Mandel: Gingrich tax plan would increase the impact of globalization on Americans

By Michael Mandel Dec 13 2011, 10:50 AM ET Eliminating investment taxes, as the presidential hopeful has proposed, would be a needless gift to investors and executives profiting off the gains from outsourcing and "global income"

Reuters

"It starts very simply: Taxes, lower taxes."

That was the first line of Newt Gingrich's explanation of how he would create jobs, given at the December 10 Republican debate in Iowa. Gingrich talked about his desire to end the capital gains tax and cut the corporate income tax to 12.5%. In addition, Gingrich has proposed a 15% flat tax as an option for all Americans, going further than the 20% flat tax advocated by Rick Perry.

On one level, Gingrich's intense focus on lower taxes fits current dogma in the Republican party, which puts tax cuts above almost everything else. He is playing to the conservative base, as a way of counteracting some of his other personal liabilities.

In Newt's plan, someone making $40,000 could pay a higher rate than a millionaire

If enacted in their entirety, Gingrich's proposed changes would turn the U.S. tax system from progressive to regressive. Someone earning $40,000 in wages could pay a higher tax rate than another person who made $400,000 a year in capital gains.

This shift from progressive to regressive is not acceptable, of course. The tax system should be a tool for reducing the stresses of inequality in the economy, not increasing it. That's especially true now, coming out of such a devastating recession where so many American are unemployed or underemployed.

But these tax cuts, which lie at the heart of the Gingrich program, would have another striking implication as well, which has not yet been remarked on. He is targeting precisely those taxes -- like the corporate income tax and capital gains tax -- that capture the gains from globalization. In other words, Gingrich is waging war on Washington's ability to tax "globalized" income, which is likely to grow faster than domestic income for the foreseeable future.

What do I mean by "globalized" income? By my definition, globalized income means funds that come directly or indirectly from the operations of U.S. companies in the global economy. The most obvious example of globalized income is the money that companies report as "rest-of-world" or foreign profits. Today, the Bureau of Economic Analysis reports that "rest-of-world" profits are running at a $450 billion annual rate, small potatoes compared to a $15 trillion economy.

However, the category of globalized income includes a lot more than foreign profits. For example, suppose that a U.S-based company is highly profitable in Asia. Even if those profits are not repatriated, the company's share price is likely to rise. If an American stockholder sells those shares and collects a $5 million capital gain, that gain is reported as domestic income. But in fact, it's due purely to the operations of that company overseas. Similarly, when the CEO of that company cashes his or her stock options, it's the same thing. The stock option gains get reported as domestic income, even though they are directly connected to the company's operations overseas.

Here's another example. Suppose that a U.S. furniture retailer switches suppliers. Instead of buying from a domestic manufacturer, they now get their furniture from a cheaper foreign manufacturer. Because of this outsourcing, corporate profits rise, and the CEO gets a big bonus. To the government statisticians, that bonus looks like pure domestic wage and salary income. However, it flows purely out of the company's ability to take advantage of the cheaper prices on the global market place.

Ordinary workers generally don't have globalized income--their wages and salaries are purely domestic, unless they happen to be working directly on exports. Globalized income flows to those people whose incomes rise when the company as a whole does well--shareholders and high-ranking executives . And those are the people who are affected by capital gain taxes, corporate income taxes, and progressive tax rates on high earners.

And here's where we get back to Newt Gingrich and his plan. The U.S. population is being separated into two groups: Those people who are benefiting from the increased globalization of the U.S. economy in their work lives, and those who are not. This is the big divide in the economy right now--and we don't need a tax proposal that just widens the gap.

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Factbox: Republicans vying to take on Obama in 2012

Republican presidential candidate and former Speaker of the House Newt Gingrich gestures as he speaks at ''The Gift of Life'' movie premiere in Des Moines, Iowa, December 14, 2011.

Credit: Reuters/Jim Young

WASHINGTON | Thu Dec 15, 2011 1:19am EST

WASHINGTON (Reuters) - Republican presidential hopefuls competing for the chance to unseat President Barack Obama in the 2012 election meet in Iowa on Thursday for one of the last debates before the state-by-state nominating race kicks off in January.

Here is a look at the candidates:

NEWT GINGRICH

A former speaker of the House of Representatives, Gingrich was the main architect of the 1994 Republican congressional election victory and author of its "Contract with America" manifesto. He ended his 20-year congressional career after Republican losses in 1998 elections.

Gingrich, 68, has overtaken Mitt Romney, who some Republicans see as too moderate, in national polls. Despite allegations of questionable business ties, Gingrich's strong debate performances and controversies surrounding some of his rivals have helped him climb into the polls.

The former representative for Georgia has been criticized for receiving up to $1.8 million in consulting fees from mortgage giant Freddie Mac and running a think tank that earned some $37 million from major healthcare companies and industry groups.

This month Gingrich came under some fire for calling Palestinians an "invented people" intent on destroying Israel.

MITT ROMNEY

Romney, 64, who lost the nomination to John McCain in 2008, has remained at or near the front of the pack among the Republican presidential hopefuls for most of the campaign, holding steady with about a quarter of the Republican vote.

Romney, who co-founded private equity firm Bain Capital, has touted his business experience as a way to attack Obama's handling of the struggling U.S. economy. Critics say he was a corporate raider who cut jobs.

He stepped in to rescue the 2002 Winter Olympics in Salt Lake City after the games were tarred by allegations of bribery by top officials and were far behind revenue benchmarks. He brought in a new management team and cut costs.

While favored by pro-business Republicans, Romney is viewed skeptically by some conservatives because he was governor of liberal Massachusetts and is a Mormon, a religion some evangelicals do not consider Christian.

Republicans have attacked him because of a healthcare plan he helped develop in Massachusetts that became a model for Obama's healthcare law. Romney defends the state law and attacks the federal version, which he has promised to repeal.

In a back-and-forth with rival Rick Perry over Romney's past support of healthcare reform, Romney offered to bet $10,000 - a quip critics say showed how out of touch the multimillionaire was with regular Americans.

RON PAUL

An anti-war member of the House from Texas who ran unsuccessfully for the party's 2008 nomination, libertarian Paul, 76, has for years pushed many of the positions that are now part of the Tea Party platform. His calls for steep cuts in the U.S. deficit and the size of government have moved to the mainstream.

A forceful debater, Paul has a dedicated following, raising $8 million in the third quarter of 2011. He receives a steady support of 8 to 10 percent in national opinion polls and while he has not broken through to the larger electorate, recent polls show him closing in on Romney and Gingrich.

RICK PERRY

The three-term Texas governor has petered out after shooting to the top of the field when he jumped into the nomination race in August.

Perry, 61, has been troubled by fumbling debate performances for much of his campaign. In a November Republican debate, he forgot the name of one of three government agencies he has pledged to eliminate if elected president.

A social and fiscal conservative, Perry has come under heavy fire from Republican rivals for relatively moderate immigration positions and an order that young girls in Texas be inoculated for a sexually transmitted virus.

Although he has never lost an election and is the longest serving governor in Texas history, his performance in debates has raised questions about whether he would stand a chance of defeating Obama and whether he has seriously considered some of his policies.

Still, Perry has proven himself a formidable fund-raiser, reaching $17 million for the third quarter.

MICHELE BACHMANN

Bachmann, 55, reached the top tier of Republican candidates after a strong performance in the first major debate in June. She has since fallen to single digits in opinion surveys.

The Minnesota member of the House won the Iowa straw poll in August and is now focusing her campaign in the state, although her support there has dropped to 10 percent or below.

Known for strong religious views and uncompromising positions on financial issues, Bachmann is seen as having little appeal to moderate Republicans or independents.

RICK SANTORUM

Santorum, 53, a former senator from Pennsylvania, made a name for himself opposing abortion rights and gay marriage while backing welfare reform. He has fought to enhance his profile in early voting states but remains far behind.

JON HUNTSMAN

Huntsman, 51, resigned in April as Obama's ambassador to China to plan his presidential run.

Like Romney, Huntsman is a Mormon. The former governor of Utah and member of a wealthy chemicals family is a moderate, and he has not won over the conservative voters who play a big role in the nominating process. He is near the bottom of many national polls.

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North Carolina governor vetoes repeal of Racial Justice Act

n">(Reuters) - North Carolina Governor Bev Perdue on Wednesday vetoed an effort by legislators to gut a two-year-old law that lets death row inmates appeal their sentences on the basis of racial bias.

The state's Racial Justice Act, which Perdue signed into law in 2009, allows prisoners sentenced to death to use statistics to determine if race was a factor in their sentencing.

The measure requires judges to reduce a death sentence to life in prison without the possibility of parole if the original sentence is proved to have been handed out with any degree of racial bias.

"I am -- and always will be -- a strong supporter of the death penalty," the Democratic governor said in a statement.

"However, because the death penalty is the ultimate punishment, it is essential that it be carried out fairly and that the process not be infected with prejudice based on race."

Republican State Representative Paul Stam, one of the authors of the bill to repeal the law, said more than 150 people are on death row and all but three, white and black, have filed motions under the 2009 law.

He argued it essentially functions as a moratorium on the death penalty while inmates file their appeals.

"We've had no executions since 2006," he said. "If this veto stands, we won't have another one for another four or five or six years. What deterrent can the death penalty be if no one is executed for 11 or 12 years?"

(Reporting by Harriet McLeod; Editing by Colleen Jenkins and Jerry Norton)

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Gingrich rise comes without big-name endorsements

U.S. Republican presidential candidate and former Speaker of the House Newt Gingrich speaks about brain science research during a campaign stop at the University of Iowa College of Public Health Medical Education Research Facility in Iowa City, Iowa, December 14, 2011.

Credit: Reuters/Jim Young

By Patricia Zengerle

WASHINGTON | Wed Dec 14, 2011 5:56pm EST

WASHINGTON (Reuters) - Newt Gingrich's surge to the top of the Republican presidential field is attracting donations and volunteers to his minimalist campaign. But Gingrich still lacks a staple of successful bids for national office: a big-name endorsement.

No prominent Republican leaders have jumped aboard Gingrich's growing but still-small bandwagon.

It is a reflection of the skepticism with which many top members of the party have viewed the former U.S. House speaker's rise in opinion polls, and adds to questions over whether Gingrich's upstart campaign will have the resources to endure a primary battle that could last into June.

By contrast, Mitt Romney, a former Massachusetts governor and the longtime leader of the Republican race before Gingrich broke away, has unfurled a long list of influential supporters.

They include New Jersey Governor Chris Christie, former Minnesota governor Tim Pawlenty and scores of state and local officials as well as Wall Street donors.

Gingrich received a nod of approval from the Union-Leader, the largest newspaper in New Hampshire, a dominant state in the nominating process because it holds an early primary on January 10.

But when it comes to major Republican office holders, "I think people are waiting and seeing to see if (Gingrich) is going to falter like so many of these other supposed front-runners" such as businessman Herman Cain and Texas Governor Rick Perry, said Republican strategist Keith Appell.

"So people are keeping their powder dry a little bit."

Boosted by strong debate performances, Gingrich became the Republican front-runner with an unconventional campaign run by only a few aides and his wife, Callista. His rise came after a staff exodus last summer seemed to have killed his campaign.

Gingrich's attraction to potential endorsers almost certainly is clouded by his past in Washington.

Gingrich, 68, alienated some Republicans during his tumultuous tenure as House speaker in the 1990s. He left Congress in 1999, two years after paying $300,000 to close an ethics investigation.

He also has a long history of making provocative statements that could alienate independent voters, such as when he recently referred to Palestinians as an "invented" people. And he has been married three times and admitted to extramarital affairs, a hurdle for him to overcome with some conservatives.

SIGNS OF PROGRESS

While it has not yielded a marquee endorsement, Gingrich's jump in the polls is beginning to pay off in other ways.

A former Gingrich aide said this week she had founded a SuperPAC for Gingrich, which is able to raise unlimited funds to back his campaign. And a Gingrich spokesman told the Wall Street Journal the campaign hopes to bring in $10 million in the three months ending December 31.

That would far outstrip Gingrich's efforts in the third quarter of this year, when he failed to reach $1 million in fundraising - a paltry amount for a national campaign that must run TV ads to be competitive.

However, Gingrich's fundraising goal would still amount to only about half the $20 million his chief rival, Romney, is projected to bring in from October through December.

More good news for Gingrich: His staff is expanding and volunteers are signing on.

The campaign said Tuesday that 60 officials from Gingrich's home state of Georgia were endorsing him, as did two Tea Party groups in South Carolina, which holds its primary on January 21.

"Newt is the most electable conservative who can clearly articulate the Tea Party agenda of lower taxes, free enterprise, smaller government and state sovereignty," Laurens County (S.C.) Tea Party President Dianne Belsom wrote in a statement endorsing Gingrich and distributed by his campaign.

Gingrich's lack of prominent supporters raises doubts about his campaign's longevity. But if he is successful in continuing to cast himself as a more conservative alternative to Romney, his campaign would epitomize the unusual nature of this year's race, analysts said.

Romney seems unable to attract more than 25 percent support from primary voters despite being widely seen as the candidate to beat among Republicans.

"This is an unconventional environment, which is why surprising things are happening," said Republican strategist Mark McKinnon. "And if Newt is the nominee, he may be the most unconventional nominee in American history."

WASHINGTON INSIDER

A Reuters/Ipsos poll on Tuesday showed Gingrich with a 10-point lead over Romney among Republicans nationwide, but showed he would fare worse in a general election contest against Obama.

Romney's team has been blasting Gingrich as an unreliable conservative and a Washington insider. And Obama's team has shifted to target Gingrich just as much as it has been going after Romney.

Romney's SuperPAC is financing a blizzard of negative advertising against Gingrich in Iowa, where another Republican candidate, Texas Congressman Ron Paul, is also assembling an army of volunteers in an effort to win the state's Republican caucuses on January 3.

Conventional wisdom is that no Republican can win the nomination without capturing the Iowa caucuses or New Hampshire, where Romney leads in the polls. Gingrich had a double-digit lead over Romney and Paul in recent Iowa polls.

For Gingrich, "the question will be, can somebody with not a lot of money stand that kind of massive negative TV attacks? In the past, negative TV attacks have worked, so we'll see," said Richard Schwarm, a longtime Iowa Republican activist and former chairman of the Iowa Republican party.

Rachel Paine Caufield, professor of politics at Drake University in Iowa, said Gingrich's supporters believe he is the best candidate to take on Obama because he is combative.

"There's a group of Republicans who really want to defeat President Obama. There's a sense that a little bit of excitement goes a long way," she said. "Any time (Gingrich) says something that's provocative, he gets attention. A lot of attention."

(Editing by David Lindsey and Todd Eastham)

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U.S. CEOs got totally deserved, completely merit-based raises of 36.47% last year

John Hammergren, CEO of healthcare provider McKesson, earned $145m last year. Photograph: George Nikitin/AP

Chief executive pay has roared back after two years of stagnation and decline. America's top bosses enjoyed pay hikes of between 27 and 40% last year, according to the largest survey of US CEO pay. The dramatic bounceback comes as the latest government figures show wages for the majority of Americans are failing to keep up with inflation.

America's highest paid executive took home more than $145.2m, and as stock prices recovered across the board, the median value of bosses' profits on stock options rose 70% in 2010, from $950,400 to $1.3m. The news comes against the backdrop of an Occupy Wall Street movement that has focused Washington's attention on the pay packages of America's highest paid.

The Guardian's exclusive first look at the CEO pay survey from corporate governance group GMI Ratings will further fuel debate about America's widening income gap. The survey, the most extensive in the US, covered 2,647 companies, and offers a comprehensive assessment of all the data now available relating to 2010 pay.

Last year's survey, covering 2009, found pay rates were broadly flat following a decline in wages the year before. Base salaries in 2009 showed a median increase of around 2%, and annual cash compensation increased just over 1.5%. The troubled stock markets took their toll, and added together CEO pay declined for the third year, though the decrease was marginal, less than three-tenths of a percent. The decline in the wider economy in 2007, 2008 and 2009 far outstripped the decline in CEO pay.

This year's survey shows CEO pay packages have boomed: the top 10 earners took home more than $770m between them in 2010. As stock prices began to recover last year, the increase in CEO pay outstripped the rise in share value. The Russell 3000 measure of US stock prices was up by 16.93% in 2010, but CEO pay went up by 27.19% overall. For S&P 500 CEOs, the largest companies in the sample, total realised compensation – including perks and pensions and stock awards – increased by a median of 36.47%. Total pay at midcap companies, which are slightly smaller than the top firms, rose 40.2%.

GMI released a preliminary report on 2010 CEO pay earlier this year, before all the data was available. Paul Hodgson, a senior research associate at GMI, said that report had shown a significant bounce but he had expected a wider sample to dampen the effect.

"Wages for everybody else have either been in decline or stagnated in this period, and that's for those who are in work," said Hodgson. "I had a feeling that we would see some significant increases this year. But 30-40% was something of a surprise." Bosses won in every area, with dramatic increases in pensions, payoffs and perks – as well as salary.

Still, there are no bankers among this year's big winners. Three of this year's top 10 earners come from the healthcare industry. Top earner John Hammergren at McKesson, the world's largest healthcare firm, made $145,266,91 last year – most of it from stock options.

The rising stock markets were especially good to CEOs, said Hodgson. Stock options were the main area that drove these outsized awards. "They got the options, the market collapsed, then it came back – and all of a sudden they were in the money again," he said.

And there will be more to come. GMI, formerly known as the Corporate Library, is expecting a rash of massive stock option bonuses as many firms awarded their top executives big option deals when the stock markets hit their lows in 2007-2008.

"There's still a lot of money just waiting in the market," said Hodgson. He described the upcoming awards as a "bombshell" likely to dwarf this year's figures.

2010 was a great year to lose your job as a CEO. Four of the 10 highest paid CEOs were retired or departing executives. Ronald Williams, former head of Aetna, a health insurer, exercised 2.4m options for a profit of $50.4m. Aetna's stock price declined by 70% from when Williams assumed the role of CEO in February 2006 until his retirement. At pharmacy chain CVS, Thomas Ryan made a $28m profit on his options. During Ryan's 13-year tenure as CEO, CVS Caremark's stock price decreased almost 54%.

Omnicare's Joel Gemunder retired last August and received cash severance of $16m, part of a final-year pay package worth $98.28m. Adam Metz, the former boss of General Growth Properties, a real estate company that specialises in shopping malls, walked away with a $46m cash bonus in 2010. GGP executives received nearly $115m in bonuses from the firm as it emerged from bankruptcy.

But this year's top earner may have his biggest payday still to come. Hammergren is due a $469m payoff if McKesson changes ownership. "Boards make these decisions, but they don't work out what happens if they stay in the job," said Hodgson.

"If they had have done, one hopes, they would have looked at each other and said: 'This is ridiculous.'"

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SurveyMonkey is now reportedly worth $1 billion

FORTUNE -- You know what's cooler than 12 million dollars? One billion dollars.

Okay, that wasn't quite as snappy as Sean Parker's exchange with Mark Zuckerberg in the The Social Network. But consider this: Dave Goldberg's "cool" music startup, Launch Media, was sold to Yahoo (YHOO) for $12 million back in 2001. Fast forward a decade, and Goldberg's new company, the decidedly prosaic SurveyMonkey (profiled here) is now valued at slightly more than $1 billion.

In a complex transaction announced on Wednesday, SurveyMonkey acquired many of the assets of MarketTools, including Zoomerang, SurveyMonkey's largest competitor. As part of the deal, TPG Capital is acquiring MarketTools and will transfer Zoomerang, ZoomPanel, a targeting service forsurveys, and TrueSample, a service used by market researchers, to SurveyMonkey. TPG Capital will retain other MarketTools assets and take an undisclosed equity stake in SurveyMonkey."These are three great products that we're excited to bring you as we integrate these tools and technologies into our core services," Goldberg, who is SurveyMonkey's chief executive, wrote in a blog post.

The deal values SurveyMonkey at slightly more than $1 billion, according to a person with knowledge of transaction, who declined to be named because the terms of the deal were supposed to remain confidential. (The New York Times reported earlier that the deal valued SurveyMonkey at "approximately" $1 billion.)

With the deal, SurveyMonkey joins a growing -- but still exclusive club -- of small, privately-held Silicon Valley startups worth more than $1 billion that includes Airbnb, Dropbox and Square. (Twitter and Facebook are both much larger and enjoy multi-billion-dollar valuations.)

The acquisition is the biggest in SurveyMonkey's history, and represents a validation of the company's "freemium" model, in which basic online surveys are free, but millions of customers pay for premium services that include customer support and the ability to brand surveys. Interestingly, that model was devised by Ryan Finley, SurveyMonkey's founder, back in 1999, when he started the company in his Madison, Wisconsin, apartment, and long before "freemium" became a buzzword on the Web.

SurveyMonkey's valuation also cements Goldberg's considerable net worth -- not that he needs the money. Goldberg is married to Sheryl Sandberg, a former senior executive at Google (GOOG), who is now COO of Facebook and is believed to own a substantial stake the social networking giant.

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Kayak: We handled this whole "All-American Muslim" thing pretty poorly

We would like to apologize to anyone who was offended by how we handled our decision not to continue advertising on All-American Muslim when it returns in January. We decided to advertise on it in the first place because we adamantly support tolerance and diversity. Our 150-person team includes people from all over the world, and from all walks of life. Our team includes people who are descended from early Europeans who came here escaping religious intolerance, and newer Americans who include many religions. We get what America is about.

For the record, we didn't "pull" our ads. Our ads kept running on this program, but we have made the decision not to give TLC more money when the show returns in January.

Unfortunately, this decision comes across as bending to bigotry. It also appears that we did not support people who deserve support as people and as Americans. For that, I am profoundly sorry.

I should have communicated more clearly. We would not want anyone to think that we caved to hatred. I wish I could share some of the emails I've received from our team. They are also very unhappy with how I handled this.

Please allow me to explain the decision. First, our approach to advertising decisions is to choose advertising based on who watches it, not the political leaning of the program.

When we decided to give our money to TLC for this program, we deemed the show a worthy topic. When we received angry emails regarding our decision to advertise, I looked into the show more thoroughly.

The first thing I discovered was that TLC was not upfront with us about the nature of this show. As I said, it's a worthy topic, but any reasonable person would know that this topic is a particular lightning rod. We believe TLC went out of their way to pick a fight on this, and they didn't let us know their intentions. That's not a business practice that generally gets repeat business from us. I also believe that it did this subject a grave disservice. Sadly, TLC is now enjoying the attention from this controversy.

I then checked the Florida Family Association website to see how this was portrayed. Besides the regrettable hatred, I also noticed that we weren't listed. The email was a template, so people who sent thousands of emails seemed to be unaware they were sending it to us. The amount of vitriol in the emails was saddening, but I didn't exactly feel pressured (not to mention we wouldn't bend to such pressure). Many of the emails I've received expressing disappointment in our decision have been much more civil, and I applaud you for that.

Lastly, I watched the first two episodes. Mostly, I just thought the show sucked.

Based on our dealings with TLC and the simple assessment of the show, I decided we should put our money elsewhere. Apologies again.

- Robert Birge, KAYAK Chief Marketing Officer

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Special Report: Tea Party grassroots army readies for battle

By Nick Carey

MYRTLE BEACH, South Carolina | Thu Dec 15, 2011 12:16am EST

MYRTLE BEACH, South Carolina (Reuters) - For insight into the conservative Tea Party movement's battle plan in 2012, check out Joe Dugan's Google spreadsheets.

Dugan, 66, a retired manufacturing executive and chairman of the Myrtle Beach Tea Party, is particularly proud of the scoring system he's devised for South Carolina legislators. Every vote by a member of the state's House or Senate is recorded, with points awarded for those that reflect the conservative position.

"Let's say you get above a five, we'll actively campaign for your reelection," Dugan says. "Below a three, then - Republican or Democrat - we'll come after you."

In 2010 the Myrtle Beach Tea Party backed 10 Republican candidates for state and local offices - from school board to governor. All ten won, including sitting Governor Nikki Haley, U.S. Senator Jim DeMint and Myrtle Beach freshman Congressman Tim Scott.

This year, when South Carolina gained a seventh seat in the House of Representatives based on the 2010 U.S. Census, Dugan's group successfully lobbied for the new district to be in their area and is now vetting candidates.

The group has also been actively courted by most of the Republican presidential candidates, including former House Speaker Newt Gingrich, who appears with Dugan in a number of photos in the Tea Party activist's study.

"The Tea Party movement is more organized, more focused and more potent," said Rep. Scott, who talks regularly to Dugan. "What happened in 2010 was not the end. It was just the beginning."

Tea Party supporters now hold fewer sign-waving rallies, a hallmark of their early opposition to bank bailouts and President Barack Obama's healthcare reform in 2009. But the movement isn't losing steam.

Interviews with activists across 20 U.S. states indicate that Tea Party groups, far from fading, have evolved into an increasingly sophisticated and effective network of activists. They are working to unseat establishment Republicans who they believe have betrayed the principles of lower taxes, limited government, and free markets.

"Those who think the Tea Party is on the wane are in for a gigantic surprise in 2012," says Debbie Dooley, co-organizer of the Atlanta Tea Party. "We have built a grassroots army and we will be a fine-tuned machine next year."

The goal of these loosely affiliated but fiercely independent groups nationwide is to hone their electoral skills and build a "farm team" of public officials who can ascend through the ranks of government. It's a long-term strategy that looks past the 2012 election to a takeover of the Republican Party and the U.S. Congress.

TEA PARTY 2.0

"The Tea Party was a very showy populist movement in the last cycle," said Steven Schier, a politics professor at Carleton College in Minnesota. "Now they are in the trenches and institutionalizing their efforts." Some call the new push Tea Party 2.0.

Instead of organizing demonstrations, an unpaid army of managers, small business owners, and stay-at-home moms is learning how to get out the vote, raise money and set up political action committees. They are working to overcome the territorial rivalries that dogged the Tea Party in 2010, when groups backed multiple primary challengers and often allowed the establishment candidate to win.

Because the Tea Party energy produced a larger than usual turnout for a mid-term election, however, the young movement propelled the Republican Party to the biggest midterm swing since 1938, with a mad scramble to staff phone banks and knock on voters' doors.

"We came to the game late last time," says Bob Orbin of the Northeast Pennsylvania Tea Party, who is a vice president at an investment advisory firm. "It was sheer craziness. We're light years ahead of that now."

One thing the activists have learned is that they must unify behind one candidate rather than let a number of conservative contenders split the vote. A Tea Party coalition has already done this in Indiana, where they hope to unseat six-term incumbent Senator Richard Lugar. Some groups in the state's 8th district have already backed a challenge to first-term Congressman Larry Bucshon.

Bucshon ran on Tea Party principles last year, but then disappointed conservatives by voting to raise the debt ceiling and to approve the compromise 2011 budget. Both Lugar's office and Bucshon's office declined to comment for this article.

Tea Partiers are keen to avoid embarrassments such as Christine O'Donnell's unsuccessful U.S. Senate bid in Delaware last year. They now realize that the higher the office, the more they need someone with a political track record, name recognition, fund-raising ability and organization.

To make sure there are qualified candidates in the pipeline, Tea Party groups around the country are recruiting candidates for lower offices with the aim of producing qualified politicians for Congress in 2014 and beyond.

"We've had to learn a lot of patience," said Karen Hurd of the Virginia Tea Party Alliance. In her state, Republicans failed to win outright control of the state Senate in November, yet Tea Party-backed candidates did win races further down the ticket. The Mechanicsville Tea Party, for instance, backed five successful supervisory board candidates in Hanover County.

But Tea Party groups have also lost the benefit of surprise, which some observers credit with their unexpected impact on state and local races in 2010.

"While the movement is significantly better organized than it was in the last cycle, the establishment is much better prepared for them," said Dan Schnur, an expert in political strategy at the University of California who worked on Republican Senator John McCain's 2000 presidential campaign.

"That could limit their impact."

According to a Reuters/Ipso poll this week, 43 percent of Republicans either identify (23 percent) or identify strongly (20 percent) with the Tea Party. Among all Americans those figures are: identify 13 percent, strongly identify 10 percent.

"The Tea Party still don't seem to be in a majority position in the electorate," said James Henson, a politics professor at the University of Texas in Austin.

"The question is whether there will be uneven voter mobilization in the primaries. Will moderate Republicans show up in greater numbers? There is a lot of cleavage within the Republican Party at the national level, but the Tea Party may meet more resistance this time."

The key to the Tea Party's grassroots strategy is to master the mechanics of state and local politics.

"WHAT ARE YOU SMOKING?"

Last year Catoosa County Tea Party member Keith Kenney - who works for a tile maker in northern Georgia - was elected as a Republican precinct chairman in his county.

"If you'd told me two years ago I'd be a precinct chairman," he says, "I'd have said, 'what are you smoking?'"

The precinct delegate system is the basic building block of America's two-party system. The average precinct has 1,500 voters and the main job of delegates (who have different titles in some states) is to get out the vote.

They also choose party county representatives, who select state representatives and so on up.

But Republicans have long relied on well-funded campaign advertising to win elections instead of a precinct ground game. So the party's precinct system was so atrophied in many places that Tea Party activists were easily elected delegates in 2010.

Once elected, Kenney compiled a PowerPoint presentation for delegates based mostly on Democratic Party literature (Democrats have traditionally had a better ground game). Now, using this or similar playbooks, Tea Party precinct delegates in many states are working on "walking lists" for their 2012 get-out-the-vote drives.

FARM TEAM

Tom Hartwell is running for circuit court clerk in Illinois' Kane County. Addressing a crowd of local conservatives at a restaurant in St. Charles last month, he pledged to tackle waste at the clerk's office, which has an annual budget of around $50 million and 127 employees.

Hartwell's brother Todd, a member of the Elgin Tea Party Patriots, persuaded him to run. Much as major-league sports franchises nurture talent in minor-league farm teams, "we're looking for the right conservatives to get them in at the ground level, then move them up," said John Carlson of St. Charles We The People, which organized the fundraiser for Hartwell.

In states such as California, with its liberal bent and new open primary system, that can mean recruiting small-government "blue dog" Democrats instead of Republicans.

"Yes, we do exist," said Leslie Eastman, a Democrat and member of the SoCal Tax Revolt Coalition in San Diego, with a laugh. She backs candidates such as John Chiang, California's Democratic state controller, whom she views as a fiscal conservative.

In most states, though, the Tea Parties' activism is aimed squarely at opposing mainstream Republicans such as U.S. Senator Lindsey Graham of South Carolina, who is up for reelection in 2014. By then, Joe Dugan in Myrtle Beach points out, the state's four conservative freshmen Congressmen will have held national office for four years and be ready to mount a challenge.

Similarly, activists in Georgia say they have some challengers in mind for Republican U.S. Senator Saxby Chambliss in 2014. Georgia Tea Party supporters flexed their muscle in May when they rejected Governor Nathan Deal's choice for chairman at the Republican state convention and elected their own candidate.

Tea Party groups in many states are also forming political action committees, or PACs, to raise money for candidates. For instance, the Southwest Michigan Patriots have formed TeaPAC to bankroll rural get-out-the-vote drives.

"There are donors out there who'd rather give to the Tea Party than to the Republican Party because the Republican Party doesn't spend it right," said Patriot leader Gene Clem. TeaPAC is soliciting corporate donations and would like to partner with Brighton, Michigan-based RetakeOurGov, which has its own modest PAC for donations to state and national races.

Some Tea Party groups have decided not to endorse or officially campaign for candidates, although individual members are free to do so. Instead, they vet candidates, educate the public about their voting records and lobby lawmakers about upcoming legislation.

They also work directly on the issues that matter most to each group - be they taxes, immigration, collective bargaining rights, gun laws, healthcare reform, voter identification or access to abortion.

PARADIGM SHIFT

The Tea Party's growing electoral savvy was on display when Ohioans went to the polls on November 8.

National media focused on a multi-million dollar proxy battle between Republican Governor John Kasich and labor groups over collective bargaining rights - a fight labor groups won by a landslide - and paid little heed to another item on the state ballot: The Ohio Healthcare Freedom Amendment.

Placed on the ballot by Ohio Liberty Council, a Tea Party umbrella organization, the measure amends the state constitution to forbid a so-called individual mandate, which would require every individual to have insurance - a central feature of President Obama's healthcare reform.

With a $700,000 budget the Council hired a small professional campaign staff for three months, went door to door statewide and hit the phones. The amendment won by a two-to-one margin.

The win was dismissed as symbolic because federal law supersedes state law, but that misses the point, said Chris Littleton of the Ohio Liberty Council.

"We showed what boots on the ground can do," he said. "This was never about superseding federal law. This was about boosting our case when Obamacare goes to the Supreme Court."

The Court will hear a challenge to Obama's healthcare reform during 2012.

The Ohio healthcare campaign demonstrated "a degree of sophistication a lot of movements have never achieved," said Carlton College's Schier. "People should take note."

"UNITE OR DIE"

In 2010 Indiana was a poster child for the Tea Party movement's dysfunctional electoral debut. Groups across the state backed four different conservative candidates against Dan Coats, the establishment Republican Party candidate for retiring Senator Evan Bayh's seat.

Coats won the primary with 39 percent of the vote. In 2012 Tea Party activists are targeting Senator Richard Lugar, and they won't make the same mistake again. Conservatives dislike Lugar's votes for the 2008 bank bailout, his co-sponsorship of the Dream Act - which would have created a path to citizenship for illegal immigrants who serve in the military or attend college - and above all his confirmation of President Obama's two Supreme Court nominees.

"For a long time Senator Lugar did serve us well, but he has drifted too far to the left," said Monica Boyer, the co-founder of Hoosiers for a Conservative Senate.

Most of the state's Tea Party groups met in January and agreed they needed to coalesce around one candidate. In September they organized a statewide convention and held a straw poll to choose Republican State Treasurer Richard Mourdock as Lugar's first primary challenger since 1976.

Conventional wisdom holds that Lugar should win because of name recognition and the $3.8 million war chest he had at the end of the third quarter, dwarfing Mourdock's $290,000.

"We know this is going to be a hard fight," said Greg Fettig, a landscaping business owner who co-founded Hoosiers for a Conservative Senate with Boyer.

"But if it were easy, everyone would be doing it."

Brian Vargus, a politics professor at Indiana University-Purdue University Indianapolis, said to beat Lugar the Tea Party must "mount a tremendous ground attack."

Volunteers for Mourdock have been knocking on voters' doors statewide since October. Lugar's office did not respond to requests for comment.

AIMING AT THE SENATE IN 2012

In mid-November, Boyer and Fettig met Tea Party leaders in DeWitt, Michigan, to describe how they had united against Lugar. Ten Republicans have filed papers in the race to run against Michigan's Democratic Senator Debbie Stabenow in 2012. This meeting was billed as a first step toward getting together behind one of them.

Wrapping up an impassioned speech, Fettig got a standing ovation when he said, "To quote our Founding Fathers, unite or die."

The speech convinced Wes Nakagiri of RetakeOurGov of the importance of getting together behind a single candidate. "I think our group could accept our second or third choice if that's what it took," he said.

Twenty-three of 33 seats in the Democratic-controlled U.S. Senate are up for grabs next year. Republicans need to win only four of those seats to gain the majority, which has made Senate races a primary focus of Republican Party activists around the country.

"Republicans are not sure yet they can beat Obama, so they're focusing on the Senate," said Republican strategist and CivicForumPAC chairman Ford O'Connell. Last year his PAC supported the successful campaigns of Florida Governor Marco Rubio and Pennsylvania Rep. Pat Toomey.

Now, in states such as Michigan, Wisconsin and Pennsylvania, conservative donors are waiting to see if Tea Party groups can coordinate their efforts, O'Connell said.

"If they can unify behind viable candidates, more money will flow to those candidates," O'Connell said. "The big question is, can they get there?"

And if they can, the next big question is what happens to the Grand Old Party. If Republicans hold the House, win the Senate, and perhaps even take the White House, that will set the stage for a Tea-Party driven "bloodletting", predicts Stuart Rothenberg, editor of the Rothenberg Political Report newsletter.

"What many people don't understand," Tucker Carlson, the conservative editor of the Daily Caller, said, "is the Tea Party is a pure populist movement against the Republican establishment."

(Additional reporting by David Morgan)

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Ron Paul gains ground, further stirring Republicans

1 of 6. Republican presidential candidate Representative Ron Paul (R-TX) listens as he is being introduced at Joey's Diner in Amherst, New Hampshire December 14, 2011.

Credit: Reuters/Brian Snyder

By Daniel Trotta

AMHERST, New Hampshire | Wed Dec 14, 2011 5:42pm EST

AMHERST, New Hampshire (Reuters) - Republican presidential hopeful Ron Paul declared on Wednesday his campaign was "peaking at the right time" as polls show him closing in on the two perceived front-runners.

The libertarian congressman from Texas with a passionate core of followers complained that pundits were dismissing his longshot campaign prematurely and sounded optimistic about catching former Massachusetts Governor Mitt Romney and former House of Representatives speaker Newt Gingrich.

All three and others are seeking to represent the Republicans and unseat Democratic President Barack Obama next November. The first of a series of Republican nominating contests is set for January 3 in Iowa.

"The momentum is building up and a lot of the candidates so far would come and go. They would shoot to the top and drop back rapidly. Ours has been very steady growth, then in this last week or two there has been a sudden extra growth," Paul told reporters after meeting voters in Amherst, New Hampshire.

Public Policy Polling released a survey on Tuesday showing him one percentage point behind Gingrich for the lead in Iowa.

Paul took 21 percent in the survey compared to 22 percent for Gingrich with Romney third at 16 percent.

In New Hampshire, which follows Iowa's caucus with a primary election on January 10, Romney led with 33 percent in a Rasmussen Reports poll released on Tuesday. Gingrich was second with 22 percent and Paul third at 18 percent. Paul's four-point gap behind Gingrich narrowed from a 10-point gap in the previous week's poll and marked Paul's best showing so far, Rasmussen said.

"In political terms, it probably means we're peaking at the right time," Paul said.

INFLUENCE THE RACE

Paul, who is making his third bid for the White House, is unlikely to take the nomination. But he may influence the race all the way to the end, acquiring delegates that stand to give him clout at the party's nominating convention next August.

He could tilt the nomination to one candidate should the race remain undecided by convention time.

"The other candidates are scared of him and his ability to attract strong supporters," said Jennifer Donahue, a fellow at the Eisenhower Institute at Gettysburg College.

"If Romney had a core like Paul does, no matter how small, he'd be much better off," Donahue said, referring to Romney's status as the establishment candidate.

Paul, 76, attracts voters with a libertarian vision of eliminating a role for the state wherever possible. But some of his views alienate traditional bases of the Republican Party.

His call to abolish the Federal Reserve alarms Wall Street Republicans. His advocacy for withdrawing from U.S. military engagements abroad concerns national security Republicans. Social conservatives may be wary of his refusal to oppose gay marriage, as Paul says the federal government has no business regulating any marriage.

"The special interests on Wall Street -- they might have a lot of money but they don't have a lot of voters," Paul said.

Loyal and boisterous followers flock to his campaign events, such as a town hall meeting in Peterborough, New Hampshire, on Tuesday.

"He doesn't think he's better than any of us. You can tell by the way he speaks to us. He seems very genuine and plain. He doesn't embellish," said Susan Davidson, 49.

"He's an extremely brave man to be able to speak his mind so simply but eloquently in the face of all the big stars and heroes in Congress. He's not afraid of them," she said.

Paul has also gained attention for television ads that have attacked Gingrich.

"He definitely takes more from Gingrich than he does from Romney," said Ford O'Connell, a Republican strategist who said he is neutral in the nominating process. "He's doing to Newt Gingrich what Romney hasn't been able to do. In a lot of ways he's Newt Gingrich's worst nightmare."

(Editing by Xavier Briand)

View the original article here

Gingrich worse against Obama than Romney: Reuters/Ipsos poll

Newt Gingrich greets a young girl during a campaign stop at Hollis Pharmacy in Hollis, New Hampshire, December 12, 2011.

Credit: Reuters/Brian Snyder

By Andy Sullivan

WASHINGTON | Wed Dec 14, 2011 11:32am EST

WASHINGTON (Reuters) - Newt Gingrich holds a 10-point lead in the fight for the Republican presidential nomination, but he would fare worse against President Barack Obama than Republican Mitt Romney, according to a new Reuters/Ipsos poll.

With the first nominating contest in Iowa less than three weeks away, Gingrich leads Romney among Republican voters nationwide by 28 percent to 18 percent, the poll found.

However, the poll raises questions about whether Gingrich -- a former speaker of the U.S. House of Representatives who has shot to the top of Republican opinion polls in recent weeks -- would be able to defeat Obama.

The poll found that if the November 2012 presidential election were held today, Obama would defeat Gingrich, 51 percent to 38 percent. By contrast, Obama would defeat Romney by a narrower margin, 48 percent to 40 percent.

Analysts say the results reflect the risk that Republicans could face if they nominate Gingrich, whose strong performances in debates have won him support among conservatives seeking an alternative to Romney.

Gingrich has a long record of making provocative statements that could alienate independent voters, such as when he recently referred to Palestinians as an "invented" people.

Even so, some conservative Republicans see him as preferable to Romney, a former Massachusetts governor who has built a more extensive campaign and fundraising operation.

"This is the Republican dilemma," said Calvin Jillson, a political science professor at Southern Methodist University. " 'Do I want to enjoy myself by voting for Gingrich ... or do I want to look toward the general election and see a winnable contest?'"

Romney has been widely viewed as the candidate to beat among Republicans.

Obama's campaign was focused squarely on an eventual race against Romney until this week, when it began taking shots at Gingrich -- an acknowledgement of the former speaker's elevated standing in the Republican race.

The new poll found Texas Representative Ron Paul and Texas Governor Rick Perry tied for third place with 12 percent each, while Minnesota Representative Michele Bachmann has the support of 10 percent of Republicans.

Former Utah Governor John Huntsman is next with 5 percent, followed by former Pennsylvania senator Rick Santorum, with 4 percent. Another 4 percent picked other candidates or none at all.

The poll, taken from December 8 to December 12, shows Gingrich's remarkable comeback since a staff mutiny and criticism by fellow Republicans nearly torpedoed his campaign in June. A Reuters/Ipsos poll taken during that period showed him polling at 6 percent.

The poll also found that Obama could be making a comeback of sorts as the economy shows signs of improvement and Republican candidates bloody each other in a series of televised debates.

Obama's 8 point lead over Romney is a dramatic increase from the 1 point deficit he faced in a Reuters/Ipsos poll taken from October 31 to November 3.

Although Obama is doing better compared with Republicans, his approval rating, at 47 percent, is little changed since the beginning of the year.

Americans remain generally pessimistic, the poll found. Only 27 percent say the country is moving in the right direction, while 69 percent say it is on the wrong track, a slight improvement from the October poll.

The poll was based on telephone interviews of 1,102 adults, 443 of them registered Republicans. The margin of error for all adults is plus or minus 3 percentage points; for Republicans the margin of error is plus or minus 4.7 percentage points.

The complete poll results can be found ">here

(Reporting by Andy Sullivan; Editing by David Lindsey)

View the original article here

Las Vegas's absurd real estate landscapes

Photos

Las Vegas's built environment is full of absurdities. The city's development patterns showcase a tension between the natural (desert) and the built (the planned communities that litter the landscape).

They also serve as visual symbols of America's 2008 housing bubble. Anticipating rapid growth, developments fail to connect to each other, confidently (or, perhaps thoughtlessly) leaving the future to fill the spaces between.

Below is a collection of satellite imagery via Google Maps that showcase some of these bizarre building patterns:

Mark Byrnes is a fellow at The Atlantic Cities and a graduate student in publications design at the University of Baltimore. All posts »

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Johannesburg exchange looks to electronic traders

By Luke Jeffs

LONDON | Thu Dec 15, 2011 2:00am EST

LONDON Dec 15 (Reuters) - The Johannesburg Stock Exchange (JSE) has struck a deal with British technology firm Fixnetix that will enable Europe's top trading firms to post orders directly on the JSE from outside South Africa for the first time.

The JSE said on Thursday it had signed an agreement with Fixnetix under which the trading systems expert will act as the exchange's electronic gateway for European banks and brokers from early 2012.

The exchange also said in an emailed statement it planned in July next year to upgrade from its current platform, hosted by the London Stock Exchange, to a newer offering from the British exchange.

"The agreement with Fixnetix and the new trading system will offer improved access to the JSE markets and may play a role in the JSE competing for trading volumes," said the JSE's head of equities Leanne Parsons.

Fixnetix will provide access to the JSE order book, via a technological gateway called a point of presence (POP), from a data centre just outside London, while the main trade matching system will be hosted in Johannesburg, the JSE added.

"In future, the JSE may also offer clients the ability to connect to other networks and POPs, making it even easier for offshore clients to trade on the JSE," Parsons added.

Investment banks and high-frequency trading firms rely on super-fast trading services from the world's top exchanges to make their strategies work, while the exchanges are keen to attract these firms to boost their dwindling trading revenues.

The LSE and its rivals NYSE Euronext and Deutsche Boerse have been investing heavily in their trading systems over recent years to keep pace with Europe's new breed of alternative exchanges, such as Chi-X and Bats Europe.

View the original article here

UK Stocks-Factors to watch on Thursday Dec 15

LONDON | Thu Dec 15, 2011 2:12am EST

LONDON Dec 15 (Reuters) - Britain's FTSE 100 index is seen opening down 6-9 points, or 0.2 percent on Thursday, according to financial bookmakers, extending Wednesday's sharp falls as the sell-off continued on Wall Street and in Asia on fears the euro zone crisis could be worsening, and after some disappointing data from China.

The UK blue chip index closed down 123.35 points, or 2.3 percent on Wednesday at 5,366.80, having rallied 1.2 percent on Tuesday, led by weakness in risk-sensitive commodity issues and banks, with concerns over the euro zone debt crisis ratcheted up as Italy's borrowing costs rose to a record high.

Worries over a possible sovereign credit rating downgrade for France were also revived, knocking the country's hard-pressed banks.

After the close on Wednesday, France's Credit Agricole warned it would post a loss for 2011, and said it would write off 2.5 billion euros worth of assets and cut 2,350 jobs in a cull of its investment banking operations.

And after the U.S. close, Fitch downgraded its credit ratings for 5 European banks, including Credit Agricole.

U.S. blue chips ended 1.1 percent lower on Wednesday, at the level they were when London closed, having recovered a touch from heftier session lows.

In Asia on Thursday, MSCI's broadest index of Asia Pacific shares outside Japan was down 2.0 percent, while Japan's Nikkei shed 1.6 percent weighed by weaker-than-expected business sentiment as shown in the Bank of Japan's quarterly Tankan survey.

Hong Kong and Shanghai's benchmark indexes were among the biggest losers in Asia after the release of HSBC's China flash PMI, the latest piece of data to show the world's second largest economy losing steam.

The private sector survey indicated that China's factory output will shrink again in December, adding to the headwinds facing a global economy struggling with sluggish U.S. growth and the euro zone sliding back into recession.

"With concerns over global economic growth in the new year still very much front of mind it's difficult to see what might kick the bulls back into action, although as volumes inevitably start to thin out ahead of the Christmas break next week and with many stocks looking increasingly depressed, ideal conditions for something of a Santa rally may well be forming," said Terry Pratt, Institutional Trader at IG Markets.

On the domestic data front, British November retail sales will be released at 0930 GMT, with a fall of -0.3 percent forecast, after a 0.6 percent rise in October, giving a year-on-year rise of 0.3 percent after a 0.9 percent increase in the previous month.

The CBI industrial trends-orders survey for December will be released at 1100 GMT.

U.S. wholesale inflation numbers will be released at 1330 GMT, with November producer prices seen up 0.2 percent on the month, after a fall of 0.3 percent in October, and the annualised rate seen unchanged at 5.9 percent.

The latest U.S. weekly jobless claims and December's Empire State index will also be released at 1330 GMT, with November U.S. industrial output due at 1415 GMT, and the December Philly Fed index scheduled for 1500 GMT.

* GLOBAL MARKETS-Europe woes prompt yr-end flight from risk

* Wall St stacks up losses as global risks rise

* Nikkei down 1.6 pct, breaks support at 25-day average

* FOREX-Euro inches up but still close to 11-mth low

* Brent little changed at $105 after biggest drop since Sept

* Shanghai copper, zinc fall on Europe debt fears

* Gold steady after carnage, Europe trouble eyed

UK stocks to watch on Thursday are:

RIO TINTO, BHP BILLITON

The Daily Mail's market report notes revived talk that Rio and BHP could both be stalking Walter Energy, and cites analysts as saying the take-out price could be double the current $60 a share.

BARCLAYS, STANDARD CHARTERED

Extra British regulations and taxes on banks will cost Barclays more than 1 billion pounds ($1.5 billion) and Standard Chartered over $500 million a year and are part of a flood of reforms that could backfire, the bosses of the two banks said.

LONDON STOCK EXCHANGE

The London Stock Exchange is in talks with UK regulators on the possibility of establishing a trade repository, or electronic data storage warehouse, that would handle over-the-counter (OTC) derivatives, the Financial Times reported.

JOHN WOOD GROUP

The oil services firm issues a trading update.

SPORTS DIRECT INTERNATIONAL

The sporting goods retailer issues a trading update.

INTERNATIONAL PERSONAL FINANCE

The emerging markets-focused lender issues a trading update.

KELLER GROUP

The ground engineering firm issues a trading update.

MOSS BROS GROUP

The suit hire and retail group issues a trading update.

HIWAVE TECHNOLOGIES

The sound and touch technologies group reports full-year results.

PURSUIT DYNAMICS

The macerator developer posts full-year results.

GCM RESOURCES

The Bangladesh-focused coal miner holds its annual general meeting.

TODAY'S UK PAPERS

> Financial Times

> Other business headlines Multimedia versions of Reuters Top News are now available for: * 3000 Xtra : visit* BridgeStation: view story .134(Reporting by Jon Hopkins; Editing by David Cowell)

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UPDATE 6-Olympus says open to rehiring ex-CEO Woodford but scepticism reigns

* Doubts remain over whether Olympus board would rehire Woodford

* Company says important to strengthen balance sheet

* Camera sales up, but still not profitable

* Net assets $1.1 bln less than previously disclosed

* Shares dive almost 20 pct

* Concerns Olympus may need to raise capital, sell assets or merge

By Nathan Layne and Yoko Kubota

TOKYO, Dec 15 (Reuters) - Japan's disgraced Olympus Corp said on Thursday it would consider reinstating its sacked CEO, Michael Woodford, but the gesture failed to erase doubts that it would ever rehire the foreigner who blew the whistle on its crooked accounts.

The maker of cameras and medical equipment said Woodford, an Englishman, would be considered as a candidate for the role of leading Olympus out of a $1.7 billion accounting fraud, one of Japan's worst corporate scandals.

"On what will happen to Mr Woodford, it is certain that he is among the options," said Olympus President Shuichi Takayama, one of the directors who voted unanimously in October to sack Woodford after he had queried the firm's dubious book-keeping.

But there remained serious doubts whether Woodford, who went public with his concerns after his sacking, would be reinstated.

"I think it is unlikely," CLSA analyst Nanako Imazu said. "Why would he (Takayama) want Woodford? ... I don't know the intention of Mr Takayama in saying that."

Takayama, currently the most senior executive after several resignations since Woodford's departure, said he had no plans to meet Woodford who some major Japanese shareholders and lenders privately oppose, according to a banking source.

"As of now, I have no plans to meet," he said.

Takayama has said that he and fellow directors will resign soon, to make way for a new board to be elected by shareholders at a meeting in March or April, and that the board wants to choose its successors before it quits. It has set up an external panel to advise on board candidates and other management issues.

Woodford, however, has attacked the existing board as lacking all credibility, saying it has no right to choose its successors. He is assembling his own team of candidates for a new board with himself at the helm as nominated CEO, a move that raised the prospect of battle for control of the company.

In a comment likely to antagonise Woodford further, Takayama added on Thursday that some existing directors might not resign after all. So far, only a few directors have quit, including the former chairman, and a former executive vice president.

"There is no need for those who are not found responsible (of wrongdoing) to resign," he said. When pressed if he would remain, he added: "It is not the stage for me to state this."

NEED FOR FRESH CAPITAL OR TIE-UPS

The next CEO and board of Olympus faces major challenges, starting with a need to repair the once-proud firm's balance sheet, which was revealed on Wednesday to be $1.1 billion weaker than had been previously disclosed in its fraudulent accounts.

Olympus shares slumped almost 20 percent after Wednesday's corrected accounts were published, with investors now concerned it might need to merge, sell assets or raise fresh capital.

Takayama said on Thursday the company was considering capital and operational tie-ups, among other options, to relieve the pressure on its balance sheet, which was shown to have a very thin layer of equity remaining after the restatements.

Olympus forecast its troubled camera business to make a loss in the current financial years, but said unit sales had grown 15 percent in the six months to end-September, from a year earlier.

The firm, whose main income-earner is its very profitable endoscope business, avoided automatic delisting from the Tokyo Stock Exchange by meeting Wednesday's deadline for producing its overdue second-quarter accounts, giving some initial relief to investors who had feared it might miss the deadline.

However, the 92-year-old firm can still be delisted if the exchange believes the accounting deceit was grave enough.

Woodford said on Wednesday he was considering options for recapitalising Olympus. He did not give an estimate of the sum needed but gave an example of how the firm's strong underlying business would ensure a return on any fresh investment.

"For example, if you put $2 billion into the company, the value of the company would probably go up more than $2 billion," he said in an Internet broadcast.

Woodford said he favoured private equity or a rights issue over a strategic alliance, which would rob Olympus of its independence. But rights issues, where existing shareholders can buy more shares on a pro-rata basis, are rare in Japan.

Olympus has lost more than half its market value since it sacked Woodford and the scandal erupted. Two top Olympus executives have been found to have masterminded the scheme to cook the books. These executives have since resigned.

Olympus has been dogged by rumours of bid interest from rivals, such as fellow endoscope makers Fujifilm and Hoya, or from private equity since the scandal broke.

The Tokyo exchange said after the announcements that it was keeping Olympus on its watchlist for possible delisting.

Some of the restated accounts also came with qualified opinions from auditors, with KPMG AZSA LLC noting it had been unable to confirm all the money flows involved in the fraud.

View the original article here

Woodford: discussed recapitalising Olympus with bankers

TOKYO | Thu Dec 15, 2011 2:16am EST

The 92-year-old company on Wednesday restated its accounts for the past five years and made a delayed release of its earnings for the half-year to September, showing a marked deterioration in its net asset position.

Olympus' shares tumbled 20 percent on Thursday after the release of the financial reports.

Woodford is visiting Japan this week to drum up support for his reinstatement at the firm two months after he was dismissed and subsequently blew the whistle on questionable acquisitions at the centre of the company's accounting scandal.

View the original article here

Repeat MSCI snub to Gulf shows extent of investor angst

By Matt Smith

DUBAI | Thu Dec 15, 2011 1:58am EST

DUBAI Dec 15 (Reuters) - Index compiler MSCI's latest snub to the United Arab Emirates and Qatar underlines the need for the Gulf neighbours to push through reforms, but problems plaguing UAE stocks run a lot deeper and investor apathy is a big worry.

On Wednesday, MSCI kept the two energy exporters as frontier markets, the third time it has opted not to give them emerging market status.

It urged the UAE to introduce new regulations to allow securities borrowing and short-selling and repeated a plea to Qatar to raise foreign ownership limits from 25 percent.

Dubai shares fell sharply in early trade in response to the decision, taking their losses to near 17 percent this year.

Yet the stocks have languished near 7-year lows for the past few weeks, showing investors were already fretting about other issues such as a lack of diversification and a degree of opacity that is especially worrisome when returns are meagre.

"Probably the biggest factor for MSCI clients is the shortage of liquidity on UAE markets," said Jeff Singer, chief executive of Nasdaq Dubai, one of three bourses in the UAE.

Turnover on the Dubai Financial Market, Nasdaq Dubai's sister bourse, is about a tenth of that of 2008, while the Dubai index is down 78 percent from a 2008 peak.

These declines stem from a real estate crash that sent stocks on the property-dominated bourse tumbling and the sector remains mired in a savage correction.

This has obscured the fact the wider UAE economy is recovering and is forecast to grow 3.8 percent in 2011 and 2012.

"The UAE stock markets are not deep enough to reflect the economy -- if there had been a wider variety of listings, the market declines of the past few years would have been smaller," said Jassim Alseddiqi, chief executive of Abu Dhabi Capital Management. "Apart from Dana Gas, energy is not represented, and nor is tourism.

"Banks have done very well since 2002, even with the financial crisis, but bank stocks are not very liquid."

Foreign institutions are also worried about the treatment of minority investors, with trading in mortgage provider Amlak suspended since 2008 and the abrupt delisting of Aabar Investments another worrying precedent.

"It's a myth that investors have short memories -- unless there's a compelling investment story, they find it difficult to forgive past transgressions," said a Dubai-based fund manager who asked not be identified.

Qatar, the world's richest country per capita, should be of interest to foreign investors. Its stock market is in the black for the year, a rarity in itself.

But daily trades on the index rarely cross 10 million shares, making it difficult to exit positions in bluechip stocks, a worry for foreign investors keen to maintain nimble portfolios in uncertain times.

"Qatar didn't make enough progress in opening up some of the higher-profile stocks to foreign investors to the extent that these investors would like," said Ibrahim Masood, senior investment officer at Mashreq Bank in Dubai.

"The UAE would be failing (to be upgraded) because of a lack of interest, whereas Qatar's fundamental story is more straight-forward and believable."

Nasdaq Dubai's Singer preferred to see the glass half full.

"The decision gives the UAE the opportunity to improve some of its operations and work aggressively over the next few months to makes changes that would enable institutional investors to come into the market," he said.

"Short-selling would create more liquidity by allowing investors with competing convictions to play the market - at the moment, investors can only come in if they believe the market will go up."

View the original article here

PRESS DIGEST - Wall Street Journal - Dec 15

n">Dec 15 (Reuters) - The following were the top stories in The Wall Street Journal on Thursday. Reuters has not verified these stories and does not vouch for their accuracy.

* Japanese authorities are set to announce Friday that they have brought the Fukushima Daiichi complex's reactors to a state called cold shutdown, a milestone in stabilizing the site.

* The SEC is heading on a collision course with the federal judge who rejected the proposed $285 million settlement between the agency and Citigroup Inc.

* Research In Motion's falling share price is ratcheting up pressure on directors to overhaul the company's management structure, which has allowed the firm's two chiefs to also serve as co-chairmen.

* Wall Street research analysts, who usually write rosy reports on companies their firms take public, gave surprisingly faint praise to the latest big Internet stock to hit the market, discount deal site Groupon Inc.

* With foreign investors calling for a management overhaul, scandal-hit Olympus Corp said Thursday it will aim to hold an extraordinary shareholder meeting in March or April.

* Hasbro Inc, the manufacturer of such classics as Monopoly, Scrabble and Operation, remains dogged by a disastrous Christmas last year, when sales fell and profits plunged by 15 percent for the quarter.

* Nokia Corp is getting back into the U.S. smartphone business with an entry-level model powered by Microsoft Corp.'s latest Windows software and sold by T-Mobile USA.

* Three years after Siemens AG reached a record foreign-bribery settlement with U.S. authorities, the German industrial conglomerate is capitalizing on business from an unexpected place-the U.S. government.

* Hewlett-Packard Co, still smarting from criticism over the exit packages it awarded to ousted chief executives Mark Hurd and Leo Apotheker, will limit severance payments it makes to senior executives who are pushed out.

View the original article here

Europe stock futures signal more losses

PARIS | Thu Dec 15, 2011 2:04am EST

At 0703 GMT, futures for Euro STOXX 50, for Germany's DAX and for France's CAC were down 0.3-0.4 percent.

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Bank of Tokyo-M'bishi UFJ: support for Olympus unchanged

TOKYO | Thu Dec 15, 2011 2:16am EST

TOKYO Dec 15 (Reuters) - Bank of Mitsubishi UFJ, the main banking unit of Mitsubishi UFJ Financial Group, will keep its support for Olympus Corp unchanged, Japan banking lobby head Katsunori Nagayasu said on Thursday.

Nagayasu, who serves as chairman of the Japanese Bankers Association, is also president of Mitsubishi UFJ Financial Group, Japan's largest bank by assets.

MUFG, along with Sumitomo Mitsui Financial Group, is one of the main lenders to Olympus, which is embroiled in an accounting scandal. MUFG is also among the Olympus's top shareholders, with a 7.6 percent stake.

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REFILE-Sony stands by PS3 sales target for 2011/12

TOKYO Dec 15 (Reuters) - Sony Corp said on Thursday that it was standing by its target to sell 15 million PlayStation 3 game machines in the 2011/12 financial year.

Welsh-born Andrew House, who on Sept. 1 took up his post as head of Sony Computer Entertainment, said that sales of the device had not suffered due to the debt crisis in Europe.

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Europe Factors-Shares seen halting week-long sell-off

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ECB's Noyer says French downgrade "not justified"

French Central Bank Governor Christian Noyer attends a news conference at the end of the G20 meeting of Finance Ministers and Central Bank Governors at the French Finance ministry in Paris October 15, 2011.

Credit: Reuters/Gonzalo Fuentes

PARIS | Wed Dec 14, 2011 8:03pm EST

PARIS (Reuters) - A downgrade of France's AAA credit rating would not be justified and ratings agencies are making decisions based more on politics than economics, European Central Bank policymaker Christian Noyer said on Thursday.

Speaking in an interview with local newspaper Le Telegramme de Brest to be published later on Thursday, Noyer also questioned whether the use of ratings agencies to guide investors was still valid.

"In the arguments they (ratings agencies) present, there are more political arguments than economic ones," said Noyer, the head of the Bank of France and a member of the ECB's governing council.

French Foreign Minister Alain Juppe said on Wednesday that decisions by rating agencies were "sometimes subjective and political," and that any loss of France's top-notch AAA rating would be regrettable but not disastrous.

Standard and Poor's is due to decide whether or not to downgrade euro zone countries in the coming days following an EU agreement on Friday to forge tougher fiscal rules.

"The downgrade does not appear to me to be justified when considering economic fundamentals," Noyer said. "Otherwise, they should start by downgrading Britain which has more deficits, as much debt, more inflation, less growth than us and where credit is slumping," he said.

Noyer was also unhappy about critical comments from ratings agencies following last week's EU summit in Brussels. He said such comments had weakened positive sentiment that arose in the markets following the agreement to draft a new treaty for deeper integration in the euro zone.

"Frankly, the agencies have become incomprehensible and irrational. They threaten even when states have taken strong and positive decisions," Noyer said. "One could think that the use of agencies to guide investors is no longer valid."

(Reporting By John Irish and Pierre-Henri Allain; Editing by Mark Heinrich)

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Holiday retail sales look brighter than before

By Martinne Geller

Thu Dec 15, 2011 12:26am EST

n">(Reuters) - An influential retail trade group raised its forecast for U.S. holiday retail sales on Thursday, citing strong results in November and expectations that consumers still have more shopping to do.

The National Retail Federation said it now expects holiday sales to rise 3.8 percent to a record $469.1 billion. That is up from the group's October forecast, which called for growth of 2.8 percent.

The new forecast is still lower than the 5.2 percent growth seen last year, but is above the 10-year average increase of 2.6 percent.

"Consumer spending this holiday season has surpassed expectations, though many shoppers continue to stick to their budgets and buy only what they need," said NRF Chief Economist Jack Kleinhenz in a statement.

The holiday shopping season, which kicks off unofficially after the U.S. Thanksgiving holiday, is critical for retailers from Wal-Mart Stores Inc (WMT.N) to Best Buy Co Inc (BBY.N) to Gap Inc (GPS.N).

The reason for the updated forecast is that NRF, a retail industry trade group, found that industry sales for November rose 4.5 percent year-over-year, and that the average American has completed far less of their holiday shopping than in previous years -- an indication that many shoppers bought for themselves in November and have lots of shopping left to do.

While retailers are "cautiously optimistic" that the season will turn out better than initially expected, NRF President Matthew Shay said "a number factors, including the debt crisis in Europe and continued political wrangling in Washington, could impact consumer spending this holiday season and into 2012."

The NRF's figures compare sales at retail stores with the year-earlier period and exclude restaurants, gasoline, automobiles and online sales.

That is why its results look different than those announced by the U.S. Commerce Department, which said U.S. retail sales grew a weaker than expected 0.2 percent in November.

(Reporting By Martinne Geller in New York, editing by Matthew Lewis)

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Europe debt woes prompt year-end flight from risk

A man is reflected on an electronic board displaying stock prices outside a brokerage in Tokyo November 10, 2011.

Credit: Reuters/Toru Hanai

By Alex Richardson

SINGAPORE | Wed Dec 14, 2011 10:17pm EST

SINGAPORE (Reuters) - Asian shares fell into bear market territory for the year and commodities and the euro nursed stinging losses on Thursday, after fears that Europe's debt crisis is still worsening prompted investors to dump riskier assets and huddle in the safety of the dollar and Treasuries.

The gloomy mood was not improved by a private sector survey indicating China's factory output shrinking again in December, adding to the headwinds facing a global economy struggling with sluggish U.S. growth and the euro zone sliding back into recession.

"We're quite bearish about the world at the moment," said Damien Boey, equity strategist at Credit Suisse in Sydney. "You're looking at basically the three major economies in the world causing problems."

The market view that a European Union summit last week had failed to produce a solution to the crisis was reinforced when Italy was forced to pay an eye-watering 6.47 percent on 5-year bonds on Wednesday, a record borrowing cost for the euro era.

Japan's Nikkei fell 1.3 percent and MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS was down 1.8 percent, following losses of around 1 percent on Wall Street and a steeper sell-off in Europe. .T .N .EU .L

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HSBC China flash PMI: link.reuters.com/hyd55s

Japan BOJ Tankan: link.reuters.com/pez55s

Euro zone crisis in graphics: r.reuters.com/hyb65p

Interactive timeline: link.reuters.com/rev89r

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The MSCI Asia ex-Japan is down 20 percent for 2011 -- the rule-of-thumb definition of a bear market -- while the Nikkei has lost about 17.5 percent. Both have underperformed global equities .MIWD00000PUS, which have lost around 12.5 percent, and U.S. stocks .SPX, which are only down around 3.5 percent.

Europe remains investors' biggest worry, with markets still braced for ratings agency downgrades of euro zone sovereigns.

"Markets are frustrated and disappointed, waiting for a road map on the resolution of the two-year-old debt crisis," said Ong Yi Ling, an investment analyst at Phillip Futures in Singapore. "Risk assets are all down. The debt crisis will be with us at least through the first half of 2012."

Equity losses in Hong Kong .HSI and Shanghai .SSEC deepened after the release of HSBC's China flash PMI, the latest piece of data to show the world's second largest economy losing steam, but reaction in broader markets was muted.

COMMODITY SLIDE

Wednesday's stock market declines were dwarfed by carnage in commodity markets, where oil, gold and copper shed 4-5 percent.

Gold has been hammered in recent days as fund managers liquidate their holdings, either to cover losses elsewhere or to lock in profits on an asset that is still up more than 10 percent for the year.

"Some macro hedge funds are liquidating gold holdings and taking profits in a difficult year," said James Steel, chief technical analyst at HSBC.

The precious metal edged down a little further on Thursday to around $1,572 an ounce, while U.S. crude oil inched up to $95.20 a barrel and Brent crude bounced more than 50 cents to around $105.60.

The euro fell as low as $1.2944, its weakest level since January 11, and was later steady around $1.2990.

A downgrade by ratings agency Fitch of five major European financial groups, including France's Credit Agricole to A-plus from AA-negative, added to the already euro-negative sentiment.

This comes on top of the prospect of further cuts by rival Standard & Poor's, which warned earlier this month it could downgrade the ratings of 15 of the 17 euro zone members.

"I can see the U.S. dollar keep trending higher while the euro flounders," said Joseph Capurso, a strategist at Commonwealth Bank of Australia.

(Additional reporting by Miranda Maxwell in Melbourne, Jane Lee in Kuala Lumpur and Frank Tang in New York; Editing by Richard Borsuk)

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Japan's disgraced Olympus says may rehire ex-CEO

1 of 2. Olympus Corp President Shuichi Takayama speaks at a news conference in Tokyo December 15, 2011.

Credit: Reuters/Kim Kyung-Hoon

By Nathan Layne and Yoko Kubota

TOKYO | Thu Dec 15, 2011 12:21am EST

TOKYO (Reuters) - Japan's disgraced Olympus Corp said on Thursday it would consider reinstating Michael Woodford, the British chief executive it sacked two months ago and who blew the whistle on a fraud that has left it weakened and in need of fresh capital.

Woodford's return would mark a dramatic climb-down by the existing board of Olympus, which had unanimously fired him in October after he had queried the firm's dubious book-keeping. The firm later admitted to uncovering a $1.7 billion fraud.

"On what will happen to Mr Woodford, it is certain that he is among the options," Shuichi Takayama, president of the maker of cameras and medical equipment, told reporters in discussing the board's options for choosing a new CEO.

But there remained serious doubts whether Woodford would indeed be chosen against other candidates for his old job.

Takayama, currently the most senior executive after several resignations since Woodford's departure, said he had no plans to meet the Englishman, who some big Japanese shareholders and lenders privately oppose, according to a banking source.

"As of now, I have no plans to meet," he said.

Takayama has said that he and fellow directors will resign soon, to make way for an entirely new board to be elected by shareholders at a meeting to be held in March or April, and that the board wants to choose its successors before it quits.

Woodford, however, has attacked the existing board as lacking all credibility, saying it has no right to choose its successors. He is assembling his own team of candidates for a new board with himself at the helm as nominated CEO, a move that raised the prospect of battle for control of the company.

In a comment likely to antagonize Woodford further, Takayama added on Thursday that some existing directors might not resign after all. So far, only a few directors have quit, including the former chairman, and the head of internal auditing.

"There is no need for those who are not found responsible (of wrongdoing) to resign," he said.

NEED FOR FRESH CAPITAL OR TIE-UPS

The next CEO and board of Olympus faces major challenges, starting with a need to repair the once-proud firm's balance sheet, which was revealed on Wednesday to be $1.1 billion weaker than had been previously disclosed in its fraudulent accounts.

Olympus shares slumped almost 20 percent after Wednesday's corrected accounts were published, with investors now concerned it might need to merge, sell assets or raise fresh capital.

Takayama said on Thursday the company was considering capital and operational tie-ups, among other options, to relieve the pressure on its balance sheet, which was shown to have a very thin layer of equity remaining after the restatements.

Olympus forecast its troubled camera business to make a loss in the current financial years, but said unit sales had grown 15 percent in the six months to end-September, from a year earlier.

The firm, whose main income-earner is its very profitable endoscope business, avoided automatic delisting from the Tokyo Stock Exchange by meeting Wednesday's deadline for producing its overdue second-quarter accounts, giving some initial relief to investors who had feared it might miss the deadline.

However, the 92-year-old firm can still be delisted if the exchange believes the accounting deceit was grave enough.

(Additional reporting by Linda Sieg, James Topham and Mari Saito; Editing by Mark Bendeich)

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SEC looking to appeal blocked Citigroup settlement: report

n">(Reuters) - Enforcement staff of the Securities and Exchange Commission may request the commissioners leading the agency that they appeal last month's rejection by a U.S. district judge of a proposed $285 million settlement with Citigroup, the Wall Street Journal said, citing people familiar with the matter.

In November, Judge Jed Rakoff angrily threw out Citigroup's proposed settlement over the sale of toxic mortgage debt, excoriating the SEC over how it reaches corporate fraud settlements.

Talks aimed at hammering out several other agreements between the agency and financial firms it has accused of misconduct before or during the financial crisis have stalled, people told the Journal.

"Everything's come to a halt because the SEC doesn't know what to ask for anymore in the settlements," one of the people told the newspaper.

If SEC commissioners approve, the agency could appeal the November 28 ruling to the Second Circuit Court of Appeals, people familiar with the situation told the newspaper.

An SEC spokesman declined to comment to the Journal on the agency's plans. Officials at the SEC could not immediately be reached for comment by Reuters outside regular U.S. business hours.

(Reporting by Sakthi Prasad in Bangalore; Editing by Matt Driskill)

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China exporters face "very severe" Q1 2012: Commerce Ministry

A man walks near trucks parked in a shipping container area at Shanghai Yangshan port December 7, 2011.

Credit: Reuters/Aly Song

BEIJING | Wed Dec 14, 2011 10:14pm EST

BEIJING (Reuters) - China's exporters will face "very severe" conditions in the first quarter of 2012, the Commerce Ministry said on Thursday, with Europe's debt crisis dragging on and dampening demand.

"The overall trade environment next year for China will be complicated, partly due to the economic uncertainties in the European countries, and I should say that the export situation in the first quarter of next year will be very severe," Commerce Ministry spokesman Shen Danyang told a news conference.

Growth in Chinese exports and imports slowed in November, fresh evidence of faltering demand abroad and at home that is pushing Beijing towards a more explicit pro-growth policy stance, according to data published on December 10.

Customs data showed exports at their most sluggish in two years -- stripping out the volatile month of February.

(Reporting by Aileen Wang and Nick Edwards; Editing by Ken Wills)

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Insight: MF Global puts harsh light on self-regulation

Former MF Global CEO Jon Corzine testifies about the firm's bankruptcy during a hearing before the U.S. House Agriculture Committee on Capitol Hill in Washington, December 8, 2011.

Credit: Reuters/Jonathan Ernst

By Philip Shishkin

WASHINGTON | Wed Dec 14, 2011 2:35pm EST

WASHINGTON (Reuters) - Two weeks after MF Global's collapse, officials from the Commodity Futures Trading Commission briefed Senate staff on the brokerage firm's final days. When asked about reports that the brokerage firm had written checks that bounced when customers tried to cash them, the regulators had an admission that surprised the room: they didn't know about the bad checks.

"This seemed like something they should be aware of," a Senate staffer present at the meeting recalled. A CFTC spokesman declined to comment.

Customers still have no explanation of what happened to MF Global and some $1 billion missing from its customer accounts more than a month after the firm's failure. And regulators struggling to solve the mystery are now forced to play catch-up.

That's in part because over the past decade, as trading volume soared, federal regulators eased direct oversight of the industry and handed more regulatory powers to the major exchanges. Now, this self-policing arrangement is prompting concerns about the regulators' and the exchanges' ability to detect and deter suspicious conduct in the rapidly expanding marketplace.

A look at the recent history of self-regulation shows the government repeatedly raised concerns about the resources the major exchanges dedicate to market oversight, while the federal agency also experienced staff cutbacks and retreated from hands-on policing.

Both the federal regulators and the exchange where MF Global operated, the CME Group, maintain they did all they could in the run-up to MF Global's collapse. But calls are growing for a better system of auditing and enforcement to prevent similar crises in the future.

"I think we've gone too far in allowing the exchanges to be so self-regulatory that it's obfuscated the need for the cop to be on the beat all the time," says Bart Chilton, a Democratic commissioner on the CFTC.

Even the industry itself is acknowledging that there will need to be some changes. While defending the self-regulatory system, Dan Roth, president of the National Futures Association, said "we should be able to identify certain frailties of the current structure that will need to be addressed."

THE FUTURES POLICE

Self-regulation is the hallmark of the U.S. futures industry. Proponents argue that by placing oversight in the hands of the people who really understand the industry, the system benefits everyone. Critics point to the recent transformation of the exchange business, away from a non-profit cooperative model, as a reason the exchanges' commercial interests are overshadowing their market-oversight role.

Though it dates back to the middle of the 19th century, the self-regulatory nature of trading futures got a boost in 2000 with the passage of the Commodity Futures Modernization Act. The main thrust of the bill, signed into law by Bill Clinton in the waning days of his presidency, was to exempt the rapidly growing market for certain types of financial and energy derivatives and swaps from federal futures regulation.

The law was lobbied heavily by the financial industry, which argued that too many rules were hindering financial innovation and economic growth. But it became an easy target after the 2008 financial crisis, in which these types of complex financial products played a role. So lawmakers passed the Dodd-Frank financial-reform law, which pulled the swaps back under the federal regulatory umbrella and instructed the CFTC to write new rules to govern them.

Another, less-discussed, purpose of the 2000 deregulation effort was to limit the prescriptive powers of the CFTC and to give more freedom to the exchanges to set their own rules. The goal was "to provide regulatory relief to futures and options exchanges," James Newsome, who was the agency's chairman in 2001, said at the time. The overall U.S. futures and options industry grew nearly five-fold between 2000 and 2010 when 7.12 billion futures and options contracts were traded, according to Futures Industry Association.

Just as futures trading was exploding in volume, the federal agency was taking a step back from direct oversight of the markets both because of the 2000 deregulation and because of agency understaffing. For instance, when the CFTC in 2003 went after a futures trader allegedly operating a foreign currency boiler room, a court told the agency it had no jurisdiction.

Even in areas where the federal agency retained jurisdiction, direct oversight of the markets rested with the futures exchanges themselves. And those exchanges began ripping up their century-old business models and consolidating rapidly.

Ever since a group of brokers formed the Chicago Board of Trade in 1848, the exchange industry was organized into nonprofit cooperatives of brokers setting their own rules.

Technological and competitive pressures began building on the exchanges that forced more change. In 2000, the Chicago Mercantile Exchange shed its old cooperative structure and soon went public. It later bought the Chicago Board of Trade. And then the newly formed CME Group Inc. acquired the owner of New York's mercantile and commodities exchanges. That made CME Group a dominant U.S. exchange, and one of the largest in the world.

OVERSIGHT STAFF CUTS FLAGGED

As CME Group grew, federal regulators were relying on the exchange operator to be their eyes and ears on the ground. But in several recent assessments, the CFTC said that CME failed to adequately staff its oversight arm, while some of its fines lacked the necessary bite to scare repeat offenders. Combined with the rapid growth in trading volume and complexity of financial products, these staff cuts "could impair the effectiveness of an exchange's compliance program and impede enforcement," federal regulators warned in a 2010 audit of the company.

The flurry of mergers that swept the world of commodity exchanges was partly to blame for the alleged shortfalls, the regulators said.

"Prudence suggests that when exchanges merge, they should avoid substantial reductions in their combined compliance staff," federal regulators said in the 2010 audit, urging the company to add employees. In a follow-up audit a year later, the regulators criticized CME Group for the same alleged staffing shortfalls and noted the issue is "of particular concern because of the substantial share of the entire U.S. futures and options marketplace accounted for by the CME Group exchanges."

A CME official said that merger synergies "didn't reveal themselves quite as quickly" but noted that CME's exchanges have always conducted effective internal oversight. Since those audits, CME says it increased its market oversight staff to about 150 employees and has been increasingly relying on technology to keep tabs on the market amid large growth in the trading volume.

FINES A SLAP ON THE WRIST

In their recent audits, federal regulators also said that fine amounts for some types of trading-related violations "may be low enough that traders could view them as merely a cost of doing business." The regulators urged the CME Group to have a fine schedule that would penalize repeat offenders with progressively higher fines. The issue has prompted federal regulators to step in with their own penalties in cases where they thought the CME was merely slapping traders on the wrist.

Consider the track record of Edward Sarvey and David Sklena, two longtime Chicago Board of Trade brokers who traded U.S. government debt. By 2004, Sarvey had already drawn five penalties for trading violations, with exchange fines ranging from $100 to $25,000 and short bans from the trading floor. Sklena had been sanctioned twice, according to records from the National Futures Association.

In 2004, the two traders engaged in what amounted to insider trading on futures pegged to five-year Treasury notes, according to court documents. The trades netted Sarvey $357,000, while Sklena earned $1.65 million in a single morning. Their customers lost about $2 million, court documents say.

In 2007, the Chicago exchange fined Sarvey and Sklena $125,000 and $175,000 respectively, and banned them from trading for about two months. But federal regulators deemed the penalties insufficient and brought their own civil case against the pair in 2008. That complaint morphed into a federal criminal indictment. Sklena was found guilty of fraud last year and sentenced to five years in prison. Sarvey died before the trial. His former lawyer, John Legutki, says he is "surprised and saddened" by the escalation of the case from "relatively minor" exchange penalties to a full-blown criminal prosecution. "This all weighed on him very heavily," he says of Sarvey.

The case also weighed on federal futures regulators who say it is indicative of soft exchange penalties that fail to deter unscrupulous brokers. "It is not an isolated case," a CFTC official told Reuters. The agency declined to provide numbers on how many times it intervened to correct what it thought were insufficient exchange sanctions.

A CME official said that it was the exchange that first caught Sarvey and Sklena, and that the subsequent federal case was built on "all the good work that the exchange did." He said that "maybe with some exceptions, (federal regulators) find the fines and the penalties that we issue are appropriate." CME also says that the number of enforcement actions brought by its subsidiary exchanges grew from 83 in 2000 to 132 so far in 2011.

During his congressional testimony on MF Global's collapse on December 8, CME Group's executive chairman Terrence Duffy said one way to deter future abuses would be to have "stricter penalties." Duffy said the exchange had conducted its audits and spot checks of MF Global "at the highest professional level" and that the alleged misappropriation of customer funds by the firm was "disguised from all regulators."

In a common refrain, many market participants have accused CME Group of not doing enough to supervise large brokerages whose business and trading volume are key to the company's bottom line. "I've had more than one person say to me that all CME wants is volume, volume, volume, and they don't necessarily care about the integrity of the marketplace," says Jerod Leman, an account executive at Wellington Commodities, a Carmel, Ind.-based broker that works with farmers who lost money in the MF Global collapse. In 2010, CME reported that its average daily trading volume grew to 12.2 million contracts, up 19 percent from the year before.

"DON'T FIX WHAT AIN'T BROKE"

This is not new territory for commodity exchanges. A prominent farmer advocate in 1932 complained that the members of the Chicago Board of Trade "have set up a little government of their own, in which trials are held like a secret lodge," according to Jerry Markham's 2001 book "The Financial History of The United States."

Since those days, the futures business has grown to include hedge funds and other investors, large and small, trading at high volume and using increasingly esoteric financial products, which makes oversight more challenging.

For its part, CME argues it has an obvious self-interest in policing its trading floors because if traders lose faith in the integrity of the exchange, CME Group will lose business. In a 2006 hearing on the matter, CME's chief executive Craig Donohue dismissed assertions of a conflict between the company's profit-making and regulatory missions as "conjecture" and said "don't fix what ain't broke."

Ted Butler, a veteran silver trader, has been pushing Comex, the New York metals exchange owned by CME Group, to investigate allegations of price manipulation on the silver futures market by a handful of large brokerages. But, he says, the exchange hasn't shown much interest. "It is a continuing mystery how the conflicted CME could be responsible for any regulatory oversight given their inherent clear conflict of interest," Butler, who himself had drawn a CFTC sanction in the 1980s, wrote in a recent newsletter.

The federal agency is conducting its own investigation into the silver market, having found no evidence of wrongdoing in an earlier probe. A CME official declined to comment, citing the ongoing federal inquiry, with which the exchange is cooperating.

CME SIDING WITH BUSINESS

In a rapidly growing futures industry, CME Group often has to wade into policy debates between federal regulators and the businesses they oversee. In several of those debates, CME sided with the firms in opposing disclosure rules and trading curbs that could cut into those firms', and the CME's, bottom line.

The CME, for instance, opposed registration requirements for high-frequency traders. CFTC officials hoped the registration would force the traders, some based overseas, to disclose more about themselves and their trading software, and allow regulators to step in quickly in case of trouble that was seen in the so-called "flash crash" of 2010.

Because of the sheer volume and the number of transactions, high-frequency traders provide an attractive business to the exchange. CME Group balked at efforts to saddle them with additional requirements. A CME official says there's no uniform definition of what constitutes high-frequency trading, and that CME's internal systems already provide the exchange with "incredibly granular information that allows us to look at trading activity."

Last year, for instance, CME Group fined a high-frequency trader called Infinium Capital Management $850,000 for glitches in its algorithm that unleashed rapid-fire trading orders and caused a brief spike in oil prices.

UNDERFUNDING OVERSIGHT

Over the past decade, the federal agency has tried to address potential conflicts of interest within the exchanges by insisting they appoint independent directors to their boards and increase the funding and independence of their regulatory oversight committees.

"There was a concern about underfunding the regulatory function of the exchange," recalls Sharon Brown-Hruska who served as a CFTC commissioner between 2002 and 2006. Major exchanges going public only heightened concerns about self-regulation, she says.

CME Group, and other exchange operators, resisted what they saw as the federal agency's unwarranted meddling. But the CFTC prevailed and decreed the exchange boards should be more than one-third independent and that regulatory oversight committees should be properly funded.

Ever since the passage of the Dodd-Frank law, the CFTC has been consumed with writing new rules to prevent future abuses in the derivatives industry. As a result, the resources the agency can devote to enforcing the existing rules may have suffered.

"Unfortunately, in response to the financial crisis, the CFTC has been off on a series of tangents, proposing one regulation after another," Senator Pat Roberts, a Republican, said at a recent hearing. "Meanwhile, back at the ranch for the first time ever, we have a major problem.

The agency says it is being asked to effectively walk and chew gum at the same time, in an era when Congress is in no mood to increase the size of the federal government. CFTC now has about 700 employees, a 10% increase since the 1990s. In the same time period, the futures market has grown five-fold, CFTC Chairman Gary Gensler said in recent congressional testimony.

Two weeks after MF Global's bankruptcy, Congress denied the Obama administration's request for a CFTC budget increase despite the agency's insistence that it needs more money to do its job. "The CFTC just doesn't have the staffing and the resources to audit the brokerages," says a former senior agency official.

That means the CFTC will likely continue to rely on the exchanges to police themselves, although the agency may choose to take a closer look at the markets in some cases. Shortly after the MF Global bankruptcy, for instance, federal regulators said they would conduct a review of the major futures brokerages to make sure their customer accounts are intact.

(Reporting by Philip Shishkin; Editing by Tim Dobbyn)

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