Yahoo Holders Turn Up Heat After Microsoft Deal Talks Fail

SAN FRANCISCO -- Yahoo Inc. Chief Executive Jerry Yang Monday had to tangle with some big shareholders who were displeased that he didn't reach a deal to sell his company to Microsoft Corp. at a sweetened price.

"I'm extremely disappointed in Jerry Yang," said Gordon Crawford, a portfolio manager at Capital Research Global Investors, which owns over 6% of Yahoo's shares. "I think he overplayed a weak hand. And I'm even more disappointed in the independent directors who were not responsive to the needs of independent shareholders."

At issue was Yahoo's stance in negotiations with Microsoft Saturday that the company was worth $37 per share, while Microsoft said it was prepared to offer $33. Some of Yahoo's major shareholders had by late last week signaled to Yahoo that they were open to a deal around $33 or $34 per share, according to people familiar with the matter.

"It's evident that most shareholders would have been perfectly happy with a transaction in the $34 range," said Mr. Crawford of Capital Research Global Investors, a division of Capital Research & Management Co. The parent concern in total owned over 16% of Yahoo's shares according to the latest available regulatory filings, making it Yahoo's largest shareholder.

With Microsoft's withdrawal of its offer Saturday, and a sharp slide in Yahoo shares Monday, some investors are asking why Yahoo didn't work harder to bridge the price gap with Microsoft. Any investor dissatisfaction could potentially feed into calls to unseat Yahoo's board at its next annual meeting or efforts to press Yahoo's directors to go back to Microsoft to try to strike a deal. Yahoo late Monday announced it would hold its annual shareholder meeting on July 3, setting a May 15 deadline to receive any new nominations for Yahoo directors.

A manager at another major shareholder said the firm was "comfortable with Microsoft's price," and had communicated to Yahoo last week that it would accept a deal in the approximate range of $33 or $34 per share.

A manager at a third major Yahoo shareholder said some investors were pressing Yahoo to "reopen the dialogue" with Microsoft about possible deals. "The shareholders are pretty irate," the manager said.

Yahoo's Mr. Yang and the company's chairman Monday defended Yahoo's actions. "Listening to shareholders is very important but you'll get lots of points of view," said Yahoo Chairman Roy Bostock in a joint interview with Mr. Yang Monday. "In the final analysis the independent directors of the board had to make a determination of what our position would be when we put the first price on the table," he added, saying that Yahoo's board had not named any price before Saturday.

"We said, considering all of these hard data, what we should do is say we think a fair value for the company is $37. It was not a take-it-or-leave it statement," Mr. Bostock said. He said Microsoft did not respond to that price other than to withdraw its offer.

One person familiar with the matter said Yahoo's board saw $37 as a starting point in what was expected to be a negotiation. Some board members may have been prepared to accept a lower price from Microsoft -- perhaps as low as $34 -- if Microsoft had continued negotiating, this person says.

Some of the major Yahoo shareholders were upset that Mr. Yang and cofounder David Filo were the ones who represented Yahoo in the discussions with Microsoft on Saturday in Seattle, prior to Microsoft's withdrawal of its offer. Those shareholders believe the two were biased against selling the company they co-founded in 1995.

Mr. Yang in the interview disputed the idea that Yahoo didn't want to sell to Microsoft. "There should be no question about our willingness" to sell to Microsoft, he said, speaking of himself and Mr. Filo. "We as a company and I personally have always been open to a deal with Microsoft and I hope that the last few days it was clear that we have shown we're willing to do a deal with Microsoft but that we couldn't get to an agreement on price."

As expected, Yahoo's stock took a pummeling in the stock market Monday, falling $4.20, or 14.7%, to $24.47. Analysts said the shares, which traded at $19.18 on Jan. 31 prior to Microsoft's initial $31 per share offer, were supported from falling to the same level by the possibility that Microsoft could revive its Yahoo pursuit, and that Yahoo was poised to announce a search advertising pact with Google. While a deal wasn't finalized as of Monday afternoon, Yahoo and Google were vetting a potential agreement with antitrust regulators, according to a person close to Google.

Mr. Yang said he was taking Mr. Ballmer's letter withdrawing the Microsoft offer "at face value for what it is." He acknowledged facing pressure now to deliver on Yahoo's plans for its business. "There is no celebrating here," he said. "We have a lot of work ahead of us."

By: Kevin Delaney
Wall Street Journal; May 6, 2008

Microsoft Ends Pursuit of Yahoo, Reassesses Its Online Options

Software Maker Cites Divide Over Price; The Google Factor

Yahoo Inc. Chief Executive Jerry Yang didn't really want Microsoft Corp. to buy his company. By Saturday, Microsoft Chief CEO Steve Ballmer didn't want that either, leaving both technology companies facing fundamental questions about their futures.

The failed courtship leaves Microsoft with limited options for achieving its strategic goal of expanding its presence online and may not close the door to another bid for Yahoo down the road.

In a letter to Mr. Yang Saturday in which he withdrew Microsoft's takeover offer, Mr. Ballmer cited a divide over price, saying Microsoft had been willing to raise its offer for Yahoo to $33 a share, or about $47.5 billion, and Yahoo demanded at least $4 a share more.

But some people close to the matter believe that the two sides could have found a middle ground if negotiations continued, particularly since some of Yahoo's major shareholders had signaled late last week they would support a takeover by Microsoft at a price in the range of $34 or $35 a share.

Microsoft's battle for Yahoo represented part of the scramble by technology and media giants to capture the flood of advertising dollars moving online and to block Web giant Google Inc. from extending its dominance in online-search advertising.

Mr. Ballmer had said in recent days that he was confident Microsoft could go it alone to build a competitive online-advertising business without buying Yahoo. At the same time, he had faced skepticism from within Microsoft about its ability to pull off such a large acquisition at a time when the software maker faces many other challenges. Mr. Ballmer himself had shown hints of such doubts in recent weeks, say people familiar with the matter.

He also squared off against a Yahoo that was increasingly confident that it was worth much more than Microsoft had been offering. While Mr. Yang and Yahoo directors preferred from the start that the Internet company stay independent, they were particularly emboldened by the success of a test late last month to carry search advertising from Google. "There was just nothing that showed any sign of this potentially coming on track," said one person familiar with Microsoft's thinking, who questioned Yahoo's stated willingness to sell the company to Microsoft at the right price, as it had said publicly.

Having averted a sale to Microsoft, Mr. Yang probably will have to placate shareholders who had been hoping for a deal. Analysts estimate Yahoo shares will fall to between $20 and $25 a share without Microsoft's bid to prop them up, down from their 4 p.m. close of $28.67 Friday in Nasdaq StockMarket trading.

Yahoo is hoping to seal a broader search-ad pact with Google in the coming days, but antitrust experts warn that will surely encounter intense regulatory scrutiny. And the company, which has struggled to focus and execute its plans in recent years, faces deep skepticism from investors about the financial targets it has released for 2009 and 2010 to justify its value on its own.

Microsoft's withdrawal diminishes prospects that Google will face a dramatically bulked up competitor in Web search and online advertising anytime soon. Google's runaway success at the expense of Yahoo and Microsoft in recent years was one major driver of Mr. Ballmer's effort to close a deal. Now, Google is likely to handle at least some of Yahoo's search-advertising business, and Microsoft is heading back to the drawing board to consider its own options. "It's disappointing because one would hope there would be a more balanced marketplace," said Sir Martin Sorrell, chief executive of advertising company WPP Group PLC. "Google's dominance continues."

Microsoft could still eventually end up buying Yahoo. If Yahoo's share price plummets, shareholders could intensify efforts to pressure Yahoo's board to agree to a deal at a lower price. Already several shareholders have sued the company over its rejection of the Microsoft bid.

Mr. Ballmer's letter Saturday appeared intentionally crafted to spell out to Yahoo shareholders how hard Microsoft worked - and the amount it boosted its bid-to entice Yahoo's board to enter a deal. That is a typical tactic for a would-be acquirer hoping to spur shareholder activism and one followed by Oracle Corp. last year in its bid for BEA Systems Inc. After BEA rejected Oracle's offer, Oracle withdrew its bid and its executives took great pains to spell out the effort they made to persuade BEA to enter a deal. Shareholder pressure early this year forced BEA into Oracle's arms.

The takeover standoff that began with Microsoft's unsolicited $31-a-share offer for Yahoo on Jan. 31 finally came to a head Saturday morning in a meeting between Mr. Ballmer, Microsoft Platforms and Services Division President Kevin Johnson, Mr. Yang and Yahoo co-founder David Filo at the airport in Seattle, say people familiar with the matter.

Messrs. Yang and Filo said that Yahoo directors were open to a deal at $37 11 share, and that the two founders would accept that sum as well, despite their personal desire for $38 a share, these people say. "They were saying, this is as low as we can go. There was no indication they were coming off that number," a person close to Microsoft said.

In Seattle, the two sides discussed price and strategy for several hours and Messrs. Yang and Filo returned to California expecting Microsoft might counter with another offer, according to one of the people familiar with the matter.

In a subsequent telephone conversation with Mr. Ballmer, the Microsoft CEO told Mr. Yang that Microsoft was ending its pursuit of Yahoo. Mr. Ballmer sent his letter to Mr. Yang around 4 p.m. Pacific time Saturday officially withdrawing Microsoft's offer. After hearing Messr.s. Yang and Filo's position on Saturday, Microsoft concluded that the Yahoo founders didn't really want to do a deal, according to people close to the. software maker.

People close to Yahoo dispute the assertion that the Internet company wasn't prepared to continue negotiating on price. Yahoo believed that its shareholders weren't prepared to accept a deal in the price range Microsoft was offering, people close the company say.

Though Microsoft never let go of the threat of a hostile deal, Mr. Ballmer ultimately determined that such a course would have been too destructive. Even if it ultimately won shareholder support for a hostile bid, Microsoft would likely have run into trouble with regulators, its advisers warned.

"Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo has not moved toward accepting our offer," Mr. Ballmer said in a Microsoft news release. "We believe the economics demanded by Yahoo do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal," he added.

Yahoo Chairman Roy Bostock responded in a press release, by saying, "From the beginning of this process, our independent board and our management have been steadfast in our belief that Microsoft's offer undervalued the company and we are pleased that so many of our shareholders joined us in expressing that view."

One person familiar with the matter said that the $37 a share Mr. Yang cited to Mr. Ballmer was based on the company's calculation of its value-particularly in light of alternatives such as a Google ad deal-and •not what its large shareholders were demanding. Major Yahoo shareholders had signaled by late last week that they were open to a deal around $34 or $35 per share and were optimistic that the price gap with Microsoft could be bridged, according to people familiar with the matter.

Some people close to the situation believe Microsoft would likely have won a hostile takeover battle at $33 per share. But Mr. Ballmer in his Saturday letter to Mr. Yang cited that potential Google deal as a reason that Microsoft decided not to go hostile. "Your apparent plan to pursue such an arrangement in the event of a proxy contest or exchange offer leads me to the firm decision not to pursue such a path," he wrote.
Mr. Ballmer said this was because such a deal would undermine Yahoo's online advertising sales strategy and pose regulatory and legal problems Microsoft wouldn't want to inherit.

A person familiar with Microsoft's thinking said that enhanced employee severance benefits Yahoo instituted in February in case of a change of control represented a cost that Microsoft was also reluctant to bear. Other concerns within Microsoft may have also influenced Mr. Ballmer's thinking. The Yahoo bid was driven by a small group of executives from Microsoft's online group. That group had planned for the bid process to play out fairly quickly with Yahoo entering a friendly deal.

But as time dragged on, other Microsoft executives, including some in the group over seeing Office software, ex pressed their opposition to th deal, say people familiar wit the situation. Also, concer within the company grew ove the challenge of integrating Yahoo's roughly 14,000 staff an various online services, the say. Whether these concerns affected Mr. Ballmer is hard to tell but people close to mm say he started to raise more question about the deal to his lieutenants.

Internal confusion over Mr. Ballmer's plans was rife in March at a three-day meeting of Microsoft's 150 top executives in upstate Washington. Despite exhaustive presntations on the future plans of each Microsoft business group, Yahoo was hardly mentioned. Only on the last day
did Mr. Ballmer mention the bid, in response to a question. He said few words on the topic, leadg some executives to believe was distancing himself from the deal.

As a result, Microsoft executives were surprised when Mr. Ballmer on April 5 sent a letter to Yahoo directors threatening a hostile approach if they didn't reach a friendly deal by April 26. That spurred Yahoo executives and an entourage of ankers and advisers from both sides to meet with Microsoft on April 15 at a Portland, Ore., law firm for what one attendee described as an "information-sharing session about operational isses, strategy and other issues." presentation from Yahoo included a slide that said Microsoft's offer "significantly undervalues" Yahoo.

Late into the meeting Mr. Ballmer addressed the elephant in the room: "Where are we on price?" he asked Mr. Yang, according to two people who were present. Responding to Mr. Ballmer's question, Mr. Yang repeated that the original offer of $31 a share "substantially" undervalued the Internet company. Mr. Ballmer again asked for a firm price, and Mr. Yang said he didn't have a number.

After flying back to New York on the redeye from Portland, Microsoft's advisers call with their counterparts at Yahoo to address the price issue.

During the April 18 call, Goldman Sachs banker Gene Sykes, one of Yahoo's lead bankers, said that at $40 a share the Internet company would be open to a friendly deal. Yahoo's advisers added that below that threshold there would be likely be a lot of debate among Yahoo directors, stressing that the board wasn't specifically asking for $40 at that point, say people familiar with the matter.

Microsoft and its advisers believed that by asking Yahoo for a price they were sending a clear signal that they were willing to pay more than the original bid of $31 a share. But they viewed an asking price of $40 a share as an unrealistic starting point.

For more than a week afterward, there was silence between the two camps. On Saturday, the deadline Mr. Ballmer had set came and went without any movement.

On the following Tuesday, April 29, Mr. Yang called Mr. Ballmer and told him Yahoo might be open to a deal below $40. He described $40 as the "bankers' view," not the board's, according to two people close to Microsoft. Yahoo Chairman Roy Bostock also called Mr. Ballmer and, along with Mr. Yang, urged the Microsoft 'CEO to sit down with Yahoo to kick-start discussions.

On Wednesday, Mr. Ballmer arid Mr. Yang met at Yahoo's law firm in Palo Alto, Calif., the people familiar with the matter say. At the meeting Mr. Yang signaled that Yahoo could accept less than $40 a share.

People close to Yahoo said that Microsoft indicated at Wednesday's meeting it could raise its bid per share a "couple" or a "few" dollars. But Yahoo learned that Microsoft was willing to make a specific offer of $33 a share only in Mr. Ballmer's letter to Mr. Yang Saturday these people said. "We did not know what the offer was," said one person close to Yahoo.

People close to Microsoft say they had made it very clear to Yahoo by the end of last week that they were prepared to offer $33, and that at that price the software maker was "near the end of the rope." On Friday, Microsoft general counsel Brad Smith called Ron Olson, a lawyer for Yahoo's board, and told him Microsoft was prepared to pay $33, according to people familiar with the matter.

During their talks last week, Microsoft and Yahoo at least briefly discussed the possibility of Microsoft's buying just Yahoo's Web-search business alone, say people familiar with the matter, though they never reached an agreement on that either .. One person involved in the negotiations described the search-business talks as a "sideshow."

While Microsoft could eventually pursue Yahoo again, people close to the two sides said they didn't believe Saturday's withdrawal was a negotiating tactic designed to pressure Yahoo to accept a lower offer. Yahoo will now likely face pressure from its investors to justify why it couldn't reach a deal in the range of $33.

In addition to the Google negotiations, Yahoo has also been in discussions to merge with Time Warner Inc.'s AOL Internet unit, under an arrangement in which Time Warner would hold a roughly 20% stake in Yahoo, people familiar with the matter said. But Microsoft's withdrawal of its Yahoo bid could shake the AOL discussions off course. It is possible, for example, that Microsoft will become a suitor for AOL, say people familiar with the matter.

Microsoft's next course of action, say people familiar with the company, will likely be to try to form a tie-up with another Internet company that could pull more consumers and advertisers to its Internet services such as Web search.

In an interview on Thursday Mr. Ballmer noted that few Internet companies have the size that Microsoft would need to immediately get a boost to its business and market share in Internet advertising. Among them, he listed Facebook Inc., AOL and MySpace, the social-networking service owned by News Corp., which also owns Dow Jones & Co., publisher of The Wall Street Journal.

By: Kevin Delaney, Matthew Karnitschnig, & Robert Guth
Wall Street Journal; May 5, 2008

Internet Says: 'Me Want Cookie'

The last time cookies became a matter of public debate was when the "Sesame Street" character Cookie Monster was accused of encouraging poor eating habits among toddlers. Today's controversial cookies are the small text files that track where people go online. Web sites do a poor job of explaining how and why this information is used, even as details about our lives are increasingly knowable online. Risks to privacy make this a race between smarter self-regulation on the Web and threatened new regulation by the Federal Trade Commission.

Most privacy advocates understand that advertising pays for the otherwise free Web, but worry that cookies can be used for more than matching advertising to individual interests. Some want a "do not track" approach on the Web, similar to the "do not call" rules that block unwanted marketing phone calls. This sounds attractive but could undercut much of the marketing power of the Web.

Even those of us who are enthusiastic about using the Web for what it does best, including access to highly customized information, agree there's something potentially creepy about cookies. How are personal data used? Are our names, addresses and financial and health records really secret? Is anonymity permanent? These questions come just as what technology can do is changing our expectations about what information remains personal. We worry about cookies despite many of us voluntarily becoming open books via sites like MySpace, Facebook and LinkedIn, which are designed to share personal information that until recently would have been considered confidential.

The cookie debate reflects the tension between what technology will allow and what privacy we expect. One problem is that Web sites and marketers have failed to explain why cookies are harmless. Cookies simply indicate where users have been and do not include sensitive information like credit cards or Social Security numbers. When data about Internet usage are tracked, it's in an anonymous, aggregated way. Cookies mean people see personally relevant advertisements. Web sites use cookies automatically to localize news, weather and sports for users, and designers mine tracked data to improve user experiences. Cookies helpfully remember registration and other personalization.

A group called the Center for Digital Democracy urges more privacy protections by arguing that "Our 'virtual' identities may be composed of discrete and disassembled bits of information about ourselves." The group objects that the Web's purpose is "to get individual consumers to behave or act in ways that favor or reflect the marketer's goal."

For some, that's the point. "To paraphrase the famous New Yorker magazine cartoon, when you're surfing the Internet, it's still true that nobody knows you're a dog. But providers can learn that you like dog biscuits, and serve you content and ads accordingly," argues Randall Rothenberg, president of the Interactive Advertising Bureau. "If politicians restrict it unthinkingly, advertising relevance will diminish, and spam will have a renaissance."

Information that is aggregated offline usually is not seen as threatening. We don't object when marketers track us by ZIP Code, age or sex, or when our cars are counted by traffic surveyors, or when we get benefits once tagged as good customers. And there's at least an implicit bargain in the case of the Web: In exchange for seeing targeted advertising, we get access to Web sites, usually free. Internet advertising was more than $20 billion last year. Some 500 million people around the world got free email, and some 200 million Americans accessed free search engines.

There are efforts to break down cookies into less potentially personally identifiable details – "crumbled cookies" – but this is technically complex. As Google CEO Eric Schmidt put it, "What we've discovered about cookies is that every question leads to a one-hour conversation." What is clear is that intentionally releasing personally identifiable information is unacceptable. When Facebook alerted people about purchases by other members, it quickly had to drop the feature.

Scholar Joseph Turow has identified a "culture of suspicion." People don't understand how the Web works, so fear they are being spied on and manipulated. Many Web sites, however they actually use cookies, contribute to the skepticism by burying disclosure deep inside privacy statements. For a counterexample of full disclosure, take a look at the All Things Digital Web site, from the Journal's Walt Mossberg and Kara Swisher (http://allthingsd.com/trackingcookies/).

People involved in building the Web are rightly proud of the openness of the digital culture. Most consider that cookies cause no harm and are key to the growth of the Internet, but many Web users feel left in the dark about how information about them is used and not used. Unless people can be reassured, there is a real risk that some day soon we'll find the untested hands of regulators in the cookie jar.

By: L. Gordon Crovitz
Wall Street Journal; May 5, 2008

Housing Bust Fuels Blame Game

Democrats Seize On Opponents' Role; Bipartisan Failures


As the falling housing market shakes financial institutions and pummels Americans in an election year, the nation's economic woes have surged to the top of voters' minds. The timely question: To what extent are politicians and regulators at fault?

Democrats are quick to blame Republicans, who were in power during the housing bubble and subprime lending frenzy. For years, America's leaders failed to restrain the markets, companies, investors and consumers from the missteps that led to the most pervasive financial crisis in decades.

But in hindsight, the failure stretches across government and across party lines. At bottom are two strong currents. From the Republican president to urban Democratic congressmen, homeownership was pushed as an overriding and unquestioned goal. And many significant attempts at regulation were obstructed by the prevailing belief that the economy did best when financial markets operated as freely as possible.

The Bush administration coupled cheerleading for homeownership with pressure on government-sponsored mortgage lenders Fannie Mae and Freddie Mac to provide funding for riskier mortgages. Both Democrats and Republicans stood by as Fannie and Freddie invested heavily in securities backed by subprime loans. Democratic congressmen pushed a federal law to restrain lending practices later discredited, but Republicans with some Democratic allies blocked or countered with weaker versions.

And at the Federal Reserve, Chairman Alan Greenspan, revered by both parties for his economic management, resisted using the Fed's authority to more aggressively regulate lender behavior.

The blame spreads beyond Washington, to state capitals. In California, home to most of the country's subprime lenders, Democratic state lawmakers didn't support laws that would have imposed tougher regulations on a prized local industry. Politicians of all stripes cheered on the lower interest rates that sparked the boom in housing and excesses in credit.

Now, as Washington scrambles to repair the damage, momentum appears to be swinging back toward a more significant role for government in the American economy. Congressional Democrats have proposed the federal government guarantee up to $400 billion in troubled mortgages if lenders first write down their value. The Bush White House, which opposes the use of public money to bail out borrowers and lenders, is signaling it is open to compromise.

It is impossible to know whether a different approach to housing and financial regulation would have produced a different outcome. As in the 1990s stock-market bubble, many victims began as willing participants seduced by ever-rising prices and easy credit.

One thing is clear. The nation gorged itself on home-buying, something once considered as American as apple pie. "Let's be honest with ourselves," Richard Syron, chief executive of Freddie Mac and a former Carter Treasury and Federal Reserve official, said in December. "We went crazy as a country with the goals...saying, 'Everybody's got to have a house.'"

Below, a look at what went wrong.

Pushing the Dream
As far back as the Civil War, owning a home has been associated with civic virtue and moral behavior. Democratic and Republican administrations alike sought to raise homeownership through subsidies, tax breaks and dedicated agencies.

When George W. Bush took office, that push became a pillar of his "ownership society" campaign. "We want everybody in America to own their own home," Mr. Bush said at a housing conference sponsored by the White House in October 2002. Earlier that year, he issued a "challenge" to lenders and others in the industry: Create 5.5 million new minority homeowners by the end of the decade. In 2003, he signed the American Dream Downpayment Act, creating a program that would offer money to the poor so they could secure a first mortgage.

These challenges came just as the lending industry was finding that subprime loans could be very profitable, at least in the short term. The administration's push also bolstered industry claims that such loans -- made to people with weak credit records -- were answering a vital social need.

Homeownership is "our mission," Angelo Mozilo, chief executive of Countrywide Financial Corp., a giant mortgage lender, said in a February 2003 speech. Citing Mr. Bush's drive, Mr. Mozilo said lenders needed to bring the rate of minority homeownership closer to that of whites. One answer, he said, was to stop requiring sizable down payments from people who couldn't afford them.

Countrywide and other lenders soon were promoting mortgages that allowed subprime borrowers to buy homes with little or no money down. The percentage of subprime borrowers who didn't fully document their income and assets grew from about 17% in early 2000 to 44% in 2006, according to data from First American CoreLogic, a research firm in San Francisco.

Subprime was initially aimed at people with weak credit. But by 2005 and 2006, lenders encouraged many types of better-off borrowers to take such loans, including people with large incomes who wanted to speculate on rental housing. Many subprime loans were made to refinance low-income people who already owned homes, often loading them up with more mortgage debt and creating the risk of foreclosure.

Government-sponsored companies that buy and guarantee mortgages also joined the subprime fray. In 2002, the Bush administration began criticizing the companies, Freddie Mac and Fannie Mae, saying they were "trailing" the rest of the mortgage market in terms of their financing of homes for low-income people and minorities.

To push Fannie and Freddie, the Department of Housing and Urban Development, or HUD, eventually required that a higher percentage of loans they fund go to low-income borrowers. The pair met HUD's requirements partly by buying the AAA-rated portions of mortgage securities created by Wall Street firms and backed by subprime home loans. After the initial low-payment period, many of those loans proved unaffordable to borrowers and are now going into foreclosure.

The homeownership rate, which rose from 65% in early 1996 to a record 69% in 2004, has since fallen below 68% and is almost certain to fall further as foreclosures rise and credit tightens for first-time buyers. Moody's Economy.com forecasts that three million home loans will go into default in the 30 months ending in mid-2009, with about two-thirds of them resulting in foreclosures.

HUD says minority homeownership has increased by about 3.1 million since mid-2002 -- more than two million shy of President Bush's goal. The Bush administration is "proud" of having pushed for more minority homeownership and never favored reckless lending, says Tony Fratto, a White House spokesman.

From the time subprime took off in the mid 1990s, legislators and regulators tried to balance two conflicting goals: increasing low-income families' access to credit and minimizing the potential for abuses by lenders. As home prices soared, tighter curbs usually lost out to a laissez-faire attitude in tune with the ruling Republicans. The result: Congress blocked legislation and the Fed was slow to regulate.

Congress Adrift

In 1999, Democrats, inspired by a groundbreaking antipredatory lending law in North Carolina, sought a federal equivalent. Predatory loans are typically described as those that involve excessive fees and high interest rates. Generally, such abuses occur in the market for subprime loans, those for people with weak credit records or high debt in relation to their income. Republicans, who controlled Congress, blocked the antipredatory legislation, arguing it would interfere with legitimate lending.

"Don't apologize when you make a loan above the prime rate to someone that has a marginal credit rating," Texas Republican Phil Gramm, then chairman of the Senate Banking Committee, told a group of bankers in 2000. "In the name of predatory lending, we could end up denying people with moderate income and limited credit ratings the opportunity to borrow money."

From 2000 on, Democrats continued to introduce bills aimed at safeguarding against alleged predatory lending. In 2005, Rep. Brad Miller of North Carolina and two other Democrats introduced one such bill. Alabama Republican Spencer Bachus, the Republican chairman of a House committee on mortgage lending, was interested in co-sponsoring the bill.

In spring 2006, Mr. Bachus abruptly toughened his stance, in effect killing negotiations, Mr. Miller says. Barney Frank, then a senior Democrat and a co-sponsor of the bill, says while Mr. Bachus was cooperative, the Republican house leadership didn't want any such bill reaching the floor.

Mr. Bachus disputes that the Republican leadership interfered with his efforts, adding: "I was very concerned about the subprime situation." He says Democrats were the ones who toughened their negotiating stance. Mr. Bachus notes that many of his provisions are contained in a bill that the House approved last year.

Fed's Light Touch

Even without congressional intervention, regulators had other tools to address potential abuse. But Alan Greenspan, chairman of the Federal Reserve until 2006, wanted to be sparing in their use.

In 2000, he rejected an informal proposal by then-Fed governor Edward Gramlich that Federal Reserve staffers examine the lending practices not just of banks but of their mortgage affiliates. In 2002, he rejected calls from Democrats to use the Fed's power under the Federal Trade Act to write rules on unfair and deceptive practices.

Mr. Greenspan, in an interview, said examining mortgage affiliates wouldn't have prevented fraud, and would have given shady operators the additional cover of claiming to be Fed-regulated. Regarding the calls from Democrats, he said he and the other governors were following the advice of the Fed's professional staff. More broadly, he said, Congress, not the Fed, was best suited to define "unfair and deceptive" practices and to create legislation to address such lending.

He says he erred in thinking that other investors and market participants would adequately monitor lending standards in the mortgage-backed securities market. "I turned out to be wrong, much to my surprise and chagrin," he said.

Mr. Greenspan and other bank regulators did take some steps to tighten oversight. In 2001, they barred banks from making "loans to borrowers who do not demonstrate the capacity to repay the loan." But that didn't explicitly apply to state-regulated finance companies and mortgage brokers, the entities that originated the majority of subprime loans. Many observers say the Fed also fueled the housing bubble by keeping short-term interest rates low in 2003 and 2004.

The pendulum is now swinging back toward intervention. Mr. Frank last November pushed an aggressive antipredatory lending bill through the House with the cooperation of Republicans. Among other things, the law would hold firms that package mortgages into securities responsible if those mortgages were predatory -- even if someone else, like a mortgage broker, originated them. The Senate has yet to take up the matter.

Rep. Scott Garrett, a New Jersey Republican who actively opposed many antipredatory-lending bills, says earlier action might not have mitigated the subprime crisis. He says innovation in the lending market would have found a way around even an all-encompassing bill. "Just a year ago we were talking about how great it was [that] the highest percentage of Americans ever were in their homes," he says.

A State's Blind Eye

The nation's laissez-faire climate permeated California, where subprime lending soared as home prices outraced incomes. Here, regulatory shortcomings spanned party lines. Republican legislators generally opposed antipredatory lending bills. And Democrats, who controlled the state legislature, didn't want to threaten one of the state's star industries. The state's regulators, meanwhile, were poorly equipped to oversee the booming mortgage industry.

California banks are regulated federally, some jointly with the state's Department of Financial Institutions. But the largest subprime originators were other kinds of institutions: mortgage brokers and finance companies which were overseen by the Department of Real Estate and Department of Corporations, respectively.

The Department of Corporations, which regulates more than 300,000 corporate entities in a wide variety of investment and financial businesses, has long been business friendly. Spokesman Mark Leyes says it has to strike a balance between regulating and facilitating business. "We're the cop, but we're the friendly cop," he says.

Since 2003, the department had been run by a series of interim commissioners. Preston DuFauchard, an assistant general counsel for Bank of America, was appointed and confirmed commissioner in June 2006. That year, companies regulated by the department loaned $252 billion to Californian home buyers.

But the mortgage industry wasn't the top priority. Mr. DuFauchard says his first tasks were to bring securities regulations in line with federal rules and to tackle concerns involving financial scams against senior citizens. Mortgages moved to the top of the list only in early 2007, after a high-profile California lender collapsed.

Armed with 27 examiners for 4,800 consumer-finance companies, including mortgage lenders, the department examined mortgage companies once every four years. The department checked whether these companies charged proper fees to borrowers and kept adequate capital reserves, but it generally wasn't tasked with assessing whether the loans themselves were sound.

In August 2006, the department examined Irvine, Calif.-based New Century Financial Corp., one of the biggest subprime lenders, and found no violation of state laws. What the examiners missed, because it wasn't technically their mandate to look, was the rapid corrosion of loan quality that would force New Century out of business seven months later.

That same month, the department notified Ownit Mortgage Solutions, Agoura Hills, Calif., another big subprime lender, that it was four months late filing its 2005 audit report and levied a $1,000 fine. In December 2006, unable to honor commitments to repurchase defaulting mortgages from investors, Ownit ceased all lending and filed for bankruptcy protection. Only nine months after that did the Department revoked its license.

"The Department of Corporations effectively fulfilled our obligations as state regulator of both" New Century and Ownit, says spokesman Mr. Leyes.

In January 2007, Democratic State Sen. Michael Machado pressed Mr. DuFauchard, the Department of Corporations commissioner, to adopt tougher federal guidelines for state lenders. Mr. DuFauchard began the process of approving the rules, but cautioned it could take months. Enforcing them "may be a bigger pill than the Department of Corporations can swallow with existing resources," he told the state senate banking committee.

Last summer, after soaring defaults ended the most questionable practices, the department swung into action. Mr. DuFauchard said the federal guidelines would apply to state lenders effective January 2008. He also initiated talks that led to mortgage-servicing companies agreeing to extend some initial interest rates to protect some homeowners from defaulting.

The department has added seven examiners while the number of mortgage lenders it oversees has shrunk by more than 100. It also has broader scope to audit licensees. Under a new state law, subprime and nontraditional mortgage lenders must evaluate a borrower's ability to repay the loan over its full life, not just during the period of introductory fixed interest rates. The state legislature had blocked such a provision back in 2001.

By: Greg Ip, James Hagerty, & Jonathan Karp
Wall Street Journal; February 27, 2008

In Ohio Drive, Big Labor Shows Its Fissures

An attempt to organize nurses in Ohio is pitting two of the nation's largest labor groups against each other.

The confrontation underscores divisions within the labor movement just as unions are trying to coordinate efforts to help elect a Democrat to the White House. Indeed, one union recently urged its locals to withhold dues typically used for voter turnout. More significantly, such fighting could tarnish the image of unions, which have been trying to stem the decline in membership and attract more workers, say labor experts.

The dispute between the Service Employees International Union and the California Nurses Association, which belongs to the AFL-CIO, stems from an effort by both unions to organize 8,000 nurses at nine Catholic Healthcare Partners hospitals in Ohio. The two unions are also battling for members in California.

The fight pits John Sweeney, president of the AFL-CIO, against Andy Stern, president of the SEIU, who led a movement by several unions to leave the AFL-CIO in 2005.

On Saturday, a scuffle broke out between members of the SEIU and participants in a labor solidarity conference in Detroit at which the executive director of the California Nurses Association was scheduled to speak. One attendee was sent to the hospital after cutting her head on a table, according to Chris Kutalik, editor of the magazine Labor Notes, which organized the conference.

Rose Ann DeMoro, executive director of the 66,000-member nurses' association, decided not to appear at the conference because of tensions between the unions. "Our folks are extremely upset about what happened," she said. "This is a nasty campaign."

Mr. Sweeney condemned the confrontation. "There is no justification -- none -- for the violent attack orchestrated by SEIU," he said in a statement. Mr. Sweeney called on leaders of both unions to meet to resolve their differences.

Mr. Stern, president of the 1.7 million-member SEIU, denied that his union orchestrated an attack and said his protesters were "assaulted" by conference attendees. He said Mr. Sweeney should prevent AFL-CIO members from interfering in the SEIU's Ohio organizing attempt. "John Sweeney has the power to solve this problem," Mr. Stern said.

Kate Bronfenbrenner, a labor expert at Cornell University, said such disputes are hurting unions' ability to attract young people. "It could have huge repercussions," she said.

By: Kris Maher
Wall Street Journal; April 16, 2008

Home Sales Fall, but Signs of Stability Emerge

U.S. sales of previously owned homes declined in March as the housing-market slump continued, but two gauges of home prices provided a glimmer of hope that the downturn might be easing a bit.
Home sales in San Francisco may be down but competition is hot. Stacey Delo reports on how some homes are seeing 10 or more bidders, and in one case 22.

Existing-home sales fell 2% last month to a seasonally adjusted annual rate of 4.93 million, the National Association of Realtors said. The drop followed an increase of 2.9% in February, the first monthly gain since July. Home sales were down 19.3% from the 6.11-million-unit pace recorded in March 2007.

The languid sales pace has pushed inventories of unsold homes to a 9.9 months' supply at current sales rates. That large overhang has put downward pressure on prices for months, especially in areas hit hardest by the housing crisis.

Now, however, there are signs that prices might be starting to stabilize. The median U.S. home price rose to $200,700 last month from a revised $195,600 in February, the Realtors' report said. And the Office of Federal Housing Enterprise Oversight's home-price index showed prices rising a seasonally adjusted 0.6% in February from January, the first monthly gain since June.

Both gauges have their limitations. The Realtors' data reflect a changing mix of homes. The Ofheo index tracks homes purchased with government-backed mortgages, which excludes homes purchased with substandard loans more susceptible to the housing market's swoon.

Still, the data suggest that the declines in sales and prices may be slowing. "While it remains too early to definitively call a bottom, we continue to argue that home sales will stabilize [albeit at very low levels] by midyear," said Stephen Stanley, chief economist at RBS Greenwich Capital, in a note to clients.

Existing-home sales dropped 6.5% in the Midwest last month and 3.5% in the South; they rose 2.2% in the West and Northeast. Single-family home sales fell 2.7%, while sales of condominiums and co-ops rose 3.6%, for a second consecutive increase.

The fate of the nation's housing market could determine the shape and length of the current economic downturn. In an interview, Richard Fisher, president of the Federal Reserve Bank of Dallas, warned that the U.S. may be in for a long period of "anemic growth -- longer than two quarters." But, Mr. Fisher said, "I don't think it needs to be all that deep. We've really weathered a hell of a setback.

"This strikes deep at the heart of the ordinary, hard-working consumer," he said. "They're getting multiple whammies -- slow economic growth, job insecurity, their homes are perceived to be worth less. And they're paying more at the pump and more for food. So the consumer is really getting hammered. And yet they've held up fairly well so far. I would expect them to change their behavioral patterns."

He also said, in the Monday interview, that slower economic growth may not resolve mounting concerns about inflation because he expects only a mild slowdown in world demand. "We've been weakening and we haven't seen the price responses," he said.

By: Kelly Evans & Sudeep Reddy
Wall Street Journal; April 23, 2008

Group Health Insurance Update: UnitedHealth Slashes Forecast

Revision Reignites Fears About Industry Outlook; Net Lower Than Expected


UnitedHealth Group Inc. reported disappointing earnings and became the latest managed-care titan to slash its profit forecast, reigniting concern about the industry's outlook amid the rising cost of health care and insurance in a rocky economy.

Shares of UnitedHealth, the country's second-largest insurer by number of health plan members, fell during the day Tuesday to $33.48, their lowest point in nearly four years, and ended at $34.15, down 9.7%. The company cited accelerating medical costs and a sharp decline in commercial health-plan members as reasons for its poor first-quarter performance. Though its executives had braced the market for a possible cut in the company's profit outlook, the 10% reduction in expected 2008 earnings a share caught Wall Street by surprise.

UnitedHealth now expects earnings this year of between $3.55 and $3.60 a share, 40 cents lower than the range it forecast earlier this year. "These financial results are not acceptable for a company with our capabilities and potential," said UnitedHealth's chief executive, Stephen Hemsley, who attributed the disappointing results to "our own performance" and the economy.

Some of UnitedHealth's wounds are self-inflicted. The company has been struggling to overcome customer-service problems brought on in part by troubles integrating its 2005 purchase of PacifiCare Health Systems. It has lost some disgruntled customers in the process.

But its thornier problems appear to be more widespread. Economic woes are forcing more employers to cut back benefits or switch to plans that yield less profit, while layoffs are helping to shrink the market of jobs offering health benefits. Also, Mr. Hemsley said, more employed people decline coverage, especially with small companies.

That presses health insurers to compete for customers on price, just as UnitedHealth and some rivals report unexpected upticks in medical costs. The combined effect raises the risk costs will outrun premiums and endanger the record profit margins Wall Street has come to expect from insurers. WellPoint Inc., the largest U.S. insurer by number of health-plan members, which reports earnings Wednesday, set off a fire sale of the sector's stocks last month with a profit warning.

Excluding recent acquisitions, UnitedHealth in the quarter lost 30,000 members from fee-based employer health plans and 530,000 from plans for which it charges premiums to take on the risk of insuring. It blamed a bad flu season for a higher-than-expected 81.5% medical-loss ratio -- the share of premiums it spends on medical costs.

By: Vanessa Fuhrmans & Dinah Wisenberg Brin
Wall Street Journal; April 23, 2008

Microsoft's Core Challenge

Yahoo Bid, Online Ventures May Reflect Strategy for Life Beyond Desktop Software


Every oil man dreams of drilling a gusher. Bill Gates certainly hit one with Microsoft's core desktop and Office software. The company should sell about $35 billion of it this year, with operating-profit margins hovering at 70%. But every well eventually runs dry. Technology evangelists seem to think the company's business model of selling desktop software is sputtering. Its bid for Yahoo bolsters their case.

The threat is clear. Free software that competes with Microsoft's is appearing on the Internet. Google offers advertising-supported spreadsheets, word processing and email. Google's word processor can be used offline as well. And its partnership with online-software concern Salesforce.com, announced last week, should result in more users.

Microsoft plays down the possibility that its core business is peaking. Instead, it claims software is moving toward a hybrid model, with users employing both desktop applications and online services. It may be right. Free online programs aren't yet reliable enough for many users. And some tasks, such as advanced spreadsheet functions, take forever to do online.

Microsoft's actions tell a somewhat different story. It is experimenting with a shift to subscription-based versions of its Office programs. And like oil-rich sheikdoms turning to tourism and financial services, it has poured cash into other ventures that act as a form of diversification, like its Internet business and the Xbox games console. Microsoft's record in entering new industries is mixed. For every success like business software, there are mediocrities such as the Zune music player.

None of these efforts, however, has been as ambitious as its current attempt to extend the life of its oil wells: its $40 billion-plus bid for Yahoo. Microsoft says its offer is entirely predicated on building an advertising giant. But bringing in outside Internet expertise could prove vital if software distribution eventually shifts online.

In any case, Google's free online offerings will improve, attracting customers and putting pressure on Microsoft's profit margins. The gusher won't stop overnight, but the days of peak extraction -- and earnings -- may be ending.

By: Robert Cyran and Lauren Silva
Wall Street Journal; April 22, 2008

Yahoo Director Sues Company

As he's not allowed to take honeymoon, strange and bizarre events continue at the Yahoo offices as senior management scrambles.

Here's the latest bizarre turn of events:

Yahoo Has Fight Over Honeymoon

A Yahoo director's honeymoon has emerged as a point of contention in a legal scuffle surrounding Microsoft's pursuit of a marriage with the Internet company.

Director Arthur Kern wed on March 1 and delayed his honeymoon “to satisfy personal and business obligations, including to Yahoo,” according to a document filed by lawyers for Yahoo directors. Mr. Kern, 61 years old, will begin honeymooning outside the U.S. on May 4 and won't be able to sit for a deposition until after his return on June 9, the lawyers contended in an April 21 filing.

That irks attorneys for two Detroit pension funds leading a suit against yahoo and its board alleging that directors breached their fiduciary duties by not responding in good faith to Microsoft's unsolicited offer. The complaint cites an enhanced severance plan Yahoo's board approved that covers full-time yahoo employees in the event a takeover occurs and the employees are laid off without cause of leave for “good reason.” Mr. Kern is chairman of Yahoo's compensation committee, which approves that arrangement.

Mr. Kern referred all questions to a Yahoo spokesman, who declined to comment.

By: Kevin Delaney
Wall Street Journal

If at First You Don't Succeed, You're in Excellent Company

In her new autobiography, "Home," Julie Andrews tells of taking a screen test for MGM studios when she was 12 years old. "They needed to gussy me up a bit because I was so exceedingly plain," she writes. "The final determination was 'She's not photogenic enough for film.'"

J.K. Rowling's book about a boy wizard was rejected by 12 publishers before a small London house picked up "Harry Potter and the Philosopher's Stone." Decca Records turned down a contract with the Beatles, saying "We don't like their sound." Walt Disney was fired by a newspaper editor who said he "lacked imagination." Michael Jordan was cut from his high-school varsity basketball team sophomore year.

What makes some people rebound from defeats and go on to greatness while others throw in the towel? Psychologists call it "self-efficacy," the unshakable belief some people have that they have what it takes to succeed. First described by Stanford University psychologist Albert Bandura in the 1970s, self-efficacy has become a key concept in educational circles, and is being applied to health care, management, sports and seemingly intractable social problems like AIDS in developing countries. It's also a hallmark of the "positive psychology" movement now sweeping the mental-health field, which focuses on developing character strengths rather than alleviating pathologies.

Self-efficacy differs from self-esteem in that it's a judgment of specific capabilities rather than a general feeling of self-worth. "It's easy to have high self-esteem -- just aim low," says Prof. Bandura, who is still teaching at Stanford at age 82. On the other hand, he notes, there are people with high self-efficacy who "drive themselves hard but have low self-esteem because their performance always falls short of their high standards."

Still, such people succeed because they believe that persistent effort will let them succeed. In fact, if success comes too easily, some people never master the ability to learn from criticism. "People need to learn how to manage failure so it's informational and not demoralizing," says Prof. Bandura, who signs many of his emails, "May the efficacy force be with you!" ("I've failed over and over and over again in my life. That's why I succeed," Michael Jordan has said.)

Sometimes, the rest of the world just hasn't caught up with an innovator's genius. In technology, rejection is the rule rather than the exception, Prof. Bandura says. He points out that one of the original Warner Brothers said of sound films, "Who the hell wants to hear actors talk?" Steve Jobs and Steve Wozniak were rebuffed by Atari Inc. and Hewlett-Packard Co. when they tried to sell an early Apple computer. And sometimes genius itself needs time. It took Thomas Edison 1,000 tries before he invented the light bulb. ("I didn't fail 1,000 times," he told a reporter. "The light bulb was an invention with 1,000 steps.")

Where does such determination come from? In some cases it's inborn optimism -- akin to the kind of resilience that enables some children to emerge unscathed from extreme poverty, tragedy or abuse. Self-efficacy can also be acquired by mastering a task; by modeling the behavior of others who have succeeded; and from what Prof. Bandura calls "verbal persuasion" -- getting effective encouragement that is tied to achievement, rather than empty praise.

"I teach teachers here, and one of the things we teach them is how to build up children who have been told they aren't competent," says Frank Pajares, a professor of education at Emory University who has been a leader in using self-efficacy to nurture academic confidence. "We all have mental habits, and once they are set, they are as hard to break as stopping smoking or biting your fingernails."

It's not too late to recover. "You can develop a resilient mindset at any age," says Robert Brooks, a Harvard Medical School psychologist who has studied resilience for decades. One key, he says, is to avoid self-defeating assumptions. If you are fired or dumped by a girlfriend, don't magnify the rejection and assume you'll never get another job or another date. (Maintaining perspective can be tough in the face of sweeping criticism, though. A teacher said of young G.K. Chesteron, who went on to become a renowned British author, that if his head were opened "we should not find any brain but only a lump of white fat.")

And don't allow a rejection to derail your dreams. "One of the greatest impediments to life is the fear of humiliation," says Prof. Brooks, who says he's worked with people who have spent the last 30 years of their lives not taking any risks or challenges because they are afraid of making mistakes.

What if you really do lack the talent to succeed at whatever you're trying to do? That's a tricky question, psychologists say -- one that's on display in the early episodes of "American Idol" each season. Try to objectively assess how much you are likely to improve with training and hard work, and how much it's worth to you, or whether there are other ways to enjoy your passion -- being a coach instead of a player, for instance. On the other hand, what if Dr. Seuss had given up after his 27th rejection and not tried once more? In the words of Henry Ford: "Whether you think that you can or you can't, you're usually right."

By: Melinda Beck
Wall Street Journal; April 29, 2008

Sohu.com Profit Soars Ahead of Olympics

Sohu.com Inc. posted a nearly fivefold increase in first-quarter net profit, as advertisers shifted to online outlets and ramped up spending in advance of the 2008 Summer Olympic Games in Beijing (for tickets visit Online Tickets USA).

The Beijing online-media company said first-quarter net rose to $21.6 million from $4.5 million a year earlier. Revenue rose to $84.8 million from $33.1 million, boosted by growth across all categories.

Sohu said it expects stronger results through the remainder of this year, boosted by increase Olympics-related advertising. “Looking ahead at the remainder of 2008, we believe the growth of our brand advertising business will be even stronger,” said Sohu Co-Presidnet Belinda Wang.

The bullish outlook reflects rising Olympic ad spending in the online market, Ms. Wang said. Sohu forecast second-quarter revenue of $93 million to $96 million.

Ad sales, virtually all of which are from brand advertising, are expected to read $40 million to $41 million, and nonadvertising revenue should rise to $53 million to $55 million, Sohu said.

Wall Street Journal; April 2008

Cutting Down on Catalogs

Problem: A mailbox overflowing with junk mail and catalogs.

Solution: CatalogChoice's site, catalogchoice.org, is a free service with close to 1,000 catalogs on file that you can opt out of with one click once you register. Another free service is www.proquo.com, which stops direct-marketing mail and will walk you through the process of printing out PDF letters to mail to credit and insurance agencies to stop credit-card and insurance offers. For a fee, www.41pounds.org (named for the amount of junk mail the average adult gets in a year) will contact direct marketing and other agencies to get you off lists for credit-card and magazine offers, coupon mailers, sweepstakes entries and insurance promotions, as well as stop catalogs you specify; $41 for five years, includes a $15 donation to a nonprofit group. For $19.95 a year, www.stopthejunkmail.com provides a similar service. The consumer credit-reporting industry's Web site, www.OptOutPrescreen.com, allows you to eliminate mailed credit-card and insurance offers. If you're a DIY person, go to the site for Privacy Rights Clearinghouse (www.privacyrights.org/fs/fs4-junk.htm) for directions on getting off mail lists.

Caveats: It could take from two to four months for your requests to be processed. ProQuo makes money by selling your name to catalogs you do want to get, and the list of catalogs that you can opt in or out of is limited at this point.


By: Nancy Matsumoto
Wall Street Journal; April 29, 2008