as Mortgage Defaults Worsen

Freddie Mac said it will need a $13.8 billion cash infusion from the U.S. Treasury as losses stemming from home-mortgage defaults surge and its future role in the housing market becomes cloudier.

The mortgage titan and its sister company, Fannie Mae, which were taken over by the government in early September, are losing ground in their mission to play a larger role in the mortgage market and to help prop up U.S. home prices. Their share of the U.S. mortgage market is falling, as lenders increasingly make loans insured by the Federal Housing Administration, rather than ones guaranteed by Fannie and Freddie.

Hobbled by uncertainty over the degree of federal government backing, Fannie and Freddie have been unable to raise money by selling long-term debt at desirable rates in recent weeks. That's forcing them to rely on riskier short-term borrowing, and preventing them from buying more home mortgages from lenders.

Their dwindling role is undercutting the Treasury's push for them to help drive down borrowing costs for consumers and to spur home purchases. Given their financial and regulatory constraints, neither company has much scope to buy large volumes of mortgages and push down mortgage rates, said Jim Vogel, an executive vice president at FTN Financial Capital Markets in Memphis, Tenn. "There is no clear path for them to be a major support for the mortgage market," he said.

That suggests that the Treasury itself, and the banks to which it is providing capital, will have to take a bigger role in providing funds for home mortgages.

Federal regulators seized control of the management of Fannie and Freddie on Sept. 6 under a conservatorship. At that time, the Treasury pledged to provide as much as $100 billion of capital to each company in exchange for preferred stock. The Treasury pledge calls for it to pony up enough capital to allow the companies to maintain a positive net worth.

Freddie's call for cash on Friday came as it posted a record loss of $25.3 billion for the third quarter, reflecting a $14.3 billion charge related to unusable tax credits. The loss left its assets of $804.4 billion about $13.8 billion below liabilities. Freddie said it expects to receive $13.8 billion from the Treasury to fill that gap by Nov. 29.

A Treasury spokeswoman noted that Treasury Secretary Henry Paulson reaffirmed Wednesday the pledge to provide capital as needed.

Fannie, which on Monday reported a $29 billion loss for the third quarter, still has a positive net worth. But it has warned that it might need a Treasury infusion by year's end.

The heavy losses at Fannie and Freddie have raised fears among some investors that the $100 billion of capital pledged to each company "may not actually be enough," said Ajay Rajadhyaksha, chief U.S. bond-market strategist at Barclays Capital in New York.

Secretary Paulson, in his update on various financial bailouts on Wednesday, said Fannie and Freddie "now operate on stable footing." But the companies themselves seem less confident. In securities filings this week, both Fannie and Freddie said it was unclear whether they would even exist after the conservatorship, which was expected to continue until they returned to financial health.

The companies also said they were running into conflicts among the various objectives set by their regulator, the Federal Housing Finance Agency, and by the Treasury. For instance, they are expected to support the mortgage market by buying more loans, while trying to minimize the need for cash from the Treasury. But buying more loans requires loading up on risky short-term debt that may prove difficult to keep raising. These conflicts "will likely lead to less-than-optimal outcomes," Fannie said in its filing.

Some executives at the companies are showing signs of demoralization. "No one knows what our business model is going to look like" in a year or two, one of them said recently. The regulator, acting as "conservator," has a veto over all major decisions.

One goal of the conservatorship was to drive down mortgage rates, but rates on 30-year fixed-rate loans conforming to the standards of Fannie and Freddie have remained in a range of about 6% to 6.75% for most of the past two months. On Friday, the average rate was about 6.2%, according to financial publisher HSH Associates, compared with 6.3% in early September, just before the rescue.

Foreign investors, long major buyers of debt issued by Fannie and Freddie, have reduced their holdings, partly because they aren't sure what the coming Obama administration and Congress will decide to do with the companies. Fannie and Freddie also will have to compete in the debt market with U.S. banks issuing bonds guaranteed by the Federal Deposit Insurance Corp.

As a result, Fannie and Freddie's debt costs have risen so much that they can no longer be assured of profitably using borrowed cash to invest in mortgage securities. In mid-2007, the yield on two-year notes issued by Fannie and Freddie was about 0.29 percentage point above comparable Treasury issues. That rose to 0.93 point in early September, and now stands at about 1.5 points, according to FTN Financial.

Freddie's loss of $19.44 a share compares with a loss of $1.24 billion, or $2.07 a share, a year earlier. The biggest factor in the latest loss was the charge of $14.3 billion to reflect the likelihood that the company won't be able to make use of tax credits listed on its balance sheet as assets. Freddie's loss also reflected $9.1 billion of write-downs in the value of mortgage securities. Provisions for credit losses rose to $5.7 billion from $1.37 billion a year earlier. Freddie also had a $1.1 billion loss from short-term unsecured loans made to Lehman Brothers Holdings Inc. a few weeks before that investment bank filed for bankruptcy on Sept. 15.

Fannie and Freddie buy mortgages from the lenders that originate the loans. They package the loans into securities and sell many of those securities to other investors. The two companies provided funding for 57% of U.S. home loans originated in the third quarter, down from 70% in the second quarter, according to Inside Mortgage Finance, a trade publication. The share of new mortgages insured by the FHA jumped to 26% in the latest quarter from just 3% for all of 2007. FHA-backed loans tend to be more affordable for people who are unable to put down a sizable down payment.

Housing and financial market conditions "deteriorated dramatically" during the third quarter, Freddie said, as house-price declines accelerated -- especially in California, Florida, Arizona and Nevada -- and unemployment grew.

Freddie is trying to find buyers for a rapidly growing number of foreclosed homes, totaling 28,089 at the end of the latest quarter, up from 11,916 a year earlier. Gross proceeds from the sale of foreclosed homes on average were 29% less than the unpaid loan balance in the third quarter, compared with 14% a year earlier. That doesn't take into account related costs, such as repairs and commissions to real-estate agents, and it excludes possible recoveries from mortgage insurance.

Fire Destroys Overt 100 in California Enclave

A wind-whipped brush fire in the coastal hills near Santa Barbara, Calif., ripped through one of the most expensive residential areas in the U.S., destroying more than 100 homes.

The fire was centered in the hills near Montecito, a wealthy enclave of about 10,000 residents in a Mediterranean-like setting, where large, estate-style properties are common, and homeowners include Oprah Winfrey, actor Rob Lowe and a host of top executives and entrepreneurs. The blaze broke out Thursday evening near Westmont College, a private Christian school, and soon overwhelmed dozens of nearby homes.
Flames in Montecito

Firefighters look for hot spots as wildfires burn out of control in the hills of Montecito, Calif., Friday.

The blaze spread to about four square miles and did most of its damage overnight. Calmer winds early Friday assisted firefighter efforts, but officials have not said when the fire would be contained. Gov. Arnold Schwarzenegger declared a state of emergency, and by mid-morning Friday, more than 500 firefighters from departments around the state were helping. The cause of the fire is not yet known. Only a few minor injuries were reported.

Kevin O'Connor, co-founder of Internet advertisement-technology company DoubleClick, owns an estate across the road from a former private tea garden where officials say the fire started. He said his wife arrived home Thursday evening with one of their three children and saw the flames. Mr. O'Connor was traveling. "I woke up this morning and thought our place was gone," he said Friday. "Surprisingly, it wasn't." The family worried, however, that their home could still be at risk on Friday.

Mr. O'Connor's estate, which was built in 1918, features a renovated 13,000-square-foot Italian-inspired mansion on more than six hillside acres. It is listed for sale for $35 million, though after the fire, he says, "I doubt if it will be on the market anymore."

A destroyed Porsche sits in the driveway of a house that burned in Montecito, Calif., one of the wealthiest residential neighborhoods in the U.S. The fire broke out Thursday night and burned more than 100 houses over four square miles in the coastal foothills southeast of Santa Barbara.

Property losses from the fire are likely to be high. Montecito lies along the so-called Gold Coast of California, one of the most expensive real-estate markets in the country. The median price of homes sold in the area in September was $935,000, compared with a statewide level of $316,480, according to the California Association of Realtors. Although the median home price has fallen some 40% in the past year in that part of Santa Barbara County, Montecito still boasts a relatively strong market for multimillion-dollar homes, real-estate brokers say.

In addition to historic estates, the area's neighborhoods have smaller homes, where even the lots are worth more than $1 million, said Randy Solakian, who markets estates and ranches for Coldwell Banker Previews International. He was among 9,000 evacuees, including 4,500 ordered to leave their homes.

Even several smaller homes in the fire area are worth at least $3 million, according to Suzanne Perkins, a prominent agent with Sotheby's International Realty. "We kind of dug our own grave by not allowing controlled burns," she said.

Some 27 homes with listing prices of more than $10 million are on the market. Steve Deutsch, vice president of First Choice Private Mortgage Bank, said he closed two mortgages on homes worth $10 million in the past month. One home was in the fire area, he said, but he didn't know whether it burned.

Nearly a hundred homes have been destroyed by wildfires in Santa Barbara, California. Firefighters fear many more could be in harms way. Courtesy Fox News. (Nov. 14)

Montecito has been a resort destination and refuge for the wealthy for more than a century. East Coast industrialists bought land and built large estates. Later, Hollywood stars and moguls gravitated to the community, known for a landscape that is uncommonly lush for Southern California. Eucalyptus and palm trees shade winding canyon roads. Stone walls and hedges shield vast residential estates.

Those same attractions can put homeowners at risk. The Montecito Fire Protection District, which provides full-time protection services to the area from two fire stations, says on its Web site that the last major fire was in 1990. Three previous fires since 1964 have also passed through the community, destroying houses and taking lives.

Like most communities built within California's so-called urban-wildland interface, the local fire department requires homeowners to clear the brush surrounding their homes. Montecito's homes are lush with foliage and old trees, including highly flammable eucalyptus.

The local fire agency plainly warns its citizens: "Wildland fires have always been a part of Montecito's natural environment. Areas of Montecito will burn again. This is not maybe. This is a given."

Tim Buckley, editor and associate publisher of the Montecito Journal, a local publication, said the mountains above Montecito haven't burned in decades.

For now, even the people who make a living off the area's real-estate wonders are on the run. Local agent Dan Encell says he was dining with his family last night in Santa Barbara when he learned they would need to evacuate their 4,500 square-foot house. "We took pictures and jewelry and that was it," he said by cellphone. He spoke while en route to another property he owned, a vineyard in nearby Paso Robles, Calif.

What Sneakers Say About Your Soul

When Derek Johnson was interviewing candidates for a marketing job at his tech company, one applicant arrived in a business suit. "It put us on edge," says Mr. Johnson, founder and CEO of Tatango.com. Mr. Johnson believed the job candidate was presenting a false image of himself. The suit, he felt, was tantamount to a lie.

Mr. Johnson is 22 -- an entrepreneur who dropped out of college when it got in the way of running Tatango, which enables groups to blast text and voice messages to their members. Like many of his generation, he sees traditional business attire as a form of cover-up. In his workplace, he says, "we're not trying to hide anything with our clothes."

Established companies have long hired employees whose clothing suggested they would toe the corporate line. Today, many young managers believe office attire should do pretty much the opposite: express a person's inner soul.

To older people, young people's style can be difficult to understand. Going far beyond business casual, the clothes seem either highly informal or provocatively young -- jeans, athletic shoes, tight T-shirts and miniskirts, for instance.

But young workers are replacing traditional business dress with their own complex sets of rules and subliminal messages. Their choices among brand-name items are meant to communicate substance. Rather than Gucci versus Allen Edmonds, for instance, the choice may involve Nike Air Force versus Chuck Taylors, also weather or not someone wears foot orthotics or custom orthotics.

Are business suits a lie, enabling the wearer to cover up one's true self? Or are they the armor one needs to do battle each day in the office? Share your views on Heard on the Runway.

In a way, their aesthetic represents a new kind of uniform -- one heavily dependent on corporate labels. But young people say their mix-and-match style offers them more versatility and creativity than the old uniform did.

"You know when someone's real and when someone's corporate," says Roman Tsunder, 34. As chief executive of Access 360 Media Inc., a youth-market consultant based in New York and Los Angeles, his clients include MTV and AT&T.

Mr. Tsunder says he saves a suit for some occasions, such as meetings with investors who might lose confidence if he appears too edgy. But he's careful to note that his isn't a businessman's status suit: He bought it at Zara, the fast-fashion chain. His outfit costs more when he wears Diesel blue jeans, a white J. Lindeberg belt and Prada shoes.

For a recent meeting with MTV, Mr. Tsunder wore silver Nike Air Force athletic shoes and a white collared shirt under a mint green V-necked sweater "because it's youthful." With a more conservative client, he says, he'll wear something more "aggressive," such as "a collared shirt that I found in the south of France."

Tina Wells, the 28-year-old founder and CEO of Buzz Marketing Group in Voorhees, N.J., wears a similarly broad high-to-low mix of brands to work. This includes mini dresses from Target, Chanel ballerina flats, and a lot of luxury denim. Like many of her generation, she defines her clothing by label: True Religion, Raven and Citizens of Humanity.

She founded her company, which serves clients that include Swarovski Group, at 16. "I'm not a Harvard M.B.A.-type person," Ms. Wells says. "If I were just a girl in a suit, I think it wouldn't clearly demonstrate" the degree of sophistication her company has to offer, she says.

She hasn't thrown out all the traditional rules. Ms. Wells has banned certain lace tops and asked one intern to remove her chin-piercing for work, saying, "I think we shouldn't scare the clients."

Yet Ms. Wells has also rejected the below-the-knee skirts and neat matching sweaters suggested by her mother. "The boomer generation -- they love those twin sets," she says. "I like cardigans, but not the set -- oh gosh, not the set."

Avoiding an overly matchy-matchy look has become a generation-defining choice. It's as though matching jackets and skirts suggest an overreliance on parents' stiff fashion conventions. Cynthia Johnson, Derek Johnson's 52-year-old mother, notes, "I was born in the '50s -- we had rules that you don't wear white after Sept. 30."

When Mr. Johnson got his first professional job -- an internship in midtown New York City -- his parents bought him two $900 suits at Nordstrom. But Mr. Johnson declines to wear those suits, even as he meets with venture capitalists to raise money for Tatango. He says he did wear one once to make a presentation, but he adds ruefully, "I think I wasn't really myself."

Wi-Fi on Wheels Is Steady, but Has A Speed Bump

Wi-Fi wireless Internet connectivity has become nearly ubiquitous. Whether you're at home, in a coffee shop, or even on some commercial airliners, you can get online with a Wi-Fi-equipped laptop, smart phone or portable game machine.

Now, Wi-Fi is making its way into your car. A small California company, Autonet Mobile, has teamed up with Chrysler and others to sell a service that floods any brand or model of car or truck with Wi-Fi Internet connectivity that can be used by multiple passengers and devices simultaneously. It's a dealer-installed option on Chrysler vehicles, but Chrysler dealers, and some independent auto electronic shops, will install it on any brand of car for a fee.

The system works via a special wireless router, mounted in the trunk or rear cargo area, that draws Internet connectivity from cellphone towers and then converts it into an in-car Wi-Fi signal with a range of 100 feet. This router looks like a military device, because it is ruggedized to survive jolts and vibrations, and is shielded to avoid interference with the car's electronics or with cellphone calls.

As long as they have built-in Wi-Fi, the laptops and smart phones used in the car don't need any add-on hardware or software to use Autonet. To them, it looks like any other Wi-Fi signal. And no special car antenna is needed; the router uses its own large antennas.

Personal Technology Columnist Walt Mossberg talks about San Francisco-based Autonet Mobile's Wi-Fi hookup in your car. (Nov. 11)

I've been testing Autonet Mobile in a rented Saturn Vue SUV in Washington, D.C., and its suburbs, and found it worked well for most basic Internet tasks like email and Web surfing. The router turns on when the car does, and the Wi-Fi signal shows up about 30 seconds later. However, Autonet is relatively pokey. It's too slow to be reliable for streaming video longer than brief YouTube clips, or for smooth video chatting.

Perhaps the biggest downside of in-car Wi-Fi is that it provides one more potential distraction for drivers. The company says the service is only for passengers, not drivers, but there's no technical barrier to a driver using it.

Of course, drivers already can court danger this way by using cellphone wireless connectivity on a laptop, iPhone, BlackBerry or other connected device. And that raises another question: Since you can already connect to the Internet from a car with a smart phone or a cellular data card for a laptop, why would you want Autonet?

There are three reasons. First, cellular Internet access is typically tied to a single device at a time. But Autonet's Wi-Fi service works just like Wi-Fi in your house: Multiple people with multiple devices can use it at the same time. In fact, the company envisions that the service's primary use will be to allow children in the back seat to use laptops for social networking, online games or homework; and multiple adult passengers to conduct online business or research routes and destinations.

Second, the monthly fees can be lower, at least for laptops. A typical cellular data card for a single laptop costs $60 a month. But Autonet's service starts at $29 a month for the entire car, regardless of how many devices are being used. A premium plan costs $59. The plans differ by how much data you are allowed to consume monthly. And Autonet requires no special laptop cards or software.

Lastly, the company claims that it has invented a technology that keeps the connection steadier while moving than the typical direct cellular connection. Although some videos froze on me, I never lost Autonet's Internet connection, whether moving slowly through downtown D.C. or moving faster on suburban highways and streets.

In my tests, with a laptop and an iPhone, Autonet's speeds ranged from around 100 kilobits per second to around 500 kbps -- far slower than a typical cable Internet service in a home. My average speed was between 400 kbps and 450 kbps.

There are some other drawbacks. First, the router costs $499, though that will soon drop to $399 in a holiday price promotion. Second, you have to sign at least a one-year contract, even if you pay monthly. Third, your Internet usage is limited. The $29 plan gets you just 1 gigabyte of data a month, while the $59 plan gets you 5 gigabytes. That should be plenty for most typical users, but not for those with large appetites for data.

These service fees are all-inclusive. You don't have to pay anything to any cellphone carrier. But there is also a $35 "activation fee," whose justification is murky, and installation costs are estimated at $50 to $75.

For security, you can set Autonet up with a password, but it doesn't yet use the most advanced version of Wi-Fi security. The company says that, while it can track and manage your Internet connection, it cannot determine the content of what you are doing online.

Finally, because the router is hard-mounted, you can't remove it for use in, say, a hotel room or second car.

If you're willing to invest in the router and can tolerate the slow speeds, Autonet might be what you want -- as long as you can resist using it while driving.

Consumers Hasten Retreat, Dimming Holiday Hopes

Weak October sales by the nation's retailers presage an austere holiday shopping season and a downturn that could last well into 2009, adding to calls for policy makers to stimulate the economy.

The Commerce Department reported Friday that its broad measure of U.S. retail sales dropped by 2.8% in October -- the largest monthly drop since records began in 1992. Sales have fallen for four straight months, a longer streak than during the 2001 recession, with declines worsening each month. As consumers pull back, the threat rises of a deep and prolonged recession.

"This sets up a very bad holiday season, with the risk that many stores that flourished over the last several years are going to go bankrupt," said Christian Menegatti, a lead U.S. analyst with RGEMonitor.com, a research and consulting firm. "You can't spend what you don't have. It's just not possible to continue spending if the income growth isn't there."

The fresh data could put pressure on policy makers to make new efforts to stimulate the economy, though it remains uncertain whether a lame-duck session in Congress next week will lead to quick action. Lawmakers are considering a range of options -- including new aid for auto makers and broadened unemployment benefits -- but face opposition in the Senate, which could slow action. People are cutting back on purchases of kids shoes, childrens shoes, organic lawn care, green tea, herbal tea and black tea.

"We need a huge package in the $500 billion to $600 billion range to offset the fall in consumption and investment," Mr. Menegatti said, in addition to federal efforts under way. The Treasury Department's $700 billion program focuses on recapitalizing banks to jump-start lending to businesses and consumers. Mr. Menegatti and other economists now favor a package that creates jobs and extends benefit programs, rather than doling out checks.

In comments in Frankfurt, Federal Reserve Chairman Ben Bernanke left the door open to additional interest-rate cuts or other moves to help markets and the economy. The benchmark federal-funds rate is now 1%.

"The continuing volatility of markets and recent indicators of economic performance confirm that challenges remain," Mr. Bernanke said. "For this reason, policy makers [around the world] will remain in close contact, monitor developments closely, and stand ready to take additional steps should conditions warrant."

The interest-rate decision for the Fed is a tricky one. As the fed-funds rate gets closer to zero, new trade-offs emerge. For instance, low short-term rates make it harder for money-market funds to cover their expenses.

And it isn't clear how effective further rate cuts would be. Though the Fed's target is formally 1%, the actual funds rate -- a rate charged between banks when they lend out reserves -- has been trading below that level for several weeks. That is in part because the Fed has flooded the financial system with cash, creating a mountain of excess bank reserves that push rates lower.

Meanwhile, a report Friday from the Labor Department found import prices fell by 4.7% in October, the third straight month of declines, as sluggish demand for goods world-wide continues to push down prices. Even excluding a 16.7% drop in petroleum prices, import prices declined.

The beleaguered U.S. consumer isn't feeling much relief, even from lower gasoline prices. A survey out Friday from Reuters and the University of Michigan found consumer attitudes hovering near multidecade lows. Consumer sentiment inched up to 57.9 during the first part of this month, compared with 57.6 in October, and a low point of 56.4 in June.

Beset by high levels of debt and unemployment concerns, many Americans are paring spending. Consumption, which drives more than two-thirds of U.S. economic growth, declined in the July-through-September quarter for the first time since 1991, and by the most since the early 1980s recession.

"I'm not spending. I'm really not," said Aviva Singfer, of Elizabeth, N.J., as she watched her 4-year-old granddaughter ride a carousel on Thursday at the Garden State Plaza mall in Paramus, N.J. "I'm just buying what I need. If anything can make it to the next season, that's what I'm doing. I'm trying to be really tight."

Ms. Singfer, an elementary school teacher, says she and her husband drew the line on discretionary spending in September, when financial markets plunged. "That's when we said 'This is the time to tighten up. No extra expenses. No disposable income.'"

On Black Friday -- the day after Thanksgiving -- many retailers offer sales and extended hours to jump-start holiday shopping. With the kickoff less than two weeks away, consumers seem in no mood to spend.

George Grund, an elevator and bridge maintenance worker from Staten Island, N.Y., isn't buying gifts this holiday. "There's not going to be any presents this season," he said while shopping at a Wal-Mart in Secaucus, N.J. "I normally do a little bit but not this season. It's just going to be tight all the way around."

U.S. Cellular Is Still Standing, For Now

As AT&T's proposed acquisition of Centennial Communications demonstrates, the market crunch isn't stopping consolidation in the wireless sector.

The deal should put the spotlight on Telephone and Data Systems, whose 80.8% owned U.S. Cellular is one of the last regional wireless carriers standing. Serving 6.2 million customers, U.S. Cellular is an obvious acquisition candidate for Verizon, although that company's pending purchase of Alltel means any deal could be some way off.

Even so, TDS stock, down 55% to $28 since the start of the year, is cheap. At its current market capitalization of $3.2 billion, and adding net debt of $630 million, enterprise value is about three times projected 2008 earnings before interest, taxes, depreciation and amortization. AT&T's offer for Centennial values that company at nearly seven times Ebitda. AT&T is trading at around five times.

There is reason to believe TDS's controlling shareholders, the Carlson family, aren't looking for an exit. Shareholder Southeastern Asset Management stated in a filing in May that TDS last year rejected an all-cash offer from a "well-resourced strategic acquirer" at a 50% premium to the then-market -- nearly $100 a share. TDS won't comment.

Southeastern has tried to squeeze TDS by voting against directors. Shareholder Gamco is considering running its own slate. Competition is likely to be more effective. If TDS stays independent, a bigger rival could decide to enter U.S. Cellular's markets by building towers rather than paying U.S. Cellular roaming fees.

Self-interest should drive a deal in the end.

D.C. Schools Chief Scores Gains, Ruffles Feathers

WASHINGTON -- Barack Obama just got elected promising to bring change to Washington. Michelle Rhee is already on the job.

Ms. Rhee, chancellor of the District of Columbia Public Schools, is trying to revamp a dysfunctional school district with wide disparities in student performance and a perception that tenure protects substandard employees. Her top goal: reduce performance disparities between wealthy white students and poor minorities in a system where about 85% of the students are African-American.

Michelle Rhee has closed 23 schools and fired more than 250 teachers as schools chancellor in Washington, D.C.

The school system is doing "an abysmal job," said Ms. Rhee, who has been on the job for 17 months. According to Department of Education data, about 60% of the district's high-school students finish in four years with a diploma. By comparison, nearby suburban districts have a graduation rate of 78%. More telling: In some Washington, D.C., high schools, only about 6% of the sophomores can read or do math on grade level.

While she is realistic that children in her school district come to school with "significant challenges," Ms. Rhee said it is "complete crap" that those students can't perform at a high level because of their environments. "It's easy to blame external factors as the reason why poor minority kids aren't achieving at the same level. It's a false premise. You have to put supports and mechanisms in place around those kids, but I refuse to allow the adults in the system to use that as an excuse."

Ms. Rhee, 38 years old, is Korean-American and the single mother of two young daughters who attend school in her 46,000-student system. She graduated from Cornell, and the Kennedy School of Government at Harvard before teaching in a Baltimore elementary school. She founded the New Teacher Project, a nonprofit that recruits and trains teachers to serve in urban schools.

In Washington, she has closed 23 schools and restructured 27 others. She fired more than 250 teachers and about one-third of the principals at the system's 128 schools. She has gotten legislative authority to reclassify hundreds of nonunion central-office employees in a way that makes them easier to remove.

In her first year, she said, "the one-year gains were greater than the prior four years altogether." The number of elementary-school students reading at grade level improved 8%; in math, the improvement was 11%. The number of secondary students on grade level has risen 9% in each category.

Washington Mayor Adrian Fenty "did not hire me to make the adults in Washington, D.C., happy," said Ms. Rhee. "He hired me to fix the schools and educate their children."

Ms. Rhee's visibility shot up during last month's final presidential debate when, before nearly 57 million viewers, Sens. John McCain and Obama argued over whether she supported vouchers to give parents an alternative to public schools. (She said she doesn't have an official position on vouchers, although she doesn't believe they are the solution to the school system's problems.)

After months of rapid change, Ms. Rhee has begun to run into obstacles. Contract negotiations with the local teachers union, which would be her largest overhaul to date, have broken down. One option in her proposal would allow her to give raises that would bring salaries up to $130,000 a year to teachers whose students score well on tests. In exchange, teachers would give up their right to tenure. Teachers already on the job can choose that proposal, or another that pays less but allows them to keep the protection from being fired as easily.

"When I put this plan together with my staff I said I'm going to be the hero of Washington, D.C., teachers," she said, explaining that between bonuses and salary increases some teachers could nearly double their salaries. "In this economy who's getting raises anywhere near as much? It is absolutely unfathomable that there is a real possibility this contract won't move."

Local teachers union president George Parker said it is unfair to base salaries on student test scores when such factors as lack of equipment or lack of parental involvement contribute to poor student performance. "It is not about us having incompetent teachers," he said. "You can't fire your way into a successful school system. You have to build one."

Some parents agree, like Washington's shadow senator, Paul Strauss. Mr. Strauss, who holds an elected position established in 1990 to help lobby Congress for full voting representation for Washington, D.C., said he likes the emphasis on rigorous academic standards, but hopes the classroom focus isn't on only teaching students how to take assessment tests. That is a "problem, but I see it as a national problem," he said.

Ms. Rhee said criticism that she doesn't get teacher input isn't accurate. "I think it would depend on the teacher that you ask," she said. "There are a lot of teachers in this system I hear from every day who love what we're doing."

Ms. Rhee said she also hears from her constituents at home -- her fourth- and first-grader daughters. Recently, Ms. Rhee didn't renew the contract of a principal at the girls' school. She said school parents began quizzing one of her daughters, who told the adults that it was within her mother's powers to make the decision.

"I think they will be better people in the end for having had a mother do this," said Ms. Rhee. "But along the way it is tough on them. Adults say completely inappropriate things to them."

Workers Get Health Care at the Office

Even as employers push a greater share of rising medical costs on to workers, a growing number of companies also are providing services like free check-ups, screening exams and prescription drugs that potentially can save employees hundreds of dollars a year.

Companies say the programs also will save them money in the long run. Although a few employers have long offered on-site clinics, the trend is gathering steam as more companies expect to reduce their overall health-care spending by focusing more attention on preventing illness, including complications from such conditions as hypertension and diabetes. Companies also expect employees will be more productive if they don't have to leave the workplace to seek medical treatment.

Some employers, such as Intel Corp., Walt Disney Co. and Toyota Motor Corp., are opening fully equipped on-site medical centers staffed by physicians and nurses that offer primary-care-type services. At these centers, employees often don't have to pay any fee for annual physicals or blood-pressure and cholesterol screenings. Getting treated for, say, a cold or stomachache might cost you $5 or $10, well below the typical co-payment for a doctor's office visit.

To make sure people take their medications, other companies, such as Marriott International Inc., provide insured employees with free generic prescription drugs for controlling chronic conditions like diabetes or asthma. SmartHealth Inc., a health-care-products company, does on-site melanoma screenings at its headquarters. "Phoenix, Arizona, has a bit too much UVA and UVB" radiation, says Curtis P. Hamann, the company's president and chief executive. Health insurance is very important, if you live in michigan you need michigan health insurance.

Some companies' on-site services are sophisticated enough that some workers are using them as primary-care centers. Olivia Skiffington, a marketing specialist at Pitney Bowes Inc.'s offices in Stamford, Conn., says she uses the company's workplace clinic for most of her ailments. The 27-year-old figures she has saved $200 to $300 in co-payments since she was hired in 2006.

Most recently, Ms. Skiffington visited her company's clinic for a sore throat that had lasted five days. "They tested me for strep throat and gave me the proper medication to get rid of it. It is all free, I don't have to make a doctor's appointment, I don't have co-pays, and I don't have to miss any work," she says.

Such comprehensive care is still found at only a small number of companies. More generally, employers are forcing a growing share of medical costs on workers to help pay for company health plans. Workers this year are paying on average $1,806 toward the premium for their employer-sponsored insurance, up 9.8% from last year, according to consulting firm Hewitt Associates. The figure represents 22% of the total premium. And out-of-pocket expenses, such as co-payments, are up 10.1% to an average $1,707 this year. Both types of employee contributions have doubled since 2002, Hewitt says. Many workers drive truck and those trucks need Tonneaus, Truck Tonneaus and Truck Bed Covers.

Some companies say the workplace clinics cut overall medical expenses, and thus help contain employee premiums. "We've passed our health-care savings on to team members with lower premiums, co-pays, deductibles, co-insurance and out of pocket maximums," says a spokeswoman for Toyota, which has a primary-care clinic at its San Antonio facility.

Pitney Bowes says that for every $1 it spends on its clinics, it saves $1 in health-care costs and gains an additional $1 in increased productivity. "We believe this will keep you healthier and contain costs. It is a long-term investment in employees," says Andrew Gold, Pitney Bowes's executive director, benefits planning.

Doctors groups are concerned about the proliferation of alternative treatment centers, including clinics being set up in supermarkets and drug stores. The groups caution that such clinics should augment primary-care physicians, not replace them.

"I don't blame employers for looking at what might be most cost-effective for them to help their employees and keep health costs down. But they must take the extra step" to inform the physician who cares for the patient on a continuing basis, says Ted Epperly, president of the American Academy of Family Physicians.

The academy says its suggested guidelines for retail clinics also should apply to workplace centers. These include a request that the scope of services the clinic is meant to provide be posted along with a description of the qualifications and training of the staff.

Companies say the clinics generally aren't designed to replace family doctors. However, most on-site centers leave it to patients to notify their primary-care physicians about test results and treatments they might have had at the workplace.

About 29% of big employers had or were planning to install on-site health clinics in 2008, according to a survey by consulting firm Watson Wyatt and the non-profit National Business Group on Health. The clinics are generally operated by outside providers, including Take Care Health Systems, a Walgreen Co. subsidiary that runs 366 on-site clinics for various employers, including 40 facilities offering a wide range of primary-care services. CVS Caremark Corp. and CareHere LLC also manage clinics for major employers, including some smaller facilities mainly meant to handle routine coughs and sniffles.

"The hugest impact for a company is that by getting people into wellness programs, and making the case for convenience and preventive care, you are increasing productivity and saving time" because people don't need to leave the work site, says Sue Adams, Intel's global health and well-being manager.

Intel last month opened two large medical centers, one at each of its two facilities in Chandler, Ariz. The centers, each of which has a full-time doctor and registered nurses, provide, among other things, primary and urgent care, lab services and physical therapy. Intel also has less-comprehensive clinics in 11 other locations.

Here's a guide to some of the latest medical perks companies are offering:
Prescriptions.

You can already save money with most employer-paid medical coverage by using the mail-order option under your plans. Companies that provide free drugs for controlling some chronic diseases include Pitney Bowes, Toyota and Marriott International. Pitney Bowes, one of the early adopters of such a program, says its cost of treating diabetic workers was reduced 14% in the six years ended 2007 and costs are down 17% for asthmatics. "By waiving employees' co-pays on some prescription drugs, we have seen more chronically ill employees remain on their prescribed regimens," a company spokeswoman says.

More companies are encouraging workers to participate in wellness or disease-management programs by lowering their health-plan premiums or deductibles or offering other incentives. SmartHealth, for example, waives the premium for employees who sign up for high-deductible plans, agree to take an annual on-site physical, abstain from tobacco and get annual dental cleanings, which are covered by the company.

Many workers can receive free short-term counseling from their company's employee-assistance program before seeking treatment on their own. These programs often provide between three and eight in-person sessions at no cost to the employee, says Melinda Down, chief clinical officer at Deer Oaks EAP Services LLC, a San Antonio firm that provides counseling services to companies. She says calls for appointments have jumped 20% in recent weeks as financial markets have slumped.

Many companies offer free annual screening tests for cholesterol and blood pressure. But some companies now have on-site labs that perform more sophisticated tests, including Pap smears for cervical cancer, tests for urinary-tract infections and prostate screening, often free.

Some employers offer immunizations, including for travel. And many companies provide free or low-cost annual vision and hearing tests on-site, at least for certain occupational groups.

Many employers make discounts available for eyewear and dental services from specific vendors even if they don't provide dental and vision coverage. Companies that don't have on-site fitness centers or programs may still offer discounted weight-control and smoking-cessation programs, and gym memberships. Check with your company benefits department.

M.B.A.s Veer Off Path to High Finance Jobs

As recruiting season begins on business-school campuses, the collapse of major banks on Wall Street has many soon-to-graduate M.B.A.s rethinking their post-graduate paths. That's especially true for students who had set their sights on a career in investment banking.

A large percentage of business-school grads head to financial careers. At schools like New York University's Stern School of Business and University of Pennsylvania's Wharton School, nearly 50% of graduates head for finance careers, with a good number of them expecting to end up at large investment banks or financial-services firms. Now, students who may have otherwise settled for nothing less than big-name investment banks are seeking smaller, boutique and middle-market investment firms that may offer more job stability. And some students, unwilling to ride out the storm, are giving up or delaying their investment-banking dreams to pursue different careers entirely.

Immediately following the Lehman Brothers collapse and news that Merrill Lynch would be acquired, students at Northwestern University's Kellogg School of Management began re-evaluating their plans, says Roxanne Hori, assistant dean and director of the career management center at Northwestern University's Kellogg School of Management. She says several major investment banks that have recruited on campus during the normal October and November recruiting season in previous years have dropped out completely this year, including Morgan Stanley and Credit Suisse Group. Others, like Citigroup, which recently revealed plans to cut its work force by more than 20,000, have scaled back. Michigan College DegreePrograms are great for anyone interested in business, and in order to get into a good school one needs private student loans.

For those whose career paths have been turned upside down, directors of career services at M.B.A. programs say that consulting, private equity and corporate finance positions within traditional manufacturing or technology companies are popular alternative avenues for students who previously planned on pursuing investment banking. "Consulting has been popular on campus this year from the company side and student side," says Pamela Mittman, assistant dean of career services and student activities at NYU's Stern School.

Maryellen Lamb, senior associate director of the University of Pennsylvania's Wharton School, says more finance-oriented M.B.A. students are focusing on function rather than industry. "I've seen a number of students saying to me 'I really want to work in finance but I don't know if I have the stomach for banking, what else can I do?' "

Linkun Li, a second-year M.B.A. student at the University of Connecticut School of Business, recently changed his focus to corporate finance and risk management from investment banking. The 30-year-old said recent market events made him change his career path. "The traditional investment-banking industry was basically wiped out with bankruptcies and mergers, and that posed concerns for me," he says. He plans to pursue these alternate paths for a few years and then try to return to investment banking once the market stabilizes.

Students who are willing to switch focus are a boon to recruiters like Brian Thomson, senior manager of university recruiting for Philips Electronics North America, who have had to compete with investment banks for candidates in previous years. He has seen a dramatic increase in interest from M.B.A. students for jobs in their finance department this year, and in some cases Philips has been the most popular company at M.B.A. information sessions.

In years past Mr. Thomson says it was sometimes a struggle to fill the eight to 10 interview slots he had set for campus visits. But on a recent trip to Kellogg he says his biggest challenge was determining which of the 60 applicants to interview. "There's a big increase in the caliber of the finance students we're seeing this year," he says, adding that the company plans on hiring more M.B.A. students than in previous years. "One door closed ... [and] now we have all of these students who are essentially free agents."

Consumer-products company Unilever U.S. has also experienced a higher number of applicants at the M.B.A.-level who say they're interested in working in the company's finance department. "We're interviewing people and hearing that they've interned with investment banks and either didn't get an offer, or received an offer and are reluctant to go that path," says Christine Eggensperger, university relations manager for Unilever. She says the increase means a wider range of talent to choose from.

The surge in interest has the attention of Julie Coffman, head of recruiting in North America for Bain & Co., a consulting firm, for different reasons. She says applications at the M.B.A. level have increased 10% to 15%. But, she says, that increase is pushing the company to do a better job vetting in order to determine the motives of applicants.

When talking to the newly interested, she makes sure they're "interested in Bain because of what we offer, not just because other avenues have closed," she says. "We don't want folks to wait out the storm for 12 to 18 months on our watch."

For those still bent on banking, turning to middle-market and small firms will give them "the option to engage in the same sort of activity for a few years, even if these firms don't carry the cachet of some of the Wall Street firms," says Richard Coughlan, senior associate dean and director of the University of Richmond's Robins School of Business. The deals they work on will be smaller or more regional, "but the actual experience [they] gain has similarities to what [they] gain at a bigger bank," he says.

Grant Garcia, a student at the school, says last December he went through recruiting for a summer position on Wall Street, at firms that no longer exist or have merged. Alumni at big New York banks have advised him to ride out the bear market by getting as much regional experience as possible, and to look back to New York in a few years. He's taking their advice and concentrating on smaller banks to find work.

Mr. Garcia and others pursuing this path will find that boutique firms and smaller banks hire only a handful of M.B.A.s each year, compared with the hundreds a big investment bank typically hires. And the influx of interested M.B.A.s is allowing the smaller concerns to be choosier.

Still, smaller investment banks say they are benefiting from a larger talent pool to choose from for positions to open next summer and fall. Peter Kies, head of the investment bank recruiting committee at Robert W. Baird & Co., a middle-market investment bank in Milwaukee, says there has been a 50% increase in interest at the M.B.A. level over last year. Mr. Kies also says that the bank is appealing to students on a national level rather than just at business schools from the Midwest and East Coast.

"We're sort of like kids in a candy store right now in terms of tracking high-quality folks," he says.

Harris Williams & Co., a middle-market M&A investment bank in Richmond, Va., and with locations in Boston, Philadelphia and San Francisco, has seen a 30% to 35% increase in applications from M.B.A. students since last year.

Stevie McFadden, recruiting director or Harris Williams & Co., says this year's class is a much more discerning group with a long-term view. "We're receiving a lot of questions about stability and what we predict our performance will be this year and next year," she says. But "we're in a position to be more selective."

Bad Debt

For many of these companies, the steeper increases couldn't come at a worse time, when the economy is weakening and credit is harder to come by.

"We can't pass these costs on to our customers; the market just won't bear it," said Daniel Lance, who owns E.CAB, a St. Petersburg, Fla., firm that produces finishes and fixtures for elevator-cab interiors.

After no increase last year, E.CAB's premiums jumped 75% to about $6,800 a month when its annual Blue Cross Blue Shield of Florida policy came up for renewal this month. Much of the jump was triggered by the hiring of a few older workers by the 25-employee firm, pushing it into a higher-cost actuarial bracket. E.CAB couldn't get a better price from rival insurers.

Rather than pass the cost on to his employees, who aren't required to contribute premiums for themselves though they do for family members, Mr. Lance said he's forgoing new wood-cutting equipment he had planned to purchase. "I just felt it was a bad time [to pass on costs]," he said. "The employees are having a tough enough time, too."

As hard as it has been for businesses to absorb ever-higher health-care costs each year, the collective premiums they paid had actually climbed at a slower rate in recent years. But as small businesses begin to receive their annual renewal notices, employers and health-insurance brokers in the South, Midwest and California report noticeably steeper rises. Some premium increases being quoted to employers are double those quoted just a few months ago.

In a nationwide survey of 30 insurance brokers released by Citigroup last week, more said insurers were raising premiums at a faster rate than those who reported slowing increases.

The clearest evidence of acceleration comes directly from insurers themselves. As they released third-quarter earnings in recent weeks, WellPoint Inc., UnitedHealth Inc. and Humana Inc. all reported less aggressive pricing by competitors in a number of markets, making it easier to charge premiums that would assure a solid profit.

"Generally speaking, we've been increasing our pricing over the last several months and last several quarters with the thought in mind that it's going to be a lot more conservative in terms of the pricing environment and we're beginning to see that," said James Murray, Humana's chief operating officer, in its earnings conference call with analysts late last month. many small firms are suffering including ones invloved in organic kids clothes, sea life jewelry, organic lawn care, natural kids clothes and equestrian jewelry.

For-profit health insurers have seen profit margins shrink this year in the face of higher-than-expected medical costs and pricing missteps, not to mention membership declines as more businesses drop or cut back coverage. While companies with 500 or more employees might have leverage to negotiate, health insurers are "being much more rigid" with smaller firms, said Edward Kaplan, national practice leader at Segal Co., an employee benefits consultancy.

Adding to upward pressure on prices could be dozens of not-for-profit Blue Cross and Blue Shield plans, whose investment portfolios have taken a beating in the recent market turmoil. In recent years, the not-for-profits have been under political pressure in their states to reduce their big surpluses from flush years by providing price breaks to customers. Analysts say they now may have more cause not to.

"Now that investment income is significantly less, we could see less concern about an embarrassment of riches and more about battening down the hatches," said Matthew Borsch, a Goldman Sachs analyst.

C. Steven Tucker, a health insurance broker for small businesses in Illinois, said his clients have been getting increases ranging between 28% and 31% this month, compared to typical increases of 18% to 20%. In Florida, brokers say many plans hit with high increases are high-deductible plans eligible to be used with a health savings account.

A few years ago, health insurers tried to win business with the new health savings accounts by charging low premiums, but since the most popular ones pay 100% of costs after a $1,500 to $3,000 deductible, their costs have been higher than anticipated. "Now the insurers are catching up," said John Sinibaldi, an employee-benefits consultant in Seminole, Fla.

Dottie Jessup, who owns bicycle shops in Clearwater and Palm Harbor, Fla., with her husband, Tom, said they and their 25 employees, who share premium costs 50-50, couldn't handle a 12.5% increase set to go into effect next month. "We don't know what kind of year we're going into," she said.

Instead, they went with their only other option: to raise one plan's deductible to $2,500 from $2,000 and the other to $3,500 from $2,850, in exchange for just a slight premium increase.

"Our concern is that we're getting to the point where we're wondering where this is all heading, because you can only reduce benefits and contain costs so much," she said. "What's our ability to provide benefits to our staff going to look like in the future?"

G. Leo DuMouchel, an Atlanta-area employee-benefits consultant, said that after years of negotiating smaller increases by raising deductibles and paring benefits, many of his small-business customers have run out of that option.

"They've pushed [cost-sharing] to the limit," said Mr. DuMouchel, who added he hasn't seen a premium increase for his clients below 17% since October, compared to 6% to 8% increases last summer. "They know employees can't handle any more."

Target's Profit Continues to Slide

Target Corp. posted its fourth consecutive quarterly slide in profit, which fell 24% as strapped shoppers were unswayed by the retailer's pitches for fashionable apparel and home goods.

Adding to the bleed on the company's earnings: more customers are defaulting on their Target credit-card bills. Bad-debt expense more than doubled to $314 million from a year earlier. Target caries many kinds of kids shoes, childrens shoes, organic kids clothes and natural kids chlothes.

In another effort to preserve cash as the nation's economic outlook darkens, Minneapolis-based Target said it is reining in store openings for 2010, a move that will reduce its 2009 capital spending to $3 billion from $4 billion. The discount retailer also suspended its share-repurchase program.

Target shares were off $1.35, or 4.1%, at $31.68 in 4 p.m. composite trading Monday on the New York Stock Exchange.

"The increasingly challenging economic environment continued to pressure our performance," Target Chief Executive Greg Steinhafel said in a conference call with investors.

Target, which has positioned itself as a purveyor of well-designed, trendy merchandise, is facing the same sales and traffic declines as other department stores and retailers that sell discretionary products. The credit crisis, rising unemployment and continuing turmoil in the housing market are prompting consumers to buy just the basics and hunt for the lowest prices.

That trend helped Target competitor Wal-Mart Stores Inc. capitalize on its low-price reputation to notch a 10% gain in third-quarter net profit, with sales at stores open at least a year rising 3%. In contrast, Target's same-store sales fell 3.3% for its quarter ended Nov. 1. Total sales rose 1.7% to $14.59 billion, but sales were lower than the company expected three months ago, before Wall Street woes became so pronounced.

Target says its prices are comparable to Wal-Mart's on similar products. Target has seen sales increases in food, health and beauty products, but they represent a much smaller percentage of overall sales than apparel and home goods, which account for more than 42% of the retailer's revenue. Target said it plans to increase its fresh and packaged food offerings at its stores.

"Its merchandise mix is part of its current problem, but food will never be as important to Target as it is to Wal-Mart," said Adrianne Shapira, retail analyst at Goldman Sachs.

Target's Mr. Steinhafel said the company's apparel and home-furnishings sales are still faring better than the overall sector, meaning they are gaining share at the expense of competitors.

Target previously projected a same-store sales decline of between 6% and 9% for November. But November started off even slower than it expected, the company said, and if current trends persist December sales could be negative versus a year ago.

Target's credit-card profit declined 83% in the quarter, a result of the higher bad-debt expense and Target's reduced investment in the portfolio -- it sold half to J.P. Morgan Chase & Co. last spring. The percent of its credit debt that it had to write off rose to 9.6%, and is expected to rise to 10% or 11% in the fourth quarter. To offset the rise, the company said it increased its bad-debt reserves by $100 million.

Target's credit-card portfolio has deteriorated throughout this year, as customer delinquencies and write-off rates rose. As a result, it recently began issuing fewer cards and reducing spending limits, reflecting moves in the credit-card industry in general.

Target has more exposure to credit cards than other retailers. With a more-affluent customer base, Target handles a higher percentage of its sales from credit cards than does Wal-Mart, for instance. Also, it sold only half its receivables last spring, while most retailers sold off their entire portfolios several years ago.

Target posted $369 million in net profit for the quarter, or 49 cents a share, compared with $483 million, or 56 cents a share, in the year-earlier period.

Doug Scovanner, Target's chief financial officer, said the company and its advisers are still analyzing a proposal by Target shareholder and activist investor William Ackman to create a real-estate investment trust from its real-estate holdings.

Cellphone Makers Brace for the Shakeup

The cellphone industry is poised for its first major shake-up since the beginning of the decade as the global economic downturn hurts sales of handsets and components, leaving some companies better protected than others.

One bellwether of the slowdown is Nokia Corp., which makes one in four cellphones sold world-wide. The company warned last week that it expects tepid demand during the holiday season and a shrinking global handset market next year as consumers cut spending.

That news follows a range of other sobering developments in all sectors of the wireless industry. Qualcomm Inc. recently projected a dramatic contraction in its sales of cellphone chips, and wireless operator Vodafone Group PLC warned that its full-year revenue will fall short of previous forecasts.

Handset manufacturers are a leading indicator of the downturn, analysts say, because consumers during tough times are less likely to upgrade their phones when their existing ones work fine. Replacement cellphones make up 75% of overall sales.

After 15% growth in handset sales during the first half, demand is falling off. Shipments are expected to decline 1% next year, according to market-research firm Strategy Analytics. Wall Street analysts are predicting steeper declines -- as much as 9% -- next year.

"This slowdown presages a shakeout, especially among companies whose balance sheets were not in great shape to begin with," says Deutsche Bank telecom analyst Brian Modoff. "This exacerbates the pressure on the weaker players throughout the industry."

The downturn won't affect all handset makers equally. Those with high-end smart phones with the latest features, like touch-screens and fancy Internet capabilities, are forecast to weather the storm best. Companies that make most of their profits in midtier phones, those with ordinary features such as a built-in camera, will have a harder time luring consumers to upgrade, analysts say.

Handset makers have moved into emerging markets to try to feed the demand for first-time cellphone buyers, but there too, sales have slackened. Bonny Joy, of Strategy Analytics, says that sales in the second half of 2008 are expected to grow at a 9% clip, slowing from 20% in the first half of the year. Sales in the Middle East and Africa are still growing around 20%, but have dropped substantially in India and China.

Among the companies better positioned for the shake-up include BlackBerry-maker Research In Motion Ltd., which this week is releasing the touch-screen Storm through Verizon Wireless. Apple Inc., whose iPhone continues to sell rapidly around the world, also is situated well. Analysts also cite HTC Corp., maker of the touch-screen G1 phone, the first based on Google Inc.'s Android software.

Motorola Inc., of Schaumburg, Ill., and Sony Ericsson are among the companies that could have a tougher time.

Sony Ericsson, a joint venture of Japan's Sony Corp. and Sweden's Telefon AB L.M. Ericsson, banked on customers paying a premium for its CyberShot camera phone and Walkman music phones. "But at the beginning of 2008, customers shifted to phones offering new display technologies and suddenly decided they weren't willing to pay that premium anymore," says Tero Kuittinen, senior analyst at Global Crown Capital LLC.

"We were among the first companies to raise the flag in mid-July about the challenging economic conditions and announced a restructuring to position ourselves for growth," said Aldo Liguori, global spokesman for Sony-Ericsson.

At Motorola, more than half of the company's sales comes from its midrange W-series phones. Management turmoil and steep cost cuts have stymied the company's ability to roll out lower-end devices or newer email phones to replace the Q series, which has sold poorly.

A Motorola spokeswoman said the company "has put aggressive plans in place to rebuild and reposition the business for the future." These include more smart phones, a Google-based phone for next year and a focus on making phones for the Americas and parts of Asia where demand for its products remains strongest.

Nokia, which has a large and diverse portfolio -- from low-end phones in India to ultrahigh-end devices -- also is in a relatively strong position, even though its smart-phone offerings have lost ground to Apple and RIM. Nokia, based in Espoo, Finland, has operating margins of around 20%, more than double its closest rival in the mass market. Nokia said it expects to maintain or slightly increase its industry-leading global market share of 38% in the fourth quarter as industrywide sales decline. Another factor is cabinets from a Cabinet Company, Motorola is making inroads on new wireless cabinet develpments.

Still, investors were apparently spooked by Nokia's gloomy forecast, sending its American depository shares down 11% Friday.

Nokia declined to comment.

Mr. Kuittinen says the industrywide sales slowdown could help Nokia by knocking out struggling rivals. "Nokia needs these forest fires to clear out the competitive threats," he says, noting that six handset makers left the mass market during the dot-com meltdown in the early part of the decade.

Compounding the problem is the credit crunch, which is spurring distributors, retailers and suppliers to conserve cash and limit inventory. "It's cascading down the chain," said Neil Mawston of Strategy Analytics.

Components makers already are feeling the heat. Motorola's former chip maker, Freescale Semiconductor Inc., has decided to exit the cellphone-chip business. Texas Instruments Co. has decided to stop making all but custom-ordered cellphone chips.

Wireless-service providers such as AT&T Inc. and Vodafone, which shares ownership of Verizon Wireless with Verizon Communications Inc., are somewhat insulated from the immediate turmoil because they don't rely on consumers upgrading handsets for their profits. Instead, the providers bank on long-term service contracts and add-on services that subscribers purchase. "Consumers aren't going to stop using their phone, so the impact on carriers will be less extreme," says Charles Golvin, a Forrester Research analyst.

Still, there are some ominous signs for carriers. Sprint Nextel Corp., which was already struggling before the economy worsened in the fall, said it is concerned about consumers being unable to pay their bills. Carriers also are taking on more financial risk in order to offer handsets at prices that will be attractive to new customers.

U.K-based Vodafone is offering the BlackBerry Storm free with an 18-month contract. And AT&T heavily subsidized the iPhone to bring it to $199. It sold 2.4 million of the devices in the third quarter -- but with $900 million in associated customer-acquisition costs and a significant impact on the company's operating margin.