The Wall Street Journal - July 14 2014 EU

VOL. XXXII NO.
113
MONDAY, JULY 14, 2014
At a luxury villa in the Mo-
roccan desert, an interna-
tional brokerage firm hosted
getaways for Libyans con-
nected to the countrys oil-
rich sovereign-wealth funds.
The men spent their days
lounging poolside and nights
partying at clubs in Mar-
rakesh.
The jaunts were part of a
campaign by Tradition Fi-
nancial Services of Switzer-
land to win business in
Moammar Gadhafis Libya, an
effort that included hiring rel-
atives of senior Libyan offi-
cials, according to people who
attended and to former em-
ployees of the firm.
The tactics evidently
worked. Tradition for years
handled investments for the
Libyan funds, earning millions
of dollars in commissions.
Now its efforts are under
scrutiny in wide-ranging U.S.
and British corruption probes
that are examining the
lengths to which some West-
ern financial firms went to
gain a piece of Libyas oil
wealth. The firms access to
Libya proved ephemeral when
Gadhafi fell in 2011. And some
have been left with a transna-
tional headache: multiple in-
vestigations of how they ob-
tained that access.
City of London Police pur-
suing a criminal probe have
interviewed former employees
of Tradition and are nearing a
decision on whether to bring
Please turn to page 10
Swiss Broker Faces
Probe on Libya Deals
By David Enrich,
Michael Rothfeld
and Margaret Coker
How U.S. Airlines Apologize
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Investors Pay Little Heed
To Esprito-Driven Drop
Plunging European stocks,
wobbly bonds and grave con-
cerns about the health of Por-
tuguese lender Banco Esprito
Santo SA made last week feel
like a rerun of the euro crisis,
but most investors say it was
no more than a blip for a re-
surgent region.
Banco Esprito Santo has
been in investors sights since
December, when The Wall
Street Journal first reported
on accounting irregularities at
the complex firm. Nerves
frayed on Thursday when
Banco Esprito Santos parent
company said it wouldnt be
able to meet some short-term
debt obligations.
The stock dropped by 19%,
prompting regulators to step
in and halt trading. The coun-
trys government bonds stum-
bled and other European as-
sets judged to be havens
rallied, marking the first seri-
ous test of confidence in Por-
tugal, which exited its three-
year bailout program in May.
The full extent of Banco Es-
prito Santos stresses is un-
clear. But for now, many inves-
tors see a chance to buy
European assets on the cheap.
When investors take a
step back from bond markets,
we see a buying opportunity
in sovereign debt, said Nick
Gartside, chief investment of-
ficer for fixed income at J.P.
Morgan Asset Management in
London, which manages $1.65
trillion of assets.
Investors should pounce
while bond prices have yet to
fully recover, said Riccardo
Barbieri, chief European econ-
omist at Mizuho Interna-
tional in London.
The drop in the govern-
ment bonds of Portugal and
other bailout recipientsthe
so-called peripherywas an
anomaly in an otherwise
glowing year. Yields on Portu-
gals 10-year bonds have
plunged from 6.13% in Janu-
ary to a low of 3.3% in June.
Yields fall when prices rise.
But the yield crept back up to
BY JOSIE COX
Incrementalism at the
Farnborough Air Show
Business News ...... 15
Journal Report..R1-R8
Talk of raising interest
rates is heating up at
the Fed
U.S. News ............... 7
European telecoms
make content plays
Heard .................... 27
Inside
An Israeli soldier cleans his weapon on Israels border with Gaza, where thousands of Palestinians
fled their homes after the Israeli military warned of an intensified offensive. Article on page 9
Associated Press
Trading Slump
Frays Nerves
On Wall Street
UBS AGs trading floor in
Stamford, Conn., once teemed
with traders occupying a
space equal to two football
fields. The Guinness World
Records recognized it as the
biggest such facility on the
planet. And the Swiss bank
used it to showcase its Wall
Street credentials.
Today, there are virtually
no traders shouting into their
phones or staring at blinking
terminals. UBSs cavernous
floor is taken up mostly by
back-office, legal and technol-
ogy staffers, according to peo-
ple familiar with the bank.
A spokeswoman for UBS
said the trading floor was
built for 1,400 traders, but
wouldnt disclose the number
of employees at the facility.
A deep slump in trading
activity in everything from
stocks and bonds to currencies
is changing the face of Wall
Street. Businesses that once
contributed disproportionately
to the revenues of the worlds
largest banks are now bleed-
ing jobs and sparking fears of
a permanent decline.
Todays markets are bor-
ing, said Thomas Thees, a
former head of North Ameri-
can credit trading at Morgan
Stanley and a former co-head
of fixed income at Jefferies
Group. This is affecting the
opportunity to make money,
and ultimately the earnings
these [trading] businesses can
provide.
Global revenue from trad-
ing in fixed income, curren-
cies and commodities, or
FICC, dropped to $112 billion
last year, down 16% from a
year earlier and 23% from
2010, according to Boston
Consulting Group.
As big banks with large
trading operations such as J.P.
Morgan Chase & Co., Goldman
Sachs Group Inc. and Citi-
group Inc. report second-quar-
ter earnings results this week,
investors and analysts will be
trying to find out whether the
slowdown is temporary or a
lasting shift.
The forces arrayed against
banks trading businesses are
powerful. Since the financial
By Katy Burne,
Justin Baer
and Saabira Chaudhuri
Europe File: Italy, not BES, is
a threat to euro zone. ............ 4
Heard on the Street: A cash
headache for companies..... 27
Banking News
Spanish banks show
recovery is still fragile....... 15
Inside story of Citigroups
$7 billion settlement.......... 16
Heard on the Street: Wells
Fargos health report.......... 27
Israel Poised for Stepped-Up Military Assault
28 | Monday, July 14, 2014 THE WALL STREET JOURNAL.
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2 | Monday, July 14, 2014
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THE WALL STREET JOURNAL.
PAGE TWO
Central-bank economic models
failed to foresee the storm that
devastated the global economy in
2008. Stephen Poloz, the head of
Canadas central bank, is trying an
alternative approach he thinks
will have better foresight: actual
human beings.
Since taking over in June 2013,
Mr. Poloz has pushed staff and
himself to look beyond models for
on-the-ground evidence to
understand Canadas economic
challenges.
His director of Canadian
research has traveled to Calgary
to quiz energy companies about
the investment outlook and to
Toronto to talk to big retailers
about competitive pressures in
setting consumer prices.
At policy meetings, a Bank of
Canada staffer delivers regular
reports showing where anecdotal
evidence from the hinterlands
differs from views inside the
banks Ottawa building. In small
round-table meetings, Mr. Poloz
presses business people to poke
holes in his views about the
economy.
In a December speech he
compared the worlds central
bankers to the sailors of another
era who were driven far off course
by a nasty storm. When things
calmed, they found themselves in
the Southern Hemisphere.
Suddenly the navigational chart
that they relied onthe night
skywas completely different.
His effort shines a light on a
problem that plagues economic
policy makers everywhere as
central banks scramble to fill
gaping cracks in their modeling
laid bare by the financial crisis. At
the Federal Reserve, a major
effort is under way to better
account for how troubled financial
institutions can upend the broader
economy.
Transcripts of Federal Reserve
policy meetings show officials
routinely bring up issues raised in
gatherings with business
executives. The Fed regularly
produces a Beige Book report
with anecdotes on the economy.
But few central banks go to the
lengths of the Canadians to solve
their countrys myriad puzzles.
One example: The central
banks models said a U.S.
economic recovery and a decline
in the Canadian dollar should lead
to a jump in exports and economic
output. But it hasnt.
Mr. Poloz and his staff have
been turning to exporters for
answers. His conclusion: Some key
sectors, like auto-parts
manufacturing, have lost
competitiveness, leading the U.S.
to buy more from lower-cost
producers such as Mexico and
overseas.
Thus a weaker Canadian
currency and more U.S. growth
arent helping them much and
Canadas economy has become
uncomfortably more dependent on
housing and household spending.
When I came, I couldnt put
my fingers on the export story,
Mr. Poloz said in an interview.
We had an export forecast that
was quite solid-looking and
seemed to me a little more
vigorous than anything I could
reconcile with conversations I had
with people. And sure enough,
that forecast recovery has not
materialized.
Christopher Ragan, a McGill
University associate economics
professor, said the approach is
helping Mr. Poloz get a more
complete view of the Canadian
economy than economic models
alone can do. But while all central
bankers rely on their judgment to
some extent, he said, few are as
comfortable as Mr. Poloz in
talking about that part of their
decision-making.
Some people believe judgment
is a hop, skip and a jump away
from a Ouija board, he said.
Mr. Poloz diverges in many
ways from his predecessor Mark
Carney, the hard-charging and
smooth-talking Oxford economics
Ph.D., Harvard undergraduate and
former Goldman Sachs banker
who ran the Bank of Canada and
then the Bank of England. Mr.
Poloz studied at small Canadian
schools and rose through the
ranks of Export Development
Canada, a government export-
promotion office, before becoming
head of the central bank.
Mr. Polozs instinct to turn to
business leaders for answers
stems in part from his years at
EDC, where he developed deep
ties with the nonfinancial
business community during the
financial crisis and recession.
He talks a little different, said
David Dodge, Mr. Carneys
predecessor at the Bank of Canada.
His approach may open him up
to criticism if he fails to navigate
Canadas return to more normal
economic and rate conditions. On
Wednesday, when the bank will
issue its regular policy decision,
Mr. Poloz is widely expected to
hold its overnight target rate for
interbank lending at 1%.
Some investors assert that a
recent rise in inflation might lead
the central bank to a less
accommodative stance.
But the economic backdrop is
challenging. A housing boom
could destabilize the economy
down the road. Meantime, the
Canadian dollar, or loonie, has
been strengthening, which could
squeeze exporters further.
Meanwhile, the Canadian
unemployment rate in June rose to
7.1% from 7%, which may bolster
Mr. Polozs contention that theres
enough slack in the economy to
warrant keeping rates low.
Whatever his precise language
on inflation, bank watchers can
likely count on him deploying a
metaphor to describe his decision.
Before one recent speech, he and
his colleagues debated whether to
liken Canadas overheated housing
market to a bad case of asthma or
a big tree with a crack in it. The
tree metaphor won out.
Its like if the tree in the
backyard has a crack in it. You
worry its vulnerable to a storm.
But if no storm happens, it goes
on and on, and maybe eventually
strengthens through growth. If
the right storm comes along and
knocks it onto your neighbors
house, youve got a problem, he
said in the interview.
Mr. Poloz likened himself to the
character George Costanza of
Seinfeld fame, a show that once
satirized itself as a show about
nothing. Weve done nothing so far
[on interest rates] but weve
explained it well, he said. Its
harder than it looks, doing nothing.
CanadaCentral Banker
HasanUnusual Approach
[ The Outlook ]
BY JON HILSENRATH
AND ELENA CHERNEY
Canadas Export Wedge
Canadas shrinking share of the U.S. nonenergy import pie comes
as its unemployment rate shows scant improvement.
The Wall Street Journal
Note: Canadas rate includes 15-year-olds, and has a broader denition of unemployed. The U.S. rate
includes people 16 and older.
Sources: U.N. Comtrade Database (imports); Statistics Canada and U.S. Labor Dept. (rate)
30
0
5
10
15
20
25
%
2000 05 10 13
Total
Total
(Excluding
commodities)
Commodities
(excluding energy)
Energy 10
5
6
7
8
9
%
12 13 14 2011
Canada (age 15+)
U.S. (age 16+)
Canadas share of U.S. imports Unemployment rate
i i i
Business & Finance
n Spanish banks say a modest
decline in bad loans in recent
months marks a postcrisis
turning point, but analysts
warn that a more comprehen-
sive measure of the banks
health points to a longer road
to recovery for lenders 15
n With the headwinds of the
global economic crisis mostly
behind the aerospace industry,
business is booming again. 15
n Intel is trying new ways to
woo small Chinese suppliers
that have lately had an outsize
impact on the evolution of the
tablet market. 15
n A $7 billion deal between
Citigroup Inc. and the U.S. Jus-
tice Department, expected to
be unveiled Monday, nearly fell
apart one day last month. 16
n General Motors CEO Mary
Barra returns to Capitol Hill
this week for what may be her
last and toughest hearings with
law makers over GMs botched
faulty-ignition-switch recall. 17
n Swiss candymaker Choco-
ladefabriken Lindt & Spruengli
AG is in talks to acquire Russell
Stover, the U.S. boxed-choco-
late seller, according to people
familiar with the matter. 17
n Reynolds American Inc. is
nearing a deal to acquire Loril-
lard Inc. that would transform
the U.S. tobacco industry and
put additional corporate mus-
cle behind the hot electronic-
cigarette market. 18
i i i
World-Wide
n Thousands of Palestinians
in the northern Gaza Strip fled
their homes for U.N. shelters
after the Israeli military
warned them with leaflets and
phone calls to evacuate ahead
of an intensified offensive. 9
n As Ukrainian forces encircle
Donetsk, the head of the rebel
government is likely to find
himself on the receiving end of
the kind of antiseparatist of-
fensive he once urged. 5
n U.S. Secretary of State John
Kerry warned of very signifi-
cant gaps in nuclear talks
with Iran, as he arrived in the
Austrian capital to join the ne-
gotiations. 8
n The U.S. and Germany tried
to play down tensions as their
top diplomats met for the first
time since a new furor erupted
over American espionage in
Berlin in recent weeks. 8
n New data show that the
hope drawing thousands of
children across the U.S.s
southwest borderthat they
will be able to stay in the
U.S.is largely realistic. 6
n Afghanistan on Monday be-
gins preparing an unprece-
dented audit of the 8.1 million
votes cast in the countrys
June 14 presidential election. 3
n France will in the coming
days launch a new military of-
fensive in North Africa to fight
terrorism in the wider Sahel
region. 4
Whats News
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HEARDON THE STREET
Email: heard@wsj.com FINANCIAL ANALYSIS & COMMENTARY WSJ.com/Heard
Wells
Points to
Wellness
At Banks
Consider Wells Fargos
earnings as a quarterly medi-
cal checkup for banking.
While investors werent
overly impressed with a 3.8%
year-over-year rise in net in-
come in the second quarter,
its overall results appear to
confirm signs of health for
the basic business of banking.
Banking has a dual-valve
heart: taking deposits and
making loans. And that heart
is beating steadily at Wells.
Compared with a year earlier,
Wellss deposits grew by more
than 9% and loans by more
than 3.6%. Anemic loan
growth had been a drag on
banks in recent years.
The first half of this year
has seen a marked pickup,
though. Federal Reserve data
show that weekly, year-over-
year loan growth for U.S.
banks started this year at a
low point of 1.8%. It has risen
in a nearly straight line from
there, though, and stood at
5.2% at the end of June, Tor-
sten Slok of Deutsche Bank
noted Friday.
At Wells, business lending
was up by 10% from a year
earlier, faster than some ana-
lysts expected. As Morgan
Stanleys Ken Zerbe pointed
out, that bodes well for banks
like Zions Bancorp and Key-
Corp, which have significant
business-lending operations.
Mortgage originations at
Wells grew by 31% from the
first quarter, although the
spring pickup wasnt as ro-
bust as anticipated. Some 74%
of home loans were purchase
mortgages, up from 44% a
year ago. That suggests home
buyers may be beginning to
fill the gap left by the end of
the refinancing boom.
Commercial real-estate
lending, however, shrank by
0.8% from the first quarter
and may bode ill for some
midsize banks.
A measure of health for
the cardiovascular system of
banks is the net interest mar-
gin, or the difference between
their cost of funding and in-
terest earned on loans. It
shows how healthily funds are
flowing through a bank. While
this shrank by 0.05 percent-
age point at Wells compared
with the first quarter, the rate
of the decline was slower
than in the first quarter.
Meantime, loan quality
continued to improve, with
net charge-offs at Wells de-
clining and the bank releasing
an additional $500 million
from loan-loss reserves.
Combined, these factors
suggest bank performance
may end up being healthier
than expected in the second
quarter. John Carney
A Cashache for Companies
After the financial crisis,
companies built strong cash
buffers to ride out the storm.
But that comfort has come at
a cost to corporate treasur-
ers, who must grapple with
the consequences of persis-
tent ultraloose monetary pol-
icy.
Portugal Telecoms prob-
lems put a new focus on what
companies are doing with
their cash piles. The company
has 897 million ($1.22 bil-
lion) invested in commercial
paper from a unit of troubled
conglomerate Espirito Santo
International. Standard &
Poors already has withdrawn
its rating on Portugal Tele-
com because the company is
merging with Oi. But S&P is
considering cutting the rat-
ing of the Brazilian company
to junk because it fears the
cash is at risk. Portugal Tele-
coms shares have fallen 29%
in July.
The Portugal Telecom
case is, hopefully, an extreme
one. But it highlights that
getting cash management
wrong can be extremely
costly. And there is a lot of
cash to manage: S&P says the
2,000 nonfinancial companies
that spend the most on capi-
tal expenditure globally held
$4.5 trillion of cash at the
end of 2013.
With zero-rate policy de
rigeur for major central
banksand now, a negative
deposit rate at the European
Central Bankfinding a home
for that money has become
more complicated. Short-
dated government debt, like
three-month German or U.S.
bills, yields 0.01% or less; in
real terms rates are negative.
Compared with higher corpo-
rate funding rates, there is a
clear cost to keeping cash on
the balance sheet. For sure,
the prime task of any trea-
surer is to ensure that cash is
invested in instruments that
are liquid and secure; the
yield is a lesser concern. Re-
turn of capital trumps return
on capital.
But even so, changes to
market structures are making
life difficult. Banks are under
pressure to make more use of
longer-term funding and rely
less on short-term, corporate
deposits that can prove
flighty. Moreover banks
credit ratings have tumbled
from their lofty precrisis lev-
els, leaving corporate trea-
surers with little choice but
to tolerate higher credit risk.
The pool of very highly rated
government debt has shrunk
thanks to quantitative easing
and the euro-zone sovereign-
debt crisis.
So corporate treasurers,
like other investors, have to
sacrifice either liquidity or
credit quality to invest cash,
either by agreeing to lock it
up for longer, or by buying
paper from lower-rated, but
still investment-grade bor-
rowers. This isnt a search
for yield as virulent or frothy
as that afflicting fund man-
agers. But treasury depart-
ments, too, are taking more
risk.
Brighter economic condi-
tions should encourage com-
panies to spend some of their
cash hoard. But memories of
the liquidity drought of 2008,
when the banking system
came close to collapse, may
mean companies prefer to
keep higher cash positions
than precrisis. As long as
zero rates continue, the
headache for corporate trea-
surers will persist.
Richard Barley
Telecoms Dial Up Content Plays
Not content to dominate
cell phones and Internet con-
nections, Telefnica is on a
mission for television sets too.
The Madrid-based telecom
operator is bulking up in con-
tent, buying the part of the
Spanish pay-TV business Digi-
tal Plus that it didnt already
own for just over 1 billion
($1.4 billion).
Other European telecom
and cable operators could in-
creasingly fancy themselves
on the small screen, too. But it
still looks risky to dial up big
deals.
Telefnicas acquisition of
the 78% of Digital Plus it
didnt own was partly oppor-
tunistic. Majority owner Pro-
motora de Informaciones,
the troubled Spanish media
company, was an eager seller,
and Telefnica didnt face
competition from minority
partner Mediaset Espaa, ei-
ther.
But bulking up in the pay-
TV business also makes sense.
Pay TV is a way to lock in top-
spending households, reduc-
ing churn in Telefonicas do-
mestic fixed-line business.
Telefnica customers with pay
TV as part of their package
spend at least 20% more than
those that dont take the ser-
vice, estimates Morgan Stan-
ley.
Much of that logic extends
elsewhere in Europe, where
fixed-line operators are wad-
ing deeper into content as a
way to differentiate an other-
wise-commoditized service.
Liberty Global acquired Mid-
somer Murders producer
All3Media with Discovery
Communications in May and
its Belgian cable operator Te-
lenet bought a stake in a local
broadcaster. U.K. telecom BT
Group is buying rights to air
sports matches in a bid to ex-
pand broadband Internet
sales.
Adding a free-to-air broad-
caster like the U.Ks ITV or
European network RTL
Group, might be the next logi-
cal step. Both own production
studios, which could give a
buyer more original content.
ITVs studio business,
which produced the popular
Downton Abbey series, is ex-
pected to generate just under
a quarter of group sales this
year, J.P Morgan analysts esti-
mate. Owning a broadcaster
could also strengthen a dis-
tributors hand when negoti-
ating rights to others con-
tent. But broadcast stocks
arent cheap, having already
benefited from the pick-up in
ad spending. ITVs share price
has risen almost 400% over
the past five years to trade at
about 13 times forward earn-
ings. RTL Groups valuation
has risen from 11 times in
2009 to more than 15 times,
according to FactSet.
Moreover, fitting a broad-
caster into a telecom or cable
operators business isnt
straightforward. TV needs
scale to be profitable, suggest-
ing a buyer might still need to
sell much of its content to
third parties. That could limit
how much exclusive content
an operator is able to offer its
own paying subscribers.
Some operators are also
wary about adding cyclical ad-
vertising revenue to their de-
fensive, subscription-based
models.
The appeal of hooking in
phone customers with content
seems unlikely to fade. But
rather than splurging on big
deals, Europes telecom opera-
tors for now should be con-
tent to experiment.
Renee Schultes
Talk Show
Number of pay-TV subscribers
globally*
*As of last reported quarter
Source: Company reports
BT Group
1.0 million
Telefnica
3.6 million
Deutsche Telekom
5.8 million
Orange
6.6 million
It isnt exactly a secret
that financial advisers are
on the rise on Wall Street.
James Gorman has put
wealth management at the
center of Morgan Stanley, a
move that helped the Wall
Street firm buck the tide of
declining earnings last quar-
ter. Even Goldman Sachs,
which is still led by a com-
modities trader, is looking
to expand its once sleepy
financial-advisory operation
The revival of financial-
advisory services doesnt
just show up in quarterly
earnings, though. It can
also be seen in the Wed-
dings & Celebrations sec-
tion of the New York
Times. Thanks to Wed-
dingCrunchers.com, it is
possible to track trends in
the wedding announce-
ments going back to 1981.
A search of the relevant
terms reveals that invest-
ment bankers and traders
are now less-frequently
mentioned than are finan-
cial advisers.
Perhaps it is an unin-
tended consequence of the
Volcker Rule. On a related
note, Morgan Stanley now
leads the marriage league
tables, getting more men-
tions in the nuptial notices
than does Goldman Sachs.
OVERHEARD
Competition
Clouds Picture
For a Box IPO
For Box, the tricky part of
the next few months may be
convincing investors it is
more than its name implies.
The Silicon Valley com-
pany filed to go public in
March, but a sharp down-
swing for other so-called
cloud stocks forced it to hold
off. It effectively put more
time on the clock this week
with a $150 million funding
round that will tide it over
until it can make its debut,
likely sometime this fall.
Many are watching Box as
a gauge of investor appetite
for the turbulent cloud sec-
tor. Its most recent securities
filing drew cheers with up-
dated financial results show-
ing it can still grow revenues
at a breakneck pace while
holding the line on expenses.
Leave it to Amazon.com
to cloud the picture, though.
That companys cloud busi-
ness, AWS, announced a new
Web-based storage and shar-
ing system Thursday that
competes directly with Box.
This provides a stark re-
minder the company faces a
wide pool of deep-pocketed
competitors that also in-
cludes Google, Microsoft
and EMC.
Box may have new prod-
ucts of its own up its sleeve,
which could help convince
investors it is more than just
a convenient service for
workers to park their files.
But it still needs to prove the
sustainability of its business
modeland the latest filing
didnt settle that question.
Spending on sales and
marketing continues to ex-
ceed quarterly billings, and
billings growth slowed in the
April quarter from a year ago
as more customers elected to
pay in monthly or quarterly
installments instead of an-
nual, a possible sign of
weaker pricing power.
The IPO market also could
get crowded. While a fall de-
but for Box would likely
come after the massive Ali-
baba offering in progress,
more venture-backed cloud
and Internet companies
could join the fray.
Box has bought time. It
still needs to make its case.
Dan Gallagher
Slim Pickings
U.S. three-month T-bill yield
Sources: FactSet (yield); Moodys Investors Service (ratings)
5
0
1
2
3
4
%
06 08 10 12 14 04
Ratings of holdings in U.S.
prime money-market funds,
March 2014
Note: Percentages dont total
to 100% due to rounding.
A3 or lower
1.6%
Triple-A
21.5%
Double-A
45.8%
A1/A2
31.0%
Getting cash
management wrong
can be costly. And
there is a lot of cash
to manage.
NEWS
Kabul to Start
Auditing Votes
In Kerry Deal
KABULAfghanistan on Monday
begins preparing an unprecedented
audit of the 8.1 million votes cast in
the countrys June 14 presidential
election, a process that is supposed
to take at least three weeks and will
delay the inauguration of a new
president.
Former Finance Minister Ashraf
Ghani and former Foreign Minister
Abdullah Abdullah agreed after mar-
athon talks with U.S. Secretary of
State John Kerry this weekend to a
full audit of the bitterly contested
election, which had threatened to
split the country along ethnic and
territorial lines.
In a crucial political deal also
brokered by Mr. Kerry, the two can-
didates said that in addition to ac-
cepting the results of the audit, they
agreed that the winner of the elec-
tion would form a national unity
government that would include the
losing side.
This will be still a difficult road,
because there are important obliga-
tions of the audit, Mr. Kerry said in
a briefing with Afghan President
Hamid KarzaiBut tonight, Afghani-
stan saw a moment of what unity
can mean.
As part of a deal to break the
deadlock over Mr. Abdullahs allega-
tions of widespread fraud on his ri-
vals behalf, Afghans and the inter-
national community now face the
herculean task of retrieving all of
the ballots cast around the country
and scrutinizing each one for signs
of fraud.
The audit will be carried out in
Kabul, and it will begin within 24
hours, Mr. Kerry said late Saturday,
adding that the U.S.-led Interna-
tional Security Assistance Force
would handle the transporting of
ballot boxes from the countrys 34
provinces.
Election officials said the audit
will start in earnest as early as
Tuesday.
Mr. Kerry and several of his top
Afghan experts spent much of Fri-
day largely listening to the candi-
dates, trying to gauge the potential
for an agreement, according to offi-
cials involved in the talks.
Shortly before midnight on Sat-
urday, after 14 hours of discussions,
the two candidates linked arms to-
gether with Mr. Kerry to celebrate a
deal.
The clock is ticking. U.S. and in-
ternational combat troops are set to
withdraw by the end of this year,
and Mr. Karzai has refused to sign a
bilateral security agreement with
Washington that would allow the
U.S. to keep a small force in the
country to conduct training and
counterterrorism missions.
While both candidates say they
will sign the deal, the United Na-
tions and the candidates have now
asked the Afghan government to
push back the planned Aug. 2 date
for the new presidents inaugura-
tion, to allow time to conduct the
audit.
Jan Kubis, the U.N. envoy to Af-
ghanistan, described the process of
separating out ballots suspected of
fraud as a truly unprecedented, ab-
solutely unique, intrusive audit,
and he appealed to international or-
ganizations to send personnel to
help supervise the process.
Send as quickly as possible ob-
servers to augment the teams that
are here, he said. This support of
the international community is
needed to provide credibility to this
process of audit.
Technical details remain to be
worked out for the audit, represen-
tatives of both candidates said. Ne-
gotiations also lie ahead over the
composition of a government of na-
tional unity. The new president will
formally appoint a government
chief executive officer picked by
the runner-up, according to mem-
bers of both campaign teams.
The European Union said in a
statement Sunday that the EU Elec-
tion Assessment Team will closely
follow the agreed auditing of elec-
tion results.
Word of the agreement gave a
boost to some Afghans, who have
endured months of uncertainty over
the political transition. Currency
traders said the afghani had appre-
ciated against the U.S. dollar.
Investors fearing violence were
fleeing the country, but now they
are staying here and see a hope for
the future, said Ameen Jan Khos-
tay, a money changer in Sar-e
Shahzada, Kabuls bustling currency
market.
We saw an increase in daily
trade today, he added. This is pos-
itive progress, and we welcome it.
Habib Khan Totakhil
contributed to this article.
BY NATHAN HODGE
AND IAN TALLEY
Ashraf Ghani, left, and Abdullah Abdullah in Kabul on Saturday.
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SPORTS
LeBron James Is Returning to Cleveland
The Miami Heat Star Decides to Sign a New Deal With His Home-State NBA Team, the Cavaliers
LeBron James, the singular tal-
ent in his generation of newly pow-
erful professional basketball players,
has decided to return to the home-
town team he once spurned, a move
that will rearrange the NBAs com-
petitive furniture for years to come.
James ended weeks of specula-
tion about his basketball future Fri-
day by announcing he will sign with
the Cleveland Cavaliers, the team he
played for in the first seven years of
his career. James left in 2010 for
Miami, where he won two NBA titles
with the Heat.
That decision four years ago,
which was broadcast in a television
special called The Decision, re-
sulted in a backlash against James
in a city that had once revered him.
He was cast as a villain as soon as
he said he would take my talents to
South Beach to join fellow super-
stars Dwyane Wade and Chris Bosh.
Fridays decision was more un-
derstated and felt far less engi-
neered. With the basketball world
effectively frozen as he deliberated,
James announced his choice in a
952-word essay for Sports Illus-
trated.
In the article, the 29-year-old
James said he wouldnt be holding a
news conference or hosting a party
as he had the last time, but instead
wanted the opportunity to explain
himself without interruption. He
also said the decision reflected a re-
lationship with Ohio that was big-
ger than basketball.
I didnt realize that four years
ago, he said. I do now.
It is the unlikeliest of homecom-
ings for James, who grew up in
nearby Akron, Ohio, and was drafted
by the Cavaliers with the No. 1 pick
in 2003. On the July night in 2010
when James left Cleveland, Cava-
liers fans reacted by burning his jer-
sey outside the teams arena. The
teams owner denigrated James as
our former hero and called his act
a cowardly betrayal.
At no point in the last four
years did I ever think this was going
to happen, said John Krolik,
founder of Cavs: The Blog. In that
time, James reached a new level of
success in Miami, while establishing
himself as the NBAs best player
since Michael Jordan.
The Heat reached the NBA Finals
in all four of his seasons there, win-
ning twice. This season, they lost
decisively in the Finals to the San
Antonio Spurs.
But it was Miamis basketball
culture that affected James in the
most meaningful way. He learned
how to win, said Turner Sports an-
alyst and former NBA star Grant
Hill.
Meanwhile, Cleveland bottomed
out when James leftand that lack
of success scored the Cavaliers the
top draft picks necessary to sur-
round James with talent now. They
took Kyrie Irving, for example, with
the No. 1 pick in 2011, and signed
him to a contract extension this
week. Cavaliers fans are also hold-
ing out hope that Cleveland adds
another player, perhaps through a
trade, to round out a big three of its
own.
Jamess new deal makes the Cav-
aliers an immediate title contender
in a league that is suddenly wide
open. The online sports book Bo-
vada pegged the Cavaliers as the 7-
to-2 favorite to win next years
championship, even though they ha-
vent made the playoffs since James
last played for them.
They are still far from a sure
thing. The team has a first-year gen-
eral manager, David Griffin, and a
rookie coach, David Blatt. James
himself refused to promise a cham-
pionship right away. Were not
ready right now. No way, he wrote.
It will be a long process, much lon-
ger than it was in 2010.
Still, Jamess latest decision, and
the incredible amount of interest in
it, may have even wider implications
off the court, as it reflects the in-
creasing value of superstardom in
the NBAs new era.
NBA teams have never been
worth more than they are now that
financial titans have targeted them
as toys.
In the last three months, former
Microsoft CEO Steve Ballmer struck
a deal to buy the Los Angeles Clip-
pers for $2 billion, and hedge-fund
billionaires Marc Lasry and Wesley
Edens purchased the Milwaukee
Bucks for $550 million.
Players are becoming more con-
scious of their personal brands,
which is evident everywhere from
their off-season contract negotia-
tions to their pregame fashion
choices. In 1994, when Hill was a
rookie in the NBA, I dont even
think I knew what the word brand
meant, he said. Today, though,
theyre more aware of their power,
and theyre willing in a subtleand
sometimes not so subtleway to
use to that to their advantage, he
said.
James had a power struggle of
his own to navigate before returning
to Cleveland. His agent, Rich Paul,
kept an office in Cleveland, while
James still had a home in the area.
But there was still the issue of Cava-
liers owner Dan Gilbert, the founder
of Quicken Loans, who wrote a let-
ter after James left in 2010 that as-
sailed his character and wrongly
guaranteed the Cavaliers would win
an NBA title before James did. This
week, at long last, the letter was re-
moved from Clevelands website.
Everybody makes mistakes,
James wrote in his article. Ive
made mistakes as well. Who am I to
hold a grudge?
On Friday, minutes after James
went public with the decision that
overturned The Decision, Gilbert
wrote on Twitter: Welcome home.
BY BEN COHEN
While still with the Cavaliers in 2009, LeBron James throws powder into the air moments before game four of the NBA Eastern Conference Finals.
A
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Miamis basketball culture
had an impact on James.
He learned how to win
2
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COMING SOON
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and heartbreak of the 2014
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CUP: A WSJ e-book
EUROPE NEWS
France to Give Broader Mission
To Troops Deployed in Africa
PARISThe French government
said over the weekend that it was
rearranging its military forces scat-
tered across the Sahara to better
combat Islamist militants threaten-
ing the stability of several Western
African countries.
French Defense Minister Jean-
Yves Le Drian said Sunday that Paris
would assign a broader, regional
mission to the thousands of troops
it deployed 18 months ago to Mali to
help prevent the country from fall-
ing into the hands of jihadist and
separatist groups.
The new operation, code-named
Barkhaneafter crescent-shaped
Saharan duneswill have its head-
quarters in Chad and rely on about
3,000 soldiers already in the re-
gion.
The objective is principally one
of counterterrorism, Mr. Le Drian
said. The aim is to prevent what I
call the highway of all forms of traf-
fic to become a place of permanent
passage, where jihadist groups can
rebuild themselves between Libya
and the Atlantic Ocean.
Frances President Franois Hol-
lande is expected to formally launch
the operation this week when he
travels to the region and has a lay-
over in Chads capital NDjamena, a
person familiar with the matter
said.
The announcement will mark a
breakthrough for the French govern-
ment, which spent months haggling
with Chad over the right to base the
operation there.
The new military operation high-
lights how France is struggling to
relinquish its role as the gendarme
of many parts of Africa.
Paris has long tried to reduce its
military footprint on the continent,
a legacy of its colonial rule. But the
rise of radical offshoots of al Qaeda
across North and Western Africa,
which have designated France as a
target, has forced the French mili-
tary to retrench.
Early last year, France dis-
patched thousands of soldiers to
Mali after jihadist and separatist
groupswho controlled large
swaths of the countrys north
launched an offensive that French
officials feared placed them within
striking distance of the capital, Ba-
mako.
BY RUTH BENDER
New Center-Left Party
Wins Slovenian Election
LJUBLJANA, SloveniaA re-
cently formed center-left party in
Slovenia, started by a newcomer in
politics, scored a landslide victory in
a parliamentary election Sunday
amid voters distrust in established
parties and unease over state asset
sales in this small euro-zone state,
preliminary results of nearly 90% of
votes counted by the State Election
Commission showed.
The result, if confirmed, could
make Miro Cerar, a 50-year-old law
professor, the countrys fourth
prime minister since the 2008 start
of a global downturn.
Mr. Cerar, whose father is a well-
known Olympic medalist, launched
his Party of Miro Cerar just five
weeks ago. He quickly became popu-
lar among voters looking for a new
leader untarnished by corruption
scandals that have dogged some in-
cumbent parties.
Most current politicians have
been at their posts for the past 20
years and they havent done much
good, so I hope that this will now
change thanks to Mr. Cerar, said
Lea Kamnikar, a public worker in
Ljubljana, after casting her vote for
the new party.
The preliminary polls showed that
Mr. Cerars party won 34.8% of all
votes cast, giving it the largest bloc
in the 90-seat parliament, with 36
votes. Six other parties will hold the
remaining seats. The partial results
are in line with the earlier released
exit polls. Final results are expected
in late July after ballots cast by mail
and Slovenians abroad are counted.
Mr. Cerar will have to rely on
support from other smaller parties
to get a parliamentary majority, and
coalition-building talks are likely to
take several weeks.
Mr. Cerar said that he is ready
to negotiate with all parliamentary
parties except the Slovenian Demo-
cratic Party of former Prime Minis-
ter Janez Jansa. Last month, Mr.
Jansa began serving a two-year jail
sentence for corruption. Mr. Jansa,
who didnt run in the Sunday elec-
tion, has denied wrongdoing and
hopes the countrys Supreme Court
will reverse the sentence.
Nevertheless, Mr. Jansas conser-
vative Slovenian Democrats are
likely to become the largest opposi-
tion party, with 21 seats in the new
parliament, the exit polls showed.
The most likely partners in the
new coalition to be led by Mr. Cerar
are two center-left parties: the So-
cial Democrats and the Democratic
Pensioners Party of Slovenia, pro-
jected to hold six and 10 seats, re-
spectively, in the new parliament.
Mr. Cerar has pledged to stick
with budget deficit-slashing mea-
sures demanded by the European
Union. He has also promised to cut
red tape and simplify labor market
rules to help the economy, expected
to contract for a third consecutive
year in 2014.
BY LEOS ROUSEK
Portugal Isnt Europes Biggest Worry
Portuguese bank is controlled via
a cascade of family-owned holding
companies and came under
pressure when financial
irregularities were uncovered at
its ultimate parent, Esprito Santo
International SA, a conglomerate
with diverse interests all over the
world. Not only was the
Portuguese bank a lender to these
family interests, but it had allowed
units higher up the shareholder
structure to sell bonds directly to
its own customers. The market
feared a black hole.
But there are good reasons to
believe that BES isnt a serious
threat to the financial stability of
Portugal, let alone the euro zone.
Indeed, there are other risks that
should worry investors moreand
may have been a factor in last
weeks selloff.
The situation at BES looks
better contained than initially
feared. Its exposure to companies
higher up the shareholder
structure turns out to be just 1.1
billion ($1.5 billion)that is
manageable in the context of a
100 billion balance sheet and its
7 billion of equity, 2.1 billion
above the regulatory minimum.
Even if, in a worst-case scenario,
BES came under pressure to honor
guarantees given by its controlling
shareholder to buyers of its bonds,
the total exposure would rise by
700 million to 1.8 billion.
Of course, the debacle at BES is
sure to be painful for the banks
shareholders, many of whom only
recently subscribed to a 1 billion
capital increase and are already
nursing losses on their new
shares. The shares have so far lost
more than half their value since
early June.
Now they face the prospect of
not only filling the hole caused by
any losses on exposures to the
banks controlling shareholders,
but also the prospect of a 25%
stake in the bank coming onto the
market should the family be
forced to sell. If they refused to
put up money, the government
still has 6 billion of its bailout
money earmarked for bank
recapitalizations available to fill
any shortfall, threatening
shareholders with even deeper
dilution.
But there is no reason so far
why BESs problems should cause
longer-term difficulties for
Portugal beyond any short-term
knock to confidence. The country
is already seeing the benefits of a
far-reaching reform program;
growth this year is expected to be
above the euro-zone average at
1.2%, rising to 1.5% next year.
Unemployment has fallen for
seven consecutive quarters to
14.3% from a peak of 17.5%, which
has helped fuel a recovery in
domestic demand.
Despite BESs problems, growth
should be supported by a healthier
banking system. Portugals second-
largest listed lender, Millennium
BCP, is raising 2.25 billion of
new equity via a fully
underwritten rights issue. The
Portuguese banking system should
also be major beneficiaries of a
new European Central Bank long-
term cheap funding facility
announced in June.
What should worry investors is
less Portugal but the fact that
growth appears to be stalling in
some of the euro zones biggest
economies. The latest surveys
point to manufacturing having
contracted in June in Germany,
France and Italy. Some of this may
be explained by one-off factors,
including weather disruptions and
the timing of public holidays. The
crisis in Ukraine also appears to
have hit German exports.
But the real disappointment
has been in the weakness of the
recovery in the new sick men of
Europe: France and Italy, both of
which have been slow to deliver
the reforms that have been
boosting productivity and
competitiveness elsewhere in the
euro zone. Indeed, whereas J.P.
Morgan last week raised its
growth forecast for Spain for this
year to 1.5%, reflecting the success
of its reforms, it downgraded its
forecast for Italy to 0%.
Given the size of its economy
and the scale of its public debtat
133% of gross domestic product
Italys lack of growth remains the
biggest threat to the stability of
the euro zone. Yet to the concern
of many policy makers and
investors, Prime Minister Matteo
Renzi appears to be spending
more political capital seeking
changes to euro-zone fiscal rules
to allow Italy to borrow yet more,
than he is on pushing through
reforms that might boost Italys
growth prospects.
When Mr. Renzi took office in
February, he announced an
ambitious 100-day program to
change Italy. Having failed so far
to deliver on any of his goals, he
has now given himself a new
deadline of 1,000 days. Yet the
only substantial reform that now
looks likely to be achieved this
year is an overhaul of the electoral
rules and the Senatereforms of
totemic significance to the Italian
political class but of zero
economic consequence.
Far-reaching reforms of the
public administration, judicial
system, government spending and
labor market have been promised
but details remain scarce and
timing unclear.
Until Mr. Renzi proves he can
live up to his own domestic
reforming rhetoric, investors
should brace themselves for more
wobbly weeks like the last one.
For a few days last week, it was
dj vu all over again.
Fears over the collapse of a
Portuguese bank spooked the
market. European
stock markets fell;
bond spreads for
euro-zone
peripheral
countries widened,
spreads for core
countries
tightened; a Spanish bank pulled
its bond auction and a Greek
government bond issue raised less
than hoped.
Ghosts that investors had
begun to assume had been finally
banished appeared to be haunting
the markets again: the fragility of
the euro-zone banking system and
the risks of contagion.
Some would argue that a
market wobble was long overdue.
The tide of money that has poured
into Southern Europe this year has
been extraordinary. The markets
have been wide open to every
government and bank. Even
Cyprus has issued bonds and its
largest bank is on the road raising
equity. The European high-yield
bond market is on track for its
best year by volume. Regulators
have taken to warning that
investors may be underestimating
the risks still lurking in the euro
zoneperverse given that central-
bank policies have been explicitly
designed to encourage investors to
take these such risks.
The travails of Banco Esprito
Santo may have struck many
investors as a good excuse to take
money off the table. The
EUROPE FILE | By Simon Nixon
Growth Outlook
Annual change in GDP
Sources: Eurostat; European Commission (est.)
0
estimates
4
6
4
2
0
2
%
08 10 12 14 08 10 12 14
Italy Portugal
Locals welcomed French soldiers sent to northern Mali early last year.
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BOOKS
How It Got Written
How did the Bible come to be
what it is today? In one sense,
thats an easy question. Place the
book in historical context and a
number of probabilities emerge.
Many Middle Eastern mythologies
and law codes show broad similari-
ties; so do early ritual practices.
The profession of scribe was com-
mon to a number of local regimes,
and the sanctity of shrines encour-
aged the storage of important doc-
uments. But the question of where
the Bible in particular got its wide-
spread, lasting and pre-eminent
authority is not as easy to answer,
for either the Hebrew Bible or the
Christian New Testament.
The Hebrew Bibles emergence
seems, in retrospect, particularly
fraught. Though this scripture it-
self celebrates a united kingdom of
Israel and Judahwhich would
have flourished around the 10th
century B.C., the period of the
kings David and Solomonthe
Jews in reality had almost no
chance to give their literature a
sustained prominence in the typi-
cal ways: through conquest, coloni-
zation and trade expansion.
That was how the Greeks en-
shrined their texts, particularly af-
ter Alexander the Greats lieuten-
ants established kingdoms in Egypt
and far into Asia; and it was how
the Romans perpetuated their own
texts during the long Pax Romana,
after they had subjugated most of
the known world. In contrast, the
Jews were almost always at the
receiving end when there was pres-
sure between their civilization and
a foreign one. It appears very likely
that they cherished their scripture
as one of the few things that, over
time, would allow them to endure
and transcend alien hegemony.
Most of the texts we now call
the Hebrew Bible were saved from
destruction and revived from ne-
glect despite threats and incur-
sions from Assyrians, Egyptians,
Babylonians, Persians and others.
They were written and rewritten
and fused together from diverse
sources and somehow authorized
and propagated. Then they were
added to and strengthened in au-
thority during further centuries of
national and religious struggle and
disaster.
Michael Satlows How the Bible
Became Holy tells this story and
the story of the New Testament
describing, in effect, the slow
growth in the Bibles sanctity. In
outline, he is helpful and persua-
sive. He begins, naturally, by trac-
ing the origins of the Hebrew Bible
in early Israel and Judah. He then
moves through centuries of reli-
gious and legal reforms and dis-
cusses, among much else, the
early- to mid-sixth-century Babylo-
nian Captivity and the subsequent
period, when a rebuilt Temple and
rebuilt walls in Jerusalem found a
counterpart in nation-building doc-
uments.
As Mr. Satlow stresses, there is
no solid evidence that, during this
entire time, scripture per se was
ever enforceable law, let alone that
it had constitutional force as Deu-
teronomy 17:14-20 suggests in
verses decreeing that the king him-
self is subject to the law. Very
probably, scripture was only a con-
comitant to belief and ritual and
was freely interpreted to adapt to
their various forms.
The Hebrew Bible began to
work toward a modern type of au-
thority only with a culminating di-
saster. For the Jews, the destruc-
tion of the Second Temple by the
Romans in A.D. 70 prevented sacri-
fice, which had been exclusively
centralized there, and so stripped
any of the priestly hierarchy who
survived of their basic function.
Rabbis, or teachers, with their por-
table scripture and versatile
knowledge of it, were left to main-
tain Jewish tradition, leading to
the Torah scrolls enshrinement as
a synagogues all-important trea-
sure.
Christians, for their part, expe-
rienced perhaps an even stranger
journey toward the sanctity and in-
stitutionalization of their scrip-
tures. The writings that came first
and that, many would argue, are
the theological core of the New
Testament comprise six or seven
letters by Paul of Tarsus, who dur-
ing much of his career as a mis-
sionary was in open conflict with
the crucified Jesus surviving fol-
lowers and relatives in Jerusalem.
Paul, who never met Jesus in the
flesh, preached the crucifixion as a
sacrifice for the salvation of hu-
mankind, the resurrection and the
Second Coming. He did not know
about or just never dwelt on Jesus
life, miracles or teachings as laid
out in the four Gospels.
The oldest surviving Christian
Biblesbeautifully lettered on du-
rable velummay be among the
ones expensively commissioned to
supply churches by the Roman Em-
peror Constantine after he legal-
ized Christianity and folded it into
the Roman state in the fourth cen-
tury. Already the better part of two
centuries had passed since Justin
Martyr prevailed in a bitter argu-
ment about the basic shape of the
Christian Biblewhich, it turned
out, was to include Jewish scrip-
ture and the Gospels. This long de-
lay is just one index of the Bibles
halting progress toward en-
shrinement as a unitary document
of sweeping significance.
Mr. Satlow, an accomplished
professor of Judaic studies at
Brown University, presents the es-
sentials of this progressin both
its Jewish and Christian manifesta-
tionswith impressive erudition,
but he often falls short by not tak-
ing the Bible seriously enough,
leaving the main conundrum un-
touched. The Bibles growth in au-
thority was slow indeed, but there
the Western world was anyway, by
not-so-late antiquity, with a Bible
of lofty and exquisite authority.
Could it be that the texts were liv-
ing, in the sense that they vindi-
cated themselves in many hard and
unexpected circumstances?
Mr. Satlow often uses the word
fantasy as a brush-off for idealis-
tic-looking passages in scripture,
as if his story were about nave ef-
forts to create a perfect world by
means of a book. The real story is
practically the opposite. It is true,
for instance, that Deuteronomy
never became a constitution per
se; but it put forward the idea of
accountable government at a time
of god-kingships. That human over-
reach might be checked by tran-
scendent law must have intrigued
both ordinary people and an elite
who came to realize that it was in
no position to thunder and
threaten and terrify. Through the
text, then, a new way of thinking
about law and society was
developed and valued.
Prophecy and oracle are
also for Mr. Satlow dismissive
terms, suggesting magic and
mumbo-jumbo. But such an atti-
tude discounts the most important
functions of the written word for
the ancients. Writing that was
held sacred was never properly
about throwing the bones to pre-
dict the future for the gullible. In
any particular case, someone at
first merely emitted words in a
world full of chatter. Rhetoric,
narrative, poetry and ritual utter-
ance were the communications
technology of Mediterranean
lands, with the effusions of
individuals playing the role of so
many websites and Twitter feeds.
But over time, with both popular
and hierarchical affirmation, some
words were set in the category of
truth, as plausibly connected to
the eternal. It was the seconding
of words meaning through collec-
tive and long-term experience that
mattered.
The operative paradox that Mr.
Satlow misses is that of popularity
and adaptability. No words were
more self-consciously and thunder-
ously holy than the curses in-
scribed on pharaohs tombs as
warnings, but these must merely
have entertained the robbers who
sacked every funerary hoard they
could find. Whats at issue isnt a
writers intention that a text be
holy, or any authoritys treatment
of it as holy, but the broad assent
that the text can win for its holi-
ness.
To argue, in effect, against this
process requires some questionable
moves on Mr. Satlows part. He
tries to undercut, for instance, the
well-founded consensus that Paul
was a Diaspora Jew, from a family
established in Tarsus (in modern-
day Turkey), who first lived in Je-
rusalem during his youth or young
adulthood for study and profes-
sional and religious development.
For this account Mr. Satlow substi-
tutes a speculative one of Paul as a
cradle Palestinian Jew, and he does
this seemingly in order to support
a widespread characterization of
the evangelist as a traitor to his
heritage: As far as scripture is con-
cerned, Paul hawked a debased
version among people he didnt
know and who themselves didnt
know any better; he wasnt one of
them, attuned to their needs and
aspirations; holy writing as he pre-
sented it and remade it thus has no
deep integrity.
Whatever the biographical real-
ity here, Mr. Satlow certainly does
not succeed in sweeping away the
data indicating a more critical real-
ity, one that broadly informed the
Bibles development. Two things
easily co-existed in Pauls thought
and contributed jointly to his suc-
cess: his great dependence on and
devotion to existing scripture
(from whichever geographical or
cultural sources he got them, he
snows down quotations, citations,
glosses); and a belief that existing
scripture profoundly belonged to
him, so that he should be able to
do as he liked with it.
Scholars like Elaine Pagels, sec-
onding the historical critics who
arose more than two centuries ago,
have stressed the arbitrariness of
scriptural authority. This authority
is supposed to result from the facts
of history, especially political and
institutional facts. We are
purportedly assigned certain be-
liefsbacked up by writingsthat
are useful to the powerful, and
what appeals to us makes little dif-
ference. Mr. Satlows How the Bi-
ble Became Holy makes me won-
der whether were entering a sort
of deconstructionist era of writing
about the Bible. No longer is the
authority of scripture said to be
artificial or illegitimate; it is said
never to have existed in the first
place. Of course, thats annoying to
the religious; but in the general fo-
rum of ideas, its annoying because
it cant conceivably be true.
Ms. Ruden is the author of Paul
Among the People: The Apostle
Reinterpreted and Reimagined in
His Own Time.
BY SARAH RUDEN
How the Bible Became Holy
By Michael L. Satlow
Yale, 350 pages, $35
ANCIENT WRITE The Shiloah inscription, found in the Hezekiah tunnel in East Jerusalem, is an early example of Hebrew and taken by some as validation of the biblical
account that King Hezekiah dug such a tunnel to prepare for an Assyrian invasion.
B
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Jews cherished scripture as
one of the fewthings that
allowed themto endure and
transcend alien hegemony.
EUROPE NEWS
Kievs Gains Costly for Towns in Crossfire
MYKOLAYIVKA, UkraineFor
Ukraines army, the two-day battle
here earlier this month was a break-
through victory that forced pro-Rus-
sia rebels to abandon their nearby
military stronghold of Slovyansk.
But in this small, impoverished
town, residents are reeling from ar-
tillery strikes that destroyed homes
and killed at least a dozen people,
including retiree Viktor Fanailov and
his wife, Emma, whose relatives say
they are still looking for body parts
amid the rubble.
In its fight to oust the rebels,
Kiev is deploying its main advan-
tage: Soviet-era artillery, tanks and
planes originally designed to battle
advancing Western armies on the
plains of Central Europe. Such heavy
weaponry lacks sophisticated tar-
geting, leading to shells that go
astray, causing collateral damage.
As Kiev gears up for the siege of
major urban centers such as Do-
netsk, which has around one million
residents, the army says special
forces, better suited to this kind of
urban fighting, are playing an im-
portant role. But they are in short
supply in Kievs chronically under-
funded military.
Ukrainian officials and locals also
say the rebel strategy so far fre-
quently appeared to be to provoke
the military into shooting at civilian
targets by firing from residential ar-
eas. The army says it is taking pains
to avoid hitting civilian targets.
To be sure, most buildings in
Mykolayivka remain largely intact,
as in Slovyansk, the center of the in-
surgency, which was under siege for
almost three months. But residents
here say they were shocked by the
intensity of the barrage, which se-
verely damaged or burned out doz-
ens of apartments.
Some in Slovyansk said they un-
derstand the need for the shelling to
rid the towns of armed rebels, many
of whom arent locals. Others criti-
cize the Ukrainian army for the
damage. Militants say they are de-
fending the cities and blame Ukrai-
nian forces for civilian casualties.
President Petro Poroshenko has
pledged to protect civilian lives by
not bombing Donetsk from the air or
fighting in the streets. But military
aides say targeted shelling could be
used to take out rebel positions.
Heavy shelling and multiple
deaths as in Mykolayivka could pour
fuel on local opposition to rule from
Kiev, and increase calls from the
West and Russia for a new cease-fire.
A truce, though, would provide a
reprieve for rebels that the military
has placed firmly on the back foot in
recent days.
The shelling of Mykolayivka, a
town of some 16,000 with a large
power station, began in the morning
on July 3.
About 3 kilometers from
Slovyansk, Mykolayivka was on the
main supply route for fighters,
weapons and food, according to offi-
cials and local residents.
Mrs. Fanailova, 75 years old, was
sleeping when the shell hit her small
house around 8:20 a.m., according
to her son-in-law. Mr. Fanailov, 78,
had just fed his three hens and was
sitting down to watch television.
Their son-in-law said he still hasnt
found Mr. Fanailovs head.
A few streets away, Raisa Ye-
liseyeva, 75, was cleaning the bath-
room in her fourth-floor apartment
when a shell hit. She forced open
her door but found the hallway floor
was no longer there. At least 10 peo-
ple died in her building as five
floors collapsed, officials and locals
said. They have turned the country
into ruins, said Mrs. Yeliseyeva,
who hid with many others in a
bomb shelter.
Residents say the militants had
checkpoints at the entrance and exit
to the town, and many of them took
up positions in the surrounding hills
as the shelling began. There were
also rebel positions in the town, of-
ficials said.
The barrage continued, on and
off, for nearly two days, locals say..
By the evening of July 4, the
president said rebels had been
flushed from the town.
Hours after the town was seized,
militants fled from Slovyansk, head-
ing south for Donetsk.
The victory in part reflects the
transformation of the army, which is
almost unrecognizable from the de-
moralized units that surrendered to
civilians in the early days of the op-
eration.
Now, 30,000 troops are involved,
supplied partly by an army of volun-
teers who bring food and flak jack-
ets and fix armored vehicles.
Officials say troops are improv-
ing their urban fighting skills as
they advance. The brunt of the fight-
ing is done by special forces, backed
by regular army units and national
guardsmen, including 2,000 volun-
teers, according to Andriy Parubiy,
the presidents top security adviser.
The rebels purposefully take up
positions near apartment buildings,
officials and some residents say.
It makes our job much harder
as the president gave a clear order
for civilians not to be harmed, said
Mr. Parubiy in an interview. The
concentration of [rebel] forces in
Donetsk and Luhansk has the same
aim and tactic: to take cover behind
peaceful citizens.
Alan Cullison
BY JAMES MARSON
G
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m
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g
e
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Russian Imperial Dream Faces Donetsk Showdown
DONETSK, UkraineThe military
noose was tightening around the
rebel city, and Alexander Borodai,
now the leader of pro-Russian sepa-
ratists in Donetsk, was urging deci-
sive action.
That was more than a decade
ago, in a different war and a differ-
ent cityGrozny, the capital of
Chechnya, which was fighting for in-
dependence from Russia. Mr. Boro-
dai, accompanying Russian troops
as a war correspondent, wanted to
see Grozny hit hard, all insurgents
killed, and Chechen autonomy eradi-
cated in favor of direct Moscow
rule.
Together, they will finally wipe
the hated city off the face of the
Earth, he wrote of Russian soldiers
preparing to enter Grozny in 2000.
Now as Ukrainian forces encircle
Donetsk for a final push against pro-
Russia insurgents holed up in this
regional capital, Mr. Borodai, head
of the rebel government, is likely to
find himself on the receiving end of
the kind of anti-separatist offensive
he once urged.
Mr. Borodais sudden emergence
at the helm of the pro-Russian sepa-
ratist movement in Ukraine shows
how Russia has struggled to find re-
liable local leaders in a fight the
Kremlin continues to insist it isnt
inciting. His comments on Chechnya
help explain the harsh worldview of
a Muscovite who has nurtured an
ideal of Russia for more than two
decades.
Mr. Borodai, 41 years old, says
hes ready to die in Donetsk for his
imperial dream, which he first be-
gan working toward in the early
1990s. Back then, as a 19-year-old
philosophy student in Moscow, he
spent a summer fighting alongside
pro-Russia rebels in Transnistria, a
breakaway republic that was carved
out of Moldova.
Later that decade, Mr. Borodai
began to cover Chechnya for a na-
tionalist Russian newspaper, Zavtra,
though he says he carried out other
unspecified roles there, not just
journalism. It is there that he
crossed paths with a man who
would become a close friendIgor
Strelkov, another Muscovite who
was then an officer with Russias
main intelligence agency, and is now
the defense minister of what the
separatists call the Donetsk Peoples
Republic.
The prominence of Mr. Borodai
and other Russian citizens at the
helm of the insurgency makes any
negotiated peace with Kiev harder
to attain and poses an image prob-
lem for Moscow, which has argued
that separatism in east Ukraine is a
grass-roots movement.
Andrei Purgin, a Donetsk man
who has been agitating for separat-
ism for more than a decade and now
serves as a deputy to Mr. Borodai,
says revolutionaries dont neces-
sarily make good administrators, so
we had to rely on specialists from
outside, on parachutists so to
speak.
Mr. Borodai arrived in May, after
an earlier stint in Crimea where he
helped midwife the Russian annexa-
tion behind the scenes as an adviser
to Crimeas separatist boss. In Do-
netsk, he stepped straight into the
spotlight, citing a dearth of local
talent.
Here he acts with near-absolute
authority. At a recent news confer-
ence, he gave its popular mayor an
ultimatumside with the separat-
ists or step down. He explained his
order: To step down doesnt mean
to stand against the wall and face a
firing squad. Over the weekend, he
demanded that local businesses pay
taxes to the separatists.
He believes autocracy is the best
form of government, though he says
he could cede power if a credible
homegrown alternative emerge. He
believes hes fulfilling a historical
mission on behalf of the Russian na-
tion, which he calls a super-ethnic-
ity glued together with Orthodox
Christianity.
The boundaries of the Russian
world are considerably larger than
the boundaries of the Russian Fed-
eration, Mr. Borodai, a pistol hol-
stered on his belt, said in an inter-
view in his spacious Donetsk office,
unadorned except for a picture of
Russian President Vladimir Putin
hanging above his desk.
Mr. Borodai smoked slim ciga-
rettes, his head shaved to a buzz-
cut, a tight black T-shirt hugging his
potbelly. Heavily armed guards
lounged on a couch outside his of-
fice discussing the latest weaponry.
His recipe for restoring the Rus-
sian world to its proper place means
expanding it and interfering on be-
half of ethnic Russians wherever
they may live: in Moldova where he
fought in a separatist war in the
early 1990s, and now in Ukraine.
Like much of Moscow in the past
decade, Mr. Borodai was busy mak-
ing money. He ran a consultancy,
and enjoyed an affluent lifestyle, he
says. One of his clients was a promi-
nent Moscow investment bank.
Asked about the irony of calling
for the annihilation of Chechen sep-
aratistsgiven that hes now a sep-
aratist himselfMr. Borodai paused
and offered this: Im in the same
exact situation; Im now also fight-
ing against separatists, not Chechen
separatists, but Ukrainian separat-
ists. Because theres Russia, the
great Russia, theres a Russian em-
pire. And now the Ukrainian sepa-
ratists who are in Kiev are strug-
gling against the Russian empire.
BY PHILIP SHISHKIN
A
s
s
o
c
i
a
t
e
d
P
r
e
s
s
Donetsk
Zelenopillya
Luhansk
Slovyansk
Kiev
RUSSI A BELARUS
POL.
ROMANI A
MOLDOVA
Bl ack Sea
CRIMEA
UKRAI NE
DETAIL
RUSSI A
U K R A I N E
DONETSK
LUHANSK
KHARKIV
50 miles
50 km
A house destroyed after bombardments by Ukrainian armed forces in a village near the city of Marinkao, on Sunday.
Alexander Borodai at a news conference in Donetsk, Ukraine, on June 21.
BOOKS
The Master Switch of Life
Freediving is a sport where
competitors plunge, sometimes
lashed to weighted sleds, hundreds
of feet below the oceans surface
without supplemental air. They
hold their breath for as long as 11
minutes. But why would they want
to? Dozens, perhaps hundreds, of
[free] divers are injured or die ev-
ery year, notes the journalist
James Nestor. Competing seems
like a death wish.
The freedivers that Mr. Nestor
meets in Deep: Freediving, Rene-
gade Science, and What the Ocean
Tells Us About Ourselves insist
that the opposite is truethat the
human body is engineered to sur-
vive underwater through a phe-
nomenon called the mammalian
dive reflex or, more lyrically, the
Master Switch of Life, the series
of life-sustaining physiological re-
actions that trigger once we sub-
merge. The deeper we dive, the
more pronounced the reflexes be-
come, writes Mr. Nestor, eventu-
ally spurring a physical transfor-
mation that protects our organs
from imploding under the immense
underwater pressure and turns us
into efficient deep-sea-diving ani-
mals.
Its a beautiful idea but sorely
tested by the realities of competi-
tors trying to outlast one another.
Mr. Nestor sees numerous freediv-
ers pulled to the surface blacked
out, their skin blue, blood stream-
ing from their mouths, noses and
eyes, rescuers slapping their faces
and screaming Breathe! Breathe!
I have a feeling, he writes, that
competitive freedivings continued
existence has a lot to do with the
fact that the local authorities dont
know what really goes on.
Yet Mr. Nestor is interested in
freediving less as an extreme sport
than as a way to explore the heart
of the oceanwhats in it, how it
functions, how we function within
it. His travels take him to compe-
titions in Greece (where one freed-
iver compares the brinkmanship to
playing poker), but he also
spends time on the water (and un-
der it) in Florida and California, in
Japan, and on the French island of
Runion. Whether charting the as-
toundingly acute electroreceptive
sense of sharks, the holographic
communication of cetaceans, or
our own ancient connection to the
ocean (some consider freediving a
spiritual practice), these explorers
send the same message: Youve
got to get wet. Mr. Nestor has an
eye for the telling fact (did you
know sea algae produce 70% of the
oxygen we breathe?) and a sunni-
ness that comes through even
when he is panicking or humili-
ated. The reader could not wish for
a better guide.
[The] current exploration of
the ocean is the equivalent of
snapping a photograph of a finger
to figure out how our bodies
work, he writes. Deep is orga-
nized by depth, with each chapter
focused on a specific zone, from
the photic (zero to 60 feet, where
sunlight is still visible) all the way
to the hadal at 28,700 feet. At 66
feet, Mr. Nestor encounters his
first band of young aquanauts:
graduate students doing 10-day
stints at the Aquarius Reef Base,
an undersea capsule off Key Largo,
Fla., researching things like the
population dynamics of sponges.
Life in the cramped space sounds
disgusting: Humidity is 100%, bac-
teria bloom and, because toilets
can explode at depth, aquanauts
prefer to do their business in the
water. And yet the researchers
are euphoric. They seem, basi-
cally, drunk, writes Mr. Nestor,
explaining that this is the effect of
nitrogen, which building up in the
blood produces a happy delirium.
The deeper one goes, however,
the larger the buildup, and, eventu-
ally, nitrogen narcosis sets in.
Freedivers can drift off to dream-
land. One diver told me that dur-
ing a very deep dive, she forgot
that she was underwater, writes
Mr. Nestor. She began to have
strange thoughts about her dog.
She pictured herself in a dark park
looking for him. As she headed
back toward the surface, and the
haze of nitrogen narcosis faded,
she remembered that she didnt
own a dog.
Part of Deep is Mr. Nestors
attempt to experience the unen-
cumbered bliss of freediving him-
self. As he is leaving the Aquarius
in his scuba gear, Mr. Nestor notes,
the constant gurgle from my regu-
lator scares off everything around
me; its like Ive gone bird watching
with a leaf blower strapped to my
back. He enlists the help of Hanli
Prinsloo, a young South African
who takes him through yoga and
breathing exercises to increase his
lung capacity and help him relax
enough to make it 40 feet below
the surface, the doorway to the
deep. It is here, Ms. Prinsloo
promises, that people experience
the most incredible transforma-
tion. The human body is suddenly
compressed enough by the ambient
pressure to become denser than
the water; instead of the water
bearing you up to the surface, it
gently pulls you down.
The transformation proves chal-
lenging. Try as he might, Mr.
Nestor repeatedly flails in 12 feet
of water, his ears screaming in pain
as he is unable to equalize the
pressure in his head. In a grubby
Japanese port town, his high-tech
freediving suit gets laughed at by a
group of elderly ama, women who
dive for sea delicacies. When he
asks the women, who traditionally
dived for pearls, if they have any
ancient freediving secrets theyd
like to share, he is laughed at
again and told: You just get in the
water!
Mr. Nestor keeps trying. He
trains in swimming pools and shal-
low water. He increases his lung
capacity from 50 seconds to more
than three minutes. He overcomes
his fear of swimming with sharks.
But the Master Switch he sees oth-
ers so effortlessly flick on remains
in him firmly off.
While trying to crack the
oceans mysteries, Mr. Nestor
puts in with a group off Runion
who tag bull sharks in order to
track and understand their move-
ments. The ragtag crew blasts the
German metal band Rammstein to
attract the sharks (who also like
AC/DC). And he takes a ride in an
unlicensed submarine hand-built
by a New Jersey prodigy named
Karl Stanley and run off the coast
of Honduras. There are no liability
waivers to sign. If something bad
happened, all passengers, includ-
ing Stanley (who pilots every
dive), would die, writes Mr.
Nestor.
The plunge in the 6-foot-wide
sub is sheer terror. Mr. Nestor and
a friend sit hunched and hyperven-
tilating in the tiny front compart-
ment, their anxiety ratcheting up
as they drop into the perpetually
black bathypelagic zone (2,300 to
13,000 feet, known as the mid-
night zone). It seems impossible
to Mr. Nestor that anything could
survive down there.
Keep looking out the window,
says Mr. Stanley, as bioluminescent
bursts of pink, purple and green
sparkle the darkness and a school
of squid look like glittering disco
balls. The sub sinks to 2,550 feet.
Here, a two-foot glob of flashing
color approaches, then hovers a
few inches from the window. The
glob, which Mr. Stanley identifies
as a comb jellyfish, is covered in
rows of bright lights, hundreds of
them that flash by individual color
and then in perfect synchronic-
ity.
The marine biologists that Mr.
Nestor meets are often unim-
pressed by freediving. (Im per-
fectly capable of collecting data
without freediving with the ani-
mals, thank you, a whale re-
searcher from the University of St.
Andrews tells him.) Yet it is freed-
ivers who guide him to the most
provocative facts about the ocean.
Sea mammals, for instance, use a
nonverbal form of communica-
tion to transmit three-dimen-
sional images (a process Mr. Nestor
compares to taking a photo with
your smartphone and sending it to
a friend); and the echolocation
clicks emitted by sperm whales
may be a precise, highly organized
language.
Mr. Nestor hears this language
off the coast of Sri Lanka. With
Ms. Prinsloo holding his hand and
urging him to trust himself, they
slide beneath the surface. They
stay very still as two sperm
whales, a mother and her calf,
swim close, then closer. They
keep their gaze upon us as they
pass within a dozen feet of our
faces, shower us with clicks, then
retreat slowly back into the shad-
ows, writes Mr. Nestor. Embold-
ened, or perhaps becalmed, by the
encounter, he soon succeeds in
flipping the Master Switch. Ive
hit zero gravity. The door is open,
he writes. When he finally comes
up for air, neither he nor Ms. Prin-
sloo says a word; they simply turn
around and fall back down past
the doorway of the deep.
Over the course of Deep, Mr.
Nestor comes to see competitive
freediving as egocentric, numbers-
driven and often foolishly danger-
ous. But he leaves the reader with
the idea of freediving as a tool to
better understand the life of the
sea and our place in the waters
eternal rhythms. Deep is a fasci-
nating, informative, exhilarating
book, and, I wager, it will at the
very least have you testing how
long you can hold your breath. My
personal best: 70 seconds.
Ms. Rommelmann is the author,
most recently, of Destination
Gacy: A Cross-Country Journey to
Shake the Devils Hand.
BY NANCY ROMMELMANN
Deep
By James Nestor
Houghton Mifflin Harcourt,
266 pages, $27
MERMAID DREAMS South African freediver Hanli Prinsloo balancing underwater.
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Scuba diving is like
going bird watching
with a leaf blower
strappedonyour back.
Few Children Are Sent Back
Thousands of children from Cen-
tral America are undertaking a per-
ilous journey to the U.S. border de-
spite warnings from the U.S. that
they will be sent back. In fact, many
will get to stay.
Data from immigration courts,
along with interviews with the chil-
dren and their advocates, show that
few minors are sent home and many
are able to stay for years in the U.S.,
if not permanently. That presents a
deep challenge for President Barack
Obama and lawmakers as they try to
shore up an overburdened deporta-
tion system.
In fiscal year 2013, immigration
judges ordered 3,525 migrant chil-
dren to be deported, according to
Justice Department figures. Judges
allowed an additional 888 to volun-
tarily return home without a formal
removal order.
Those figures pale in comparison
with the number of children appre-
hended by the border patrol. In each
of the last five years, at least 23,000
and as many as 47,000 juveniles
have been apprehended. Those to-
tals include Mexicans, who often are
sent home without formal deporta-
tion proceedings and so may not be
among those ordered removed last
year.
There are many reasons children
end up staying. Some see their cases
linger in backlogged courts and ad-
ministrative proceedings. Some win
the legal right to remain in the U.S.
And some ignore orders to appear
in court.
Children who enter the U.S. ille-
gally often are trying to reunite
with family members or escaping
gang violence and poverty. The U.S.
has been overwhelmed finding shel-
ters for them, and Mr. Obama has
repeatedly said that they wont be
allowed to stay. But the reality on
the groundthat so few are re-
turned to their home countrieswill
continue to encourage more to make
the journey north, said Doris Meiss-
ner, director of the Immigration Pol-
icy Program at the nonpartisan Mi-
gration Policy Institute.
Theyre here, and theyre stay-
ing, and whatever else might hap-
pen to them is at least a year or
more away, said Ms. Meissner, a
former Immigration and Naturaliza-
tion Service commissioner. Until
peoples experience changes, more
are going to continue to come, be-
cause theyre achieving what they
need: safety and reunification with
their families.
Last fiscal year, immigration
judges reached a decision in 6,437 ju-
venile cases, according to the court
data. About two-thirds of the minors
were ordered deported or allowed to
leave the country voluntarily, and 361
were given legal status. In most other
cases, the judge terminated the case,
meaning the child wasnt ordered out
of the U.S. but wasnt given explicit
permission to stay, either.
Separate data from the Depart-
ment of Homeland Security show
that in fiscal 2013, about 1,600 chil-
dren were actually returned to their
home countriesless than half the
number who were ordered re-
movedsuggesting that some are
evading deportation orders.
The head of the immigration
court system told a Senate hearing
this week that 46% of juveniles
failed to appear at their hearings
between the start of the 2014 fiscal
year last Oct. 1 and the end of June.
And court figures show that last
year, more than 2,600 out of about
6,400 orders were entered without
the juvenile presentin absentia.
Simply reaching a decision in
these cases can take years, and the
backlog is growing worse. As of June
30, there were 41,832 pending juve-
nile cases, up from about 30,000 nine
months earlier. In some jurisdictions,
it is common for court dates to be
set two or three years out.
Most illegal border crossers are
adults, children traveling with
adults, or juveniles from Mexico.
Their cases tend to be heard quickly,
and most are immediately sent back
to their home countries.
The current crisis at the border
is due to a different set of illegal im-
migrants, unaccompanied minors
from Central America. The long de-
lays largely can be traced to a 2008
federal law that requires cases in-
volving children traveling alone
from countries other than Mexico
and Canada be heard in immigration
court. The wait can stretch to sev-
eral years for a decision, even in a
straightforward case.
The vast majority of these chil-
dren are placed with family mem-
bers in the U.S. while the proceed-
ings unfold, but first they must
travel through facilities run by two
different government agencies,
which further extends the process.
On top of that, judges often de-
lay cases repeatedly to give the chil-
dren time to find legal representa-
tion. Just 15% of some 21,000
children sheltered by the Depart-
ment of Health and Human Services
between August 2012 and July 2013
were matched with attorneys while
in government custody, an HHS
spokesman said.
Helen Cruz, 16, said gang vio-
lence in her home of Tegucigalpa,
Honduras, pushed her to make the
1,900-mile trek to the Texas border
with her 17-year-old sister.
More than seven months after
she arrived, Ms. Cruzs legal pro-
ceedings have barely begun. Her
first court appearance is scheduled
for August, and it could take an-
other year or more for her case to
be adjudicated, said Wendi Adelson,
a professor at the Florida State Uni-
versity College of Law who is repre-
senting her pro bono.
Her August hearing will likely be
a short affair to inform the judge
she plans to apply for special immi-
grant juvenile status, a process that
could take many months. That will
require Ms. Cruz to obtain an order
from state juvenile court stating
that she has been abandoned by her
father and it isnt in her best inter-
est to return to Honduras. She then
will need to file an application with
the U.S. Citizen and Immigration
Service, where the number of pend-
ing special immigrant juvenile sta-
tus cases ballooned to 702 in the
year ending September 2013 from
47 during the same period in 2011,
agency statistics show.
Sometimes I feel like going back,
but Im in danger over there from
gang violence, Ms. Cruz said. If I can
stay here, I will get a chance to get
an education and be able to help the
people I love back home.
Under U.S. rulings, threat of gang
violence by itself doesnt qualify
someone for asylum. Nor does eco-
nomic hardship at home qualify
someone for legal status in the U.S.
At the same time, the U.S. some-
times is unable or unwilling to re-
turn children who have been or-
dered removed. So far, that is a
small problem, one official said, but
it is likely to grow as the U.S. seeks
to return many more youths to their
home countries.We just want to
make sure that kids dont fall
through the cracks, a senior admin-
istration official said. You cant
send them back without making
sure theres a system in place that
makes sure they dont wind up in an
unsafe environment.
Because of court backlogs, most
of the 2013 court and deportation
data represent cases of children
who arrived in earlier years. One ex-
planation for the low deportation
figures is that people apprehended
as juveniles turn 18 during the
course of court proceedings and so
become counted as adults. Deporta-
tion figures also dont include Mexi-
can youth who are turned around at
the border each year.
Some children are able to stay
because they qualify for asylum or
special visas given to victims of
crime or human trafficking. Advo-
cates say that a robust court system
is necessary to be sure those claims
are properly considered.
BY LAURA MECKLER
AND ANA CAMPOY
Adriana Ortez, 2, and her mother, Dayana Ortez, of El Salvador, wait for a bus in McAllen, Texas, to go to California.
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U.S. NEWS
Sources: Bipartisan Policy Center analysis of Department of Homeland Security data (children apprehended); DHS (juveniles removed); Justice Department, Executive Ofce
for Immigration Review (judge decisions) The Wall Street Journal
1
Includes children traveling with adults and alone from all countries. Mexicans are often not subjected to formal deportation proceedings.
2
Case closed without an order to
leave the country, possibly because of insufcient evidence to support deportation.
3
Person given some ability to stay in the U.S.
Odds in Their Favor
Few of the children who make it across the southern U.S. border are sent back home.
Children apprehended at
the border
1
Juveniles physically removed from
the U.S., not all cases are subject to
deportation
Immigration judge decisions for
juveniles, scal year 2013
50,000
0
10,000
20,000
30,000
40,000
10 FY2009 11 12 13
0
10,000
20,000
30,000
40,000
10 FY2009 11 12 13
Ordered removed from U.S.
Terminated
2
Voluntary departure
Relief granted
3
Case dropped due to prosecutorial discretion
Other
3,525
1,589
888
361
38
36
Note: Fiscal year ends Sept. 30
47,397
1,600
New GOP
Leader Gets
His Signals
From Home
BAKERSFIELD, Calif.U.S. Rep.
Kevin McCarthy sat at Luigis Res-
taurant here on a recent Saturday,
slicing through a rare steak, as poli-
ticians and business owners in his
hometown took turns congratulating
the incoming House majority leader.
Anyone in search of Mr. McCarthy
on weekends needs to look no fur-
ther than Luigis, one of this citys
oldest family-run businesses. As the
man who orchestrated a 2010 Repub-
lican takeover of Congress by target-
ing Democrats who, in his estima-
tion, were out of touch with their
districts, Mr. McCarthy is keenly
aware that forsaking home for power
in Washington can spell defeat.
Just as it has in Washington, the
immigration debate has heated up
in Mr. McCarthys home district, as
hope for an overhaul remains stalled
and a surge of immigrants from
Central America has brought fresh
attention to the issue.
Mr. McCarthy feels the pressure
at home from the United Farm
Workers, the labor organization
founded by civil rights leader Cesar
Chavez and based in his district.
UFW President Arturo Rodriguez
said he would seek to defeat Mr.
McCarthy if he doesnt move immi-
gration-overhaul forward, noting
Latinos make up a third of the pop-
ulation in his district.
The time is not here yet, but I
think its going to come soon, be-
cause the demographics of this com-
munity are changing rapidly, Mr.
Rodriguez said. He is more con-
cerned about his own personal
power.He is putting that over the
benefit of his own constituents.
Mr. McCarthy says he favors
some overhaul measures. But he
doesnt support a path to citizen-
ship for those who came to the
country illegally, believes current
laws should be enforced and wont
support any legislation, he said, un-
til the borders are secure.
Mr. McCarthy also is facing pres-
sure from the right. Tom Pavich, a
farmer and a leader of the Bakers-
field Tea Party, said that while his
group was pleased to have their rep-
resentative in such a powerful posi-
tion, he would like to see Mr.
McCarthy develop a more conserva-
tive voting record.
The group believes Mr. McCarthy
could have fought harder during
Washingtons debt-ceiling debates
and done more to defund Obama-
care, Mr. Pavich said.
He is a very likable man and we
consider him our friend, Mr. Pavich
said, but added: Even with friends
you need to show some tough love.
Mr. McCarthy is doing what he
can to ensure he doesnt suffer the
fate of the man he replaces as ma-
jority leader, Rep. Eric Cantor,
whose Virginia primary loss last
month came at the hands of a virtu-
ally unknown tea-party candidate
who successfully attacked Mr. Can-
tor as having become too much part
of the Washington establishment.
Despite facing only a write-in op-
ponent this fall, Mr. McCarthy al-
ready has aired a campaign com-
mercial here. Being elected
majority leader was an honor, Mr.
McCarthy said in the spot. But the
highest honor is serving our com-
munity and you.
BY ALEJANDRO LAZO
PERSONAL JOURNAL
Who Is the Sorriest U.S. Airline?
Carriers Deploy Software and English Majors to Craft Letters Showing Contrition
Southwest Airlines uses soft-
ware to perform triage on upset
customers. Computers look for key-
words that show up in the letters,
then sort the notes into four per-
sonality categories:
Feelers, Drivers, Enter-
tainers and Thinkers.
Customer relations
agents then write to
that type of personality.
The driver wants bullet points
and results. The feeler needs to be
caressed. But we close with the
same result, said Wayne Shaw,
Southwests director of customer
relations.
Airlines apologize a lot to their
customers. Theyve made a science
of saying sorry out of necessity:
The Department of Transportation
fines airlines for not responding to
customers with substantive an-
swers to gripes.
Besides the regulatory require-
ment of a response within 30 days
for disability issues and 60 days for
other problems, airlines say han-
dling complaints is a crucial part of
their business. A good apology can
turn an angry customer into a loyal
customer; a bad apology can make
a bad situation worse.
A sincere apology is a hard
thing to deliver via email, Mr.
Shaw said.
Southwest, which was fined
$150,000 by the DOT last year for
failing to respond to a large num-
ber of complaints due to a com-
puter glitch, has 200 agents han-
dling customer complaints. Its an
entry-level job for college gradu-
ates. Southwest also employs
proofreaders, often English majors.
United Airlines, which had the
highest rate of complaints filed at
the DOT among major airlines the
past three years, has a team of
about 450 customer-care agents
handling general issues and re-
funds. Add to that 400 people
handing frequent-flier program is-
sues and about 100 answering bag-
gage-related letters and emails.
Delta Air Lines employs 150
people in Atlanta and Minneapolis
to email answers to angryand
complimentarycustomers. Many
get letter-writing training and are
experienced airport agents used to
dealing directly with customers.
Airlines say they try to make re-
sponses conversational and per-
sonal. They aim to apologize and
acknowledge the problem, provid-
ing more information about the
particular situation after research,
then offering some compensation
as a goodwill gesture, such as some
frequent-flier miles. Letters are
signed by an employee, though
many use pseudonyms.
Complaints are sorted by com-
plexity and by the value of the cus-
tomertop-tier frequent fliers and
big spenders get priority. A low-
level customer may get 3,000 fre-
quent-flier miles for a canceled
flight, while a high-value customer
who complains is soothed with
10,000 miles.
Agents research incidents to
verify and provide explanations.
Complaints also are tracked so air-
lines can peg frequent complainers
trawling for extra miles or dis-
counts.
Customer feedback is compiled
into reports for top executives, and
individual letterscomplaint or
complimentdo get forwarded to
supervisors and employees, airlines
say.
American Airlines uses a library
of responses built over the years
that agents can search and then
customize. That allows for consis-
tency and accuracy in responses.
Weve gone completely away from
corporate-speak to personally
showing empathy, said John Ro-
mantic, Americans managing di-
rector of service recovery.
United said it tries not to go
overboard on the apology. Gener-
ally we tell the customer we are
sorry they did not have the experi-
ence they expected on United,
spokesman Rahsaan Johnson said.
We try to be empathetic to the
customer but not sound insincere.
Delta gives its agents freedom
to be chatty and personal. That
strategy backfired with Margery
Rothenberg, a health-care market-
ing executive from the New York
City area who hit her head hard on
the corner of a row-number sign
protruding above her seat on a
Delta jet last month.
I saw stars, she said. A flight
attendant brought her ice and told
her it happens all the time; the
captain encouraged her to com-
plain to delta.com.
She did, attaching pictures in
hopes the airline would realize the
signs, with a protruding corner
sticking out above passenger
heads, are a hazard.
Unfortunately, you were hurt
by a seat marker. That truly sounds
unpleasant, and you should have a
nicer experience on our plane, a
Delta agent wrote. Although, our
flight attendant offered you ice
there was a bump at the place of
injury. Were working hard to
clean, modernize, and maintain our
planes.
Ms. Rothenberg, still with a big
bump on her head a week after the
incident, wasnt mollified. The
sentence construction is awkward
and childish, and I felt like it
wasnt really written to me in a
personal way, she said. The offer
of 3,500 Delta SkyMiles left me
feeling very shortchanged and un-
appreciated, she said.
Asked for comment on the re-
sponse to Ms. Rothenberg, Delta
reached out to her again offering
10,000 miles and asked if she
needed medical attention. Hers was
the first complaint about the pro-
truding signs, the company said,
and the airline would look into the
potential hazard further.
As for the language of the apol-
ogy, they are more individually
written than in past years, said
Delta spokesman Russell Cason.
Agents get training in language and
no longer use form letters.
We are trying to use a more
conversational language and tone,
Mr. Cason said.
Edwin Battistella, an English
professor at Southern Oregon Uni-
versity and author of a book on
public apology, says too often apol-
ogies say very little, stating the ob-
vious and avoiding responsibility.
The letter to Ms. Rothenberg is
not so much an apology as an ex-
cuse. Theyre not really sorry for
anything they did. Theyre sorry
for the injury, he said. Its an at-
tempt to manage the situation
rather than resolve it.
Good apologies are direct: They
identify what the transgressor did
wrong, take responsibility and ei-
ther say what will be different in
the future or offer some compensa-
tion, he said.
Its hard to imagine an industry
with more direct correspondence
with angry customers than airlines.
The industry proactively apolo-
gizes to customers who suffer long
delays or get stuck after cancella-
tions, instantly sending emails with
offers of miles or discounts before
passengers get home and get a
chance to complain.
When passengers do write to
the airline, the DOT or both, most
complaints revolve around flight
problemsdelays and cancella-
tions.
A 2009 study by researchers at
the University of Nottinghams
School of Economics in the United
Kingdom found that apologies can
be more valued by customers than
even compensation.
More than 600 customers of the
German eBay site who posted neu-
tral or negative reviews of a trans-
action were sent an apology or
compensation of under $7 to with-
draw their online evaluation.
Nearly 45% of customers who re-
ceived the apology withdrew the
evaluation, compared with about
21% of those who got compensa-
tion.
Our results suggest that firms
apologize so much because apolo-
gies do indeed influence custom-
ers behavior, the study concluded.
BY SCOTT MCCARTNEY
Im really sorry about the injury you
suffered on our flight. Unfortunately, you
were hurt by a seat marker.
That truly sounds unpleasant, and you should
have had a nicer experience on our plane.
Although, our flight attendant offered you ice
there was a bump at the place of injury. Were
working hard to clean, modernize, and maintain
all our planes. I wish the conditions on your
recent flight were better.
Also, thanks for taking the time to send us
your suggestion for the improvement of our in-
flight cabin. I realize you didnt receive the
service you expected and should have received.
u The language seems sort of parent to child, with the
intent of mollifying people without admitting any fault. It
seems very second-grade teacher-ish to me.
Edwin Battistella, Southern Oregon University English professor
ANATOMY OF AN APOLOGY
Heres an excerpt of a letter Delta Air Lines wrote passenger Margery Rothenberg
afer she complained about hitting her head during a ight, with an analysis of the text.
u The letter reects howDelta has worked hard to move
away fromscripted, less personal responses. Such re-
sponse have helped improve connections with customers
Keyra Lynn Johnson, Delta spokeswoman
u Its almost like they are talking down to the person. That
has to be avoided. You have to treat people as equals rather
than talk down like youre talking to a child.
Derek Arnold, Villanova University communications instructor
u Scripted tone. They do not acknowledge anything
was wrong. Mr. Battistella
u It doesnt meet our standards of showing that were
truly listening, caring and connecting with the customers in
a way that truly reects our brand. Ms. Johnson
THE
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Talk of Raising Rates Heats Up Within The Fed
A debate is intensifying among
the Federal Reserves regional bank
presidents about whether to push
interest rates up from near zero
sooner than planned because of re-
cent improvements in the U.S. job
market, potentially signaling a
broader discussion that could
change the rate outlook.
Most Fed officials at Junes policy
meeting didnt see rate increases un-
til 2015, according to projections
made before the Labor Department
reported that the jobless rate fell to
6.1% in June, down 1.4 percentage
points from a year ago.
We have made more progress
toward our unemployment goals
than we would have thought earlier
this year, John Williams, president
of the Federal Reserve Bank of San
Francisco, said in an interview with
The Wall Street Journal. He added
that this development suggests
that monetary policy can safely
start the process of normalization a
touch earlier than previously ex-
pected.
Fed Chairwoman Janet Yellen tes-
tifies this coming Tuesday and
Wednesday to Congress on the econ-
omy and monetary policy, and could
shed light on where she stands on
the critical issue of raising rates.
Mr. Williams, who ran the San
Francisco Feds research department
when Ms. Yellen was the banks pres-
ident, said the shift in his view was
not a game changer because he
still believes there is quite a bit of
slack in the economy holding infla-
tion down. If the Fed does start
moving rates up sooner, he noted, it
wouldnt be substantially sooner
than previously thought.
One particularly encouraging
sign that Mr. Williams noted is that
recent declines in unemployment
have been driven by people getting
jobs, as opposed to people leaving
the labor force.
Atlanta Fed President Dennis
Lockhart, a centrist among officials,
pointed to job improvements in a
speech in Jackson Hole, Wyo., on Fri-
day but said he was sticking to his
view that rates should stay near zero
until the second half of 2015. He was
still concerned about the presence of
a large contingent of part-time work-
ers who want full-time jobs, a devel-
opment he said weighs on inflation
and wages.
In the current situation, I feel
its advisable to accrue evidence and
gain perspective, he said. You
might call this a whites of their
eyes approach to pulling the trigger
on raising rates.
If the economy is much stronger
than what Im anticipating, and we
get closer to our objectives sooner,
than I would obviously reconsider
my position about the timing of
rate hikes, Mr. Lockhart told report-
ers after Fridays speech.
Meanwhile, Fed hawks are be-
coming more vocal about wanting
earlier interest-rate increases.
We need to adjust the language
in our statement to reflect that the
economy really is better that it was
and that the necessity of having
zero interest rates for a long time to
come seems to me to be perhaps a
risky or unnecessary step at this
point, Philadelphia Fed President
Charles Plosser said in an interview
with the Journal.
St. Louis Fed President James
Bullard has been warning that mar-
ket participants might not appreci-
ate how quickly the economy is con-
verging toward the Feds goals of
maximum employment and stable
prices.
A year ago, he noted, Fed offi-
cials thought the jobless rate would
be at 7% by now and the central
bank would be finished with a pro-
gram of mortgage and Treasury
bond purchases meant to spur hir-
ing and investment. Instead, the
jobless rate is almost a full percent-
age point lower than expected and
bond purchases havent ended.
Things have moved a little faster
than the [Fed policy making] com-
mittee was anticipating, but our pol-
icy hasnt reacted to that, he said in
an interview. Mr. Bullard thinks the
Fed should start moving rates up in
the first quarter of 2015 and said he
is leaning toward an earlier projec-
tion if he gains confidence the econ-
omy has firmly rebounded from the
first-quarter slump in gross domes-
tic product.
BY JON HILSENRATH
AND MICHAEL S. DERBY
U.S. NEWS
Source: New York State Education Department (prociency); analysis of New York State Education Department data by Jonah Rockoff, Columbia Graduate School of Business (scatterplots) The Wall Street Journal
Note: Numbers apply to academic years ending in the years shown.
But the students actual performance relative to their peers didnt change much more than it did in those
years when testing standards went untouched.
New York schools average English assessment scores compared with the previous year
Deciency of Prociency | Its the standards that are changing, not the students
The percentage of students considered procient in New York dropped in years when the
state toughened its standards.
Share of New York students in third through eighth grade scoring at levels considered
to be procient or higher on statewide assessments
100%
0
10
20
30
40
50
60
70
80
90
10 2009 11 12 13
2013
Test content and
standards change
with Common Core.
MATH: 29.6%
ENGLISH: 31.1%
2010
Observers decide tests are
too easy, and raise the bar for
procient.
MATH: 54.0%
ENGLISH: 53.2%
2009 ...
MATH: 81.8%
ENGLISH: 77.4%
630
640
650
660
670
680
690
700
630 640 650 660 670 680 690 700
240 2
0
1
2
S
T
A
T
E
A
S
S
E
S
S
M
E
N
T
260
280
300
320
340
360
630
2011 STATE ASSESSMENT
2
0
1
3
C
O
M
M
O
N
C
O
R
E
640 650 660 670 680 690 700
2012 TO 2013:
TEST CHANGED
2011 TO 2012:
TEST UNCHANGED
When New York
and Kentucky
rolled out the first
tests aligned with
the Common Core
State Standards,
the results were dismal: Most
students failed the new
standardized tests, in stark
contrast to the old assessments,
which the vast majority passed.
The results alarmed parents,
but the scores on these new
testsjust like those on earlier
forms of assessmentreveal less
about what children know than
about the way the test makers
decide to measure that knowledge.
The National Governors
Association and Council of Chief
State School Officers unveiled the
Common Core standards in 2010,
saying they were intended to raise
academic standards, and the test
scores so far appear to reflect the
increased expectations.
When New York first
administered Common Core tests
in 2013, less than a third of
students demonstrated
proficiencyconsidered a pass
in math and English. Kentucky
recorded similar scores when it
launched its assessments in 2012.
And results are expected to be
comparable in other states as they
roll out new tests next year.
Experts warned, however,
against reading too much into the
proficiency labels or pass-fail
numbers in assessing how much
students were actually learning.
Its the same set of kids, said
Jonah Rockoff, an economist at
Columbia Business School who
studies school accountability. Its
the same set of teachers. Their
school didnt change dramatically
overnight.
In devising the grading scale
for the new tests, New York used
a bookmark method to identify
four levels of achievement from
well below proficient to
excels, according to Ken
Wagner, deputy commissioner for
assessment and curriculum at the
New York Department of
Education.
We brought together 95
teachers from across the state,
Mr. Wagner said. We gave them
the test the students took in order
of difficulty from easiest to most
difficult. You keep going until you
say, gosh, I dont think a student
at level one would get this
correct, but someone at level two
would.
At that point, each teacher
dropped a bookmark and
continued until the threshold for
each performance level was
identified. The panel, divided into
math and English groups,
repeated the process four times
before arriving at final cut scores.
Its a deep concept, Mr.
Rockoff said. How do you send a
message to kids about what is
good enough?
Setting cut scores can indeed
be somewhat arbitrary, and New
York provides another example of
how manipulating the scale
changes the perception of how
well children are performing.
In 2009, before the Common
Core was introduced, 86% of
students taking New Yorks
standardized tests scored
proficient or better in mathematics
and 77% in English. Those
impressive results led the state and
outside observers to conclude that
the tests were too easy.
To address the criticism, New
York simply raised the cutoffs, so
that passing required a higher
score. With the new scale, 61% of
students ranked proficient in
math and 53% in English.
We use words like proficient
that carry a lot of baggage, said
Daniel Koretz, a Harvard professor
who is an expert on educational
assessment and testing policy.
People believe they know what
these labels mean. It has nothing
to do with how well kids are
doing. It is a way of making a
judgment about how performance
is going to be labeled.
Various groups object to the
Common Core standards, which
were drafted with the aim of
better preparing students in all
states for college and career.
Some regard the uniform
approach as an intrusion on
states rights. Others object to the
frequent testing. Teachers dislike
being evaluated based on student
test scores.
But such debates over Common
Core have diverted attention from
legitimate questions about
whether U.S. schools adequately
educate children, and there is
compelling evidence to the
contrary.
The federal governments
National Center for Education
Statistics compared individual
states assessments with the
nations report cardan
assessment mandated by Congress
to provide data on student
achievementand found that, by
its standards, most students
werent proficient in reading or
math. A respected international
assessment of 65 countries shows
U.S. students scoring below
average in math and average in
reading and science. And a study
by the National Center for
Education Statistics found that
20% of college freshmen in the
U.S. need remedial classes.
We have 210,000 students, Mr.
Wagner said of New York. Only
35% graduate-college- and career-
ready. That means almost 140,000
students every year, year after
year, are leaving the fourth year of
high school not ready for whats
next. Thats a real stark reality.
Still, experts caution that
concerned parents who want to
understand more about their
childrens education should look
beyond testing labels.
The deeper question parents
ought to be asking themselves,
Mr. Rockoff said, is Did I know
what my kid was learning last
year, and if I compare it to the
new Common Core curriculum, am
I happy or sad?
Test Scores May Move, Learning Doesnt
[ The Numbers ]
BY JO CRAVEN MCGINTY
Fed hawks are becoming
more vocal about earlier
interest-rate increases.
Major players & benchmarks
Credit derivatives
Spreads oncredit derivatives are one way the market rates
creditworthiness. Regions that are treading inroughwaters
cansee spreads swing toward the maximumand vice versa.
Indexes beloware for five-year swaps.
Markit iTraxxIndexes SPREADRANGE, in pct. pts.
Mid-spread, since most recent roll
Index: series/version in pct. pts. Mid-price Coupon Maximum Minimum Average
Europe: 21/1 0.62 101.82% 0.01% 0.81 0.56 0.67
Eur. HighVolatility: 20/1 0.71 101.28 0.01 1.26 0.68 0.93
Europe Crossover: 21/1 2.50 111.18 0.05 3.11 2.19 2.63
Asia ex-JapanIG: 21/1 1.04 99.83 0.01 1.06 0.99 1.02
Japan: 21/1 0.64 101.76 0.01 0.68 0.63 0.66
Note: Data as of July 10
Spreads
Spreads on
ve-year swaps
for corporate
debt; based on
Markit iTraxx
indexes.
In percentage points
3.00
2.00
1.00
0
1
t
Australia
t
Japan
2014
Jan. Feb. Mar. April May June July
Index roll
Source: Markit Group
BehindEurope's deals: Bank revenue rankings, France
Behind every IPO, bond offering, merger deal or syndicated loanis one or more investment banks. Here are
investment banks ranked by year-to-date revenues fromrecent deals.
PERCENTAGEOFTOTAL REVENUE
Revenue, Equity Debt Mergers &
in millions share capital markets capital markets acquisitions Loans
BNPParibas $188 9.2% 12% 50% 23% 16%
Credit Agricole CIB 173 8.4 12 49 18 20
GoldmanSachs 168 8.2 15 63 7 15
Deutsche Bank 164 8.0 21 54 11 14
JPMorgan 152 7.4 13 56 16 15
MorganStanley 130 6.4 31 39 21 9
SGCorporate Investment Banking 112 5.5 22 52 13 12
Natixis 103 5.0 23 55 6 17
Credit Suisse 102 5.0 11 57 20 11
Source: Dealogic
Tracking
credit
markets &
dealmakers
Dow Jones Industrial Average P/E: 17
LAST: 16943.81 s28.74, or 0.17%
YEAR TO DATE: s367.15, or 2.2%
OVER 52 WEEKS s1,479.51, or 9.6%
Note: Price-to-earnings ratios are for trailing 12 months
17150
16900
16650
16400
16150
15900
17 25 2 9 16 23 30
May
6 13 20 27
June
3 11
July
High
Close
Low
50day
moving average
t
StoxxEurope 50: Friday's best andworst...
Previous
close, in STOCKPERFORMANCE
Company Country Industry Volume local currency Previous session YTD 52-week
Schneider Electric SE France Electrical Components &Equipment 1,609,723 66.58 1.48% 5.0% 14.7%
BNP Paribas France Banks 5,746,121 48.36 1.40 -14.6 9.6
Royal Dutch Shell A United Kingdom Integrated Oil &Gas 2,808,786 2,390 0.93 10.5 8.5
Unilever United Kingdom Food Products 1,978,144 2,622 0.92 5.6 -5.9
Reckitt Benckiser Grp United Kingdom Nondurable Household Products 737,108 5,000 0.73 4.3 1.4
BGGrp United Kingdom Integrated Oil &Gas 4,743,598 1,187 -1.00% -8.5 1.2
Tesco United Kingdom Food Retailers &Wholesalers 13,379,369 278.10 -0.93 -16.8 -20.4
GlaxoSmithKline United Kingdom Pharmaceuticals 6,044,228 1,562 -0.64 -3.1 -10.4
Anheuser-Busch InBev Belgium Brewers 994,586 82.84 -0.61 7.2 16.1
Lloyds Banking Group PLC United Kingdom Banks 104,144,504 72.67 -0.60 -7.9 9.7
...Andthe rest of Europe's blue chips
Latest,
in local STOCKPERFORMANCE
Company/Country (Industry) Volume currency Latest YTD 52-week
Unilever CVA 2,904,941 31.36 0.66% 7.1% -0.4%
Netherlands (Food Products)
AXA 5,771,476 17.62 0.66 -12.8 9.4
France (Full Line Insurance)
HSBC Hldgs 17,213,499 592.30 0.56 -10.6 -17.9
United Kingdom(Banks)
BHP Billiton 4,967,973 1,961 0.49 4.9 8.9
United Kingdom(General Mining)
National Grid 3,976,951 851.00 0.47 8.0 11.8
United Kingdom(Multiutilities)
L'Air Liquide 760,962 98.85 0.41 -3.8 1.1
France (Commodity Chemicals)
ENI 9,610,077 19.38 0.36 10.8 21.6
Italy (Integrated Oil &Gas)
Total 3,265,588 50.77 0.36 14.0 31.9
France (Integrated Oil &Gas)
Bayer 1,405,953 101.15 0.35 -0.8 20.6
Germany (Specialty Chemicals)
Vodafone Group 44,927,392 189.45 0.26 -22.7 -4.4
United Kingdom(Mobile Telecommunications)
INGGroep 14,375,589 10.08 0.25 -0.2 36.8
Netherlands (Life Insurance)
British American Tobacco 2,690,695 3,528 0.20 9.0 0.9
United Kingdom(Tobacco)
Allianz SE 1,275,032 127.70 0.20 -2.0 10.1
Germany (Full Line Insurance)
AstraZeneca 965,145 4,354 0.20 21.8 34.0
United Kingdom(Pharmaceuticals)
Roche Holding Part. Cert. 669,332 262.70 0.19 5.4 8.3
Switzerland (Pharmaceuticals)
Glencore PLC 16,573,529 343.30 0.18 9.8 28.9
SAP SE 1,866,777 57.06 0.16 -8.4 0.6
Germany (Software)
Sanofi SA 1,565,880 75.81 0.15 -1.7 -5.0
France (Pharmaceuticals)
Banco Santander S.A. 38,471,438 7.44 0.13 16.7 51.4
Spain (Banks)
Telefon L.M. Ericsson B 6,506,577 78.60 0.13 0.1 -1.6
Sweden (Telecommunications Equipment)
Latest,
UBS 9,701,982 16.26 0.06% -3.9% -2.6%
Switzerland (Banks)
Deutsche Telekom 6,637,537 12.08 0.04 -1.9 36.3
Germany (Mobile Telecommunications)
BP PLC 11,824,844 503.80 0.02 3.2 8.4
United Kingdom(Integrated Oil &Gas)
Moet Hennessy Louis Vuitt 428,508 139.35 ... 5.1 4.3
France (Clothing &Accessories)
Nestle 3,393,386 68.45 ... 4.8 7.0
Switzerland (Food Products)
Zurich Insurance Group 314,135 269.50 -0.04 4.3 5.7
Switzerland (Full Line Insurance)
Barclays 39,276,029 207.90 -0.05 -23.6 -31.4
Novartis AG 2,430,614 79.60 -0.06 11.8 14.5
BASF 2,001,402 83.35 -0.08 7.6 17.1
Germany (Commodity Chemicals)
Siemens 1,963,156 92.51 -0.15 -6.8 16.6
Germany (Diversified Industrials)
ABB 3,689,632 20.26 -0.20 -13.7 -4.5
Switzerland (Industrial Machinery)
Credit Suisse Group AG 5,573,192 25.07 -0.20 -8.1 -6.0
Switzerland (Banks)
Deutsche Bank 6,424,658 25.45 -0.22 -26.6 -23.8
Germany (Banks)
Standard Chartered 4,079,010 1,194 -0.29 -12.2 -21.3
Diageo 3,169,525 1,846 -0.30 -7.7 -8.6
United Kingdom(Distillers &Vintners)
Rio Tinto 3,178,084 3,204 -0.33 -6.0 13.1
Financiere Richemont 773,434 89.95 -0.39 1.3 1.2
Switzerland (Clothing &Accessories)
Banco Bilbao Vizcaya Argn 24,544,179 9.04 -0.42 2.0 43.1
Spain (Banks)
Telefonica S.A. 13,053,823 12.13 -0.53 2.5 19.6
Spain (Fixed Line Telecommunications)
Daimler 2,933,276 66.68 -0.55 6.0 35.2
Germany (Automobiles)
Sources: SIX Financial Information
DJIAcomponent stocks
Volume, CHANGE
Stock Symbol in millions Latest Points Percentage
AT&T T 11.5 $35.76 0.06 0.17%
AmExpress AXP 2.1 94.47 0.01 0.01
Boeing BA 3.2 128.09 1.30 1.03
Caterpillar CAT 2.0 109.96 0.60 0.55
Chevron CVX 5.2 128.47 1.78 1.37
CiscoSys CSCO 20.7 25.52 0.08 0.31
CocaCola KO 9.7 41.97 0.29 0.69
Disney DIS 5.0 86.89 0.03 0.03
DuPont DD 2.8 64.89 0.05 0.08
ExxonMobil XOM 7.6 101.74 0.83 0.81
GenElec GE 35.3 26.55 0.35 1.34
GoldmanSachs GS 2.3 164.80 1.38 0.84
HomeDpt HD 4.7 79.61 0.21 0.26
Intel INTC 20.0 31.25 0.01 0.03
IBM IBM 2.3 188.00 0.30 0.16
JPMorgChas JPM 10.2 55.80 0.24 0.43
JohnsJohns JNJ 5.4 105.10 0.70 0.66
McDonalds MCD 2.8 100.37 0.21 0.21
Merck MRK 6.1 58.44 0.14 0.24
Microsoft MSFT 23.9 42.09 0.41 0.97
Nike B NKE 2.8 77.29 0.21 0.27
Pfizer PFE 18.2 30.07 0.07 0.23
ProctGamb PG 7.5 81.16 0.45 0.55
3M MMM 1.9 144.31 0.42 0.29
TravelersCos TRV 1.1 94.68 0.38 0.40
UnitedTech UTX 3.7 114.13 0.62 0.55
UtdHlthGp UNH 2.7 82.87 0.79 0.96
Verizon VZ 17.6 50.32 0.68 1.37
VISAClA V 1.4 217.00 1.46 0.68
WalMart WMT 4.5 76.82 0.24 0.31
Source: WSJ Market Data Group
Credit-default swaps: European companies
At itsmost basic, thepricingof credit-default swapsmeasureshowmuchabuyer hastopaytopurchase-and
howmuch a seller demands to sell-protection fromdefault on an issuer's debt. The snapshot belowgives a
sense whichway the market was moving yesterday.
Showing the biggest improvement...
CHANGE, in basis points
Yesterday Yesterday Five-day 28-day
RaiffeisenZentralbank
Oesterreich
108 9 32 20
3i Gp 111 1 1 3
SIXCONTINENTS 51 ... ... 1
LandbkBadenWuertbg 57 ... ... 2
Henkel 25 ... ... 1
SwedishMatch 59 ... ... 3
NNGroup 53 ... ... 1
Adecco 55 ... ... 1
ABElectrolux 60 ... 1 1
Siemens 39 ... 1 ...
Andthe most deterioration
Dexia Cr Loc 205 22 27 48
HSBCHldgs 60 5 8 15
TVNFinCorpIII ABpubl 217 18 29 29
RaiffeisenBkIntl 143 11 25 35
RabobankNederland 53 4 8 11
BANKIA 149 11 22 34
BcoComercial Portugues 253 18 61 99
Finmeccanica 198 14 21 10
Portugal TelecomIntl Fin 273 18 44 58
HSBCBk 53 4 11 14
BLUE CHIPS & BONDS
WSJ.com
>>
Follow the markets throughout the day, with updated
stock quotes, news and commentary at WSJ.com.
Also, receive emails that summarize the days trading in
Europe and Asia. To sign up, go to WSJ.com/Email.
Below, a look at the Dow Jones Stoxx
50, the biggest and best known
companies in Europe, including the U.K.
Big Gaps With Iran
On Nuclear Deal Remain
VIENNASignificant gaps be-
tween Iran and world powers re-
main a week before the deadline for
a nuclear deal, European foreign
ministers said Sunday.
Iranian Foreign Minister Javad
Zarif met U.S. and European foreign
ministers in Vienna, seeking a
breakthrough.
After the talks, European foreign
ministers said while the discussions
had been useful, Tehran must now
choose whether it would take the
steps needed for a deal.
I think it has been good to have
these meetings at ministerial level
but there is no change in the state
of play in these negotiations as of
this moment, said U.K. Foreign Sec-
retary William Hague.
Mr. Hague said there is still a
huge gap in particular between
Irans demands for its future enrich-
ment program and the position of
Western governments that Tehran
must scale back its activities.
The lack of a breakthrough Sun-
day would seem to significantly
raise the odds that a final, compre-
hensive nuclear deal will not be
done by July 20. The U.S. has said
the talks would only be extended
beyond that point if there is real
progress to report.
German Foreign Minister Frank-
Walter Steinmeier said he could not
predict whether an accord would be
reached on time. He said now was
the moment for Iran to show that
they were ready to take steps to
reach a deal.
It is now up to Iran to decide
whether they follow the path to-
ward international cooperation or
whether they want to remain in iso-
lation, he said.
Mr. Zarif met late Sunday with
U.S. Secretary of State John Kerry,
who warned on arrival in the Aus-
trian capital of very significant
gaps between the sides.
Obviously, we have some very
significant gaps still. So we need to
see if we can make some progress
and I really look forward to a very
substantive and important set of
meetings and dialogues, Mr. Kerry
told reporters as he arrived.
It is vital to make certain that
Iran is not going to develop a nu-
clear weapon that their program is
peaceful.
After the meeting with Mr. Kerry,
Mr. Zarif said the talks had made
some important headway.
We tried to look into ways or
means of bridging the gaps, narrow-
ing the differences that we have
not necessarily by trying to meet
halfway but...by trying to look into
innovative ways of addressing the
problems.
Mr. Zarif said Iran should have a
serious nuclear program. but one
that removes any concern and doubt
about the peaceful nature.
Iran negotiates on its nuclear
program with the U.S., the U.K.,
France, Russia, China and Germany.
The Russian and Chinese foreign
ministers were unable to join the
talks on Sunday.
Iran and the six powers are seek-
ing to reach an agreement over the
next week that gradually lifts inter-
national sanctions on Tehran in ex-
change for clear guarantees that
Iran wont be able to quickly break
out and produce nuclear weapons.
Speaking Saturday evening in Vi-
enna, a senior U.S. official said any
final agreement would need to en-
sure that Irans future enrichment
activities would be very limited
for a number of years that can be
measured in double digits.
For some period of time, they
are going to have to have a very
limited, very constrained program
that will have inspections, verifica-
tion, monitoring and a lot of limita-
tions of what they can do, the offi-
cial said.
Iranian officials have been push-
ing for a nuclear deal that would
limit the countrys program for only
a few years. However they contin-
ued to say it was Western govern-
ments that were failing to show
flexibility. One diplomat accused the
U.S. of sticking to rigid stances.
Earlier in the week, Irans Su-
preme Leader Ayatollah Ali Khame-
nei said Iran will need a signifi-
cantly greater enrichment program
though he did not say when.
By enriching uranium, Iran can
produce enough nuclear fuel for an
atomic bomb. Iran says its nuclear
program is purely for peaceful pur-
poses.
BY LAURENCE NORMAN
U.S. Secretary of State John Kerry and German Foreign Minister Frank-Walter Steinmeier attend the nuclear talks.
A
g
e
n
c
e
F
r
a
n
c
e
-
P
r
e
s
s
e
/
G
e
t
t
y
I
m
a
g
e
s
U.S., Germany AffirmTies
VIENNAThe U.S. and Germany
tried to play down tensions on Sun-
day as their top diplomats met for
the first time since a fresh furor
erupted over American espionage in
Berlin in recent weeks. But new
signs emerged that the prospect re-
mains for wide-ranging repercus-
sions.
U.S. Secretary of State John
Kerry and German Foreign Minister
Frank-Walter Steinmeier stood next
to each other on the sidelines of
Iran nuclear talks here and tried to
make clear they remained commit-
ted to their trans-Atlantic alliance.
We have enormous political co-
operation and we are great friends,
Mr. Kerry told reporters after the
meeting. We will continue to work
together in the kind of spirit that
we have exhibited today.
On Thursday, Germany took the
rare step of telling the Central Intel-
ligence Agencys Berlin Station Chief
to leave the country, frustrated that
the U.S. wasnt being forthright in
response to allegations that two
German government workers had
been spying for the U.S.
Austrian Foreign Minister Sebas-
tian Kurz on Sunday said his gov-
ernment was taking very, very seri-
ously allegations that one of the
alleged spies had been directed by
U.S. officials based in Austria.
BY NICOLE LUNDEEN
Militants Kill 3 Pakistani Troops in Attack
ISLAMABADMilitants based in
Afghanistan attacked Pakistani para-
military troops in the northwestern
Bajaur tribal region, Pakistani offi-
cials said, killing three soldiers and
prompting Islamabad to issue a pro-
test to Kabul.
At least 40 militants ambushed
the Frontier Corps vehicle, which
was on a routine patrol. The terror-
ists had come into Pakistan from Af-
ghanistan, heavily armed, and at-
tacked around 12:30 a.m. on
Saturday, a military official in the
area said. They escaped when
troops fought back.
Three soldiers, including an of-
ficer, were killed, and two others
were seriously wounded, officials
said. The ambush occurred at Ghaki
Pass, which connects Bajaur with
Afghanistans Kunar province.
Early last month, four Pakistani
soldiers were killed in Bajaur in a
similar cross-border attack.
The Pakistani Taliban, who are
allied with al Qaeda, claimed re-
sponsibility for Saturdays attack.
Pakistan launched an offensive to
clear out militants fromthe North Wa-
ziristan tribal region last month. Sev-
eral militant groups, including al
Qaeda, the Pakistani Taliban and the
Haqqani network, are based in North
Waziristan. The U.S. had been putting
pressure on Pakistan for years to clear
the region of militants. The Pakistani
Taliban and other militant groups have
vowed retaliation for the offensive.
This is our reaction to the oper-
ation in North Waziristan. We will
continue to attack security forces in
all the tribal areas, Pakistani Tali-
ban spokesman Shahidullah Shahid
said after the Bajaur attack.
The Pakistani government said it
lodged a strong protest with the
Afghan government over the attack.
BY QASIM NAUMAN
AND SAFDAR DAWAR
WORLD NEWS
lN 1R UNl1b 51A15 BANKRUP1C CUUR1
FUR 1R bl51RlC1 UF bLAWAR
ln re: u3LC lNC.,
Uebtor.
)
)
Chapter 11
Case No. 14-10475 (C33)
N01lcE 10 c0RREN1 AN0 F0RMER R0L0ER6 0F
P0BLlc 6Ec0Rl1lE6 l660E0 BY 06Ec lNc.
PLA5 1AK NU1lC 1RA1:
1. Cemmencement ef Chater 11 Case and Flllng ef Plan. 0n Maroh 5, 2014, the above-
referenoed debtor and debtor in possession (the Uebtor") oommenoed a voluntary oase
under Chapter 11 of 1itle 11 of the united 3tates Code (the Bankruptoy Code") in the united
3tates Bankruptoy Court for the Uistriot of Uelaware (the Bankruptoy Court"). 3imultaneously,
the Uebtor tled the Uisolosure 3tatement with Respeot to Plan of Reorganization of u3LC
lno. (as amended, the Uisolosure 3tatement") and the Plan of Reorganization of u3LC lno.
(as amended, the Plan"). 0n 1uly 7, 2014, the Bankruptoy Court approved the Uisolosure
3tatement. Copies of the Uisolosure 3tatement and the Plan are available (a) at http://www.
loganandoo.oom, (b) at http://eof.deb.usoourts.gov, or (o) by mail upon telephonio or written
request to Logan & Company, lno., 546 valley Road, upper Montolair, New 1ersey 07043,
L-mail: u3LCloganandoo.oom, 1elephone: (973) 509-3190. Capitalized terms not otherwise
detned herein shall have the meanings asoribed to themin the Plan.
2. 5eclal Bar bate fer Certaln 5ecurltles-Related Clalms. ln oonjunotion with approving
the Uisolosure 3tatement, the Bankruptoy Court set a speoial bar date applioable to ourrent and
former holders of publio seourities issued by the Uebtor, inoluding oonvertible senior notes (0ld
Notes) and oommon stook (u3LC Common 3took), who may wish to assert seourities-related
Claims against the Uebtor. As ordered by the Bankruptoy Court, any Claim (i) arising from
resoission of a purohase or sale of the 0ld Notes or the u3LC Common 3took, (ii) for damages
arising from the purohase or sale of suoh a seourity, or (iii) for reimbursement or oontribution
allowed under Bankruptoy Code 3eotion 502 on aooount of suoh a Claim(oolleotively, a 510(b)
Claim") must be asserted against the Uebtor in a Proof of Claim reoeived no later than 5:00
p.m. Lastern 1ime on August 11, 2014 (the 3peoial Bar Uate"), by Logan & Company, lno., the
Uebtor's oourt-approved olaims agent, at the following address: u3LC lno. Claims Uooketing
Uepartment, o/o Logan & Company, lno., 546 valley Road, upper Montolair, N1 07043. A Proof
of Claim form may be obtained from the olaims agent's website, www.loganandoo.oom, under
olient name u3LC lno. Any suoh Claim that is not asserted in a Proof of Claim reoeived by the
olaims agent before the 3peoial Bar Uate will be barred and will not be entitled to reoeive any
payment or distribution of property from the Uebtor or its suooessors or assigns with respeot to
suoh Claim. Any Proof of Claim reoeived by the olaims agent will be subjeot to objeotion by the
Uebtor, as the Uebtor does not believe there is any basis for the allowanoe of any suoh Claims.
A Proof of Claim need not be tled solely to assert a Claim for prinoipal and interest due on the
0ld Notes or to assert an ownership interest in the u3LC Common 3took, a Proof of Claim is
required only if you wish to assert a 510(b) Claimas desoribed above.
3. 1reatment ef Netehelder Clalms under the Plan. lf you are a ourrent holder of 0ld Notes,
your Claim for the prinoipal and interest due on the 0ld Notes will be treated under the Plan in
the manner provided for Noteholder Claims in Class 5. ou will separately reoeive a oopy of the
Uisolosure 3tatement and a ballot for voting on the Plan fromthe Uebtor's voting Agent.
4. 1reatment ef Cemmen 5teck lnterests,Clalms under the Plan. As set forth in the Plan,
Common 3took lnterests/Claims in Class 7 inolude (a) any lnterests in the Uebtor that are
based upon or arise from u3LC Common 3took and (b) any Claims against the Uebtor that
are subordinated pursuant to Bankruptoy Code 3eotion 510(b) arising from the resoission
of a purohase or sale of u3LC Common 3took, any Claim for damages arising from the
purohase or sale of u3LC Common 3took, or any Claim for reimbursement, oontribution, or
indemnitoation on aooount of any suoh Claim. under the Plan, and subjeot to oertain limitations
and olaritoations oontained therein, if Class 5 and Class 6 vote to aooept the Plan, the holders
of any Allowed Common 3took lnterests/Claims in Class 7 shall be entitled to reoeive a Pro Rata
share of 5 of the New Common 3took issued under the Plan (subjeot to dilution). lf, however,
Class 5 or Class 6 votes to rejeot the Plan, the holders of suoh Claims and lnterests in Class 7
shall not reoeive or retain any property on aooount of suoh Claims and lnterests.
5. Plan Cenrmatlen Rearlng. A hearing to oonsider oontrmation of the Plan will be
held on 3eptember 5, 2014 at 1:00 p.m. (Lastern 1ime) before the onorable Christopher 3.
3ontohi, 1udge of the Bankruptoy Court for the Uistriot of Uelaware, 824 North Market 3treet,
5th lloor, wilmington, Uelaware 19801. 1he hearing may be adjourned from time to time by
announoement in open oourt. 1he Plan may be modited, if neoessary, prior to, during, or as a
result of the oontrmation hearing, without further notioe.
6. beadllne fer Ubjectlng te Plan. But fer the revlslens ef the Plan, and subject
te accetance ef the Plan by Class 5 and Class 6, helders ef Cemmen 5teck lnterests,
Clalms weuld have ne legal entltlement te recelve er retaln any reerty frem the bebter.
1herefere, ln accerdance wlth Bankrutcy Cede 5ectlen 1126(g), helders ef Clalms and
lnterests ln such Classes are deemed te have rejected the Plan and are net entltled te vete
en the Plan. Rewever, such artles are entltled te ebject te cenrmatlen ef the Plan. Ne
later than August 22, 2014 at 4:00 .m. (astern 1lme), all ebjectlens te cenrmatlen ef
the Plan must be (a) led wlth the Clerk ef the Bankrutcy Ceurt vla the Bankrutcy Ceurt's
electrenlc llng recedures and (b) served en the netlce artles set ferth ln Paragrah 30 ef
the erder arevlng the blsclesure 5tatement [becket Ne. 318].
Uated: wilmington, Uelaware, 1uly 11, 2014 B URbR UF 1Rl5 CUUR1
Mark U. Collins, RlCARU3, LA10N & llN0LR, P.A., 920 N. King 3treet, wilmington, Uelaware
19801, 1elephone: 302-651-7700, laosimile: 302-651-7701 -and-
U. 1. Baker, LA1AM & wA1KlN3 LLP, 885 1hird Avenue, New ork, New ork 10022-4834,
1elephone: 212-906-1200, laosimile: 212-751-4864, Co-Counsel for Uebtor
ln re: u3LC lNC.,
Uebtor.
)
)
Chapter 11
Case No. 14-10475 (C33)
N01lcE 0F REARlN010c0N6l0ERc0NFlRMA1l0N0F, AN00EA0LlNE F0R
0B1Ec1lN010, PLAN0F RE0R0ANl2A1l0N0F 06Ec lNc.
1U: ALL PAR1l5 lN lN1R51:
1. 0n Maroh 5, 2014, u3LC lno. (the Uebtor") oommenoed a voluntary oase under
Chapter 11 of 1itle 11 of the united 3tates Code (the Bankruptoy Code") in the united 3tates
Bankruptoy Court for the Uistriot of Uelaware (the Bankruptoy Court"). 3imultaneously, the
Uebtor tled the Uisolosure 3tatement with Respeot to Plan of Reorganization of u3LC lno.
(as amended, the Uisolosure 3tatement") and the Plan of Reorganization of u3LC lno. (as
amended, the Plan").
2. 0n 1uly 7, 2014, the Bankruptoy Court entered an order approving the Uisolosure
1elephone: (973) 509-3190.
3. A hearing to oonsider oontrmation of the Plan will be held on 3eptember 5, 2014 at
1:00 p.m. (Lastern 1ime) before the onorable Christopher 3. 3ontohi, 1udge of the Bankruptoy
Court for the Uistriot of Uelaware, 824 North Market 3treet, 5th lloor, wilmington, Uelaware
19801. 1he hearing may be adjourned from time to time by announoement in open oourt. No
later than August 22, 2014 at 4:00 p.m. (Lastern 1ime), all objeotions to oontrmation of the
Plan must be (a) tled with the Clerk of the Bankruptoy Court via the Bankruptoy Court's eleo-
tronio tling prooedures and (b) served on the notioe parties set forth in Paragraph 30 of the
order approving the Uisolosure 3tatement [Uooket No. 378].
4. 1he Plan may be further modited, if neoessary, pursuant to 11 u.3.C. 1127, prior to,
during, or as a result of the oontrmation hearing, without further notioe to parties in interest.
1elephone: 212-906-1200, laosimile: 212-751-4864
Co-Counsel for Uebtor
Legal Notices
ADVERTISEMENT
BANKRUPTCIES
Major stockmarket indexes Stock indexes fromaround the world, grouped by region. Showninlocal-currency terms.
PREVIOUS SESSION PERFORMANCE
Region/Country Index Close Net change Percentage change Yr.-to-date 52-wk.
EUROPE Stoxx Europe 600 336.91 0.54 0.16% 2.6% 13.7%
Stoxx Europe 50 2987.33 2.63 0.09 2.3 11.1
Euro Zone Euro Stoxx 318.29 0.60 0.19 1.3 17.2
Euro Stoxx 50 3157.05 6.46 0.21 1.5 18.0
Austria ATX 2379.29 12.93 0.55 -6.6 3.3
Belgium Bel-20 3089.07 -8.12 -0.26% 5.7 17.5
Czech Republic PX 960.54 17.14 1.82 -2.9 6.8
Denmark OMXCopenhagen 662.36 2.99 0.45 17.0 33.8
Finland OMXHelsinki 7478.82 -9.40 -0.13 1.9 20.1
France CAC-40 4316.50 15.24 0.35 0.5 12.0
Germany DAX 9666.34 7.21 0.07 1.2 17.7
Hungary BUX 17902.46 48.35 0.27 -3.6 -8.3
Ireland ISEQ 4657.14 10.48 0.23 2.6 14.9
Italy FTSE MIB 20614.86 126.11 0.62 8.7 33.6
Netherlands AEX 403.61 0.22 0.05 0.5 10.6
Norway All-Shares 680.87 2.12 0.31 13.0 27.1
Poland WIG 51085.89 611.53 1.21 -0.4 10.7
Portugal PSI 20 6142.87 37.63 0.62 -6.3 14.5
Russia RTSI 1383.18 -0.52 -0.04% -4.1 2.5
Spain IBEX35 10538.80 5.20 0.05% 6.3 34.3
Sweden OMXStockholm 444.86 0.77 0.17 5.0 16.9
Switzerland SMI 8468.52 -5.71 -0.07 3.2 6.1
Turkey BIST 100 79364.43 812.8 1.03 17.1 7.4
U.K. FTSE 100 6690.17 17.80 0.27 -0.9 2.2
ASIA-PACIFIC DJ Asia-Pacific TSM 1507.76 -6.04 -0.40 4.1 9.4
Australia SPX/ASX200 5486.80 22.40 0.41 2.5 10.3
China Shanghai Composite 2046.96 8.62 0.42 -3.3 0.4
Hong Kong Hang Seng 23233.45 -5.54 -0.02 -0.3 9.2
India S&P BSE Sensex 25024.35 -348.40 -1.37 18.2 25.4
Japan Nikkei Stock Average 15164.04 -52.43 -0.34 -6.9 4.5
Singapore Straits Times 3293.73 24.23 0.74 4.0 1.8
South Korea Kospi 1988.74 -14.10 -0.70 -1.1 6.4
AMERICAS DJ Americas 496.08 0.41 0.08 6.5 16.9
Brazil Bovespa 54785.93 193.18 0.35 6.4 20.3
Mexico IPC 43481.83 7.54 0.02 1.8 7.8
Note: Americas index data are as of 5:00p.m. ET. Sources: SIXFinancial Information; WSJ Market Data Group
Cross rates U.S.-dollar and euro foreign-exchange rates inglobal trading
USD GBP CHF SEK RUB NOK JPY ILS EUR DKK CDN AUD
Australia 1.0658 1.8232 1.1939 0.1568 0.0312 0.1724 0.0105 0.3109 1.4493 0.1944 0.9943 ...
Canada 1.0719 1.8336 1.2007 0.1577 0.0314 0.1734 0.0106 0.3127 1.4575 0.1955 ... 1.0057
Denmark 5.4833 9.3799 6.1420 0.8068 0.1604 0.8872 0.0541 1.5995 7.4559 ... 5.1154 5.1446
Euro 0.7354 1.2581 0.8238 0.1082 0.0215 0.1190 0.0073 0.2145 ... 0.1341 0.6861 0.6900
Israel 3.4280 5.8641 3.8398 0.5044 0.1003 0.5546 0.0338 ... 4.6612 0.6252 3.1981 3.2163
Japan 101.3295 173.3379 113.5024 14.9087 2.9644 16.3950 ... 29.5594 137.7827 18.4798 94.5325 95.0712
Norway 6.1805 10.5726 6.9230 0.9093 0.1808 ... 0.0610 1.8030 8.4040 1.1272 5.7659 5.7988
Russia 34.1821 58.4731 38.2885 5.0292 ... 5.5306 0.3373 9.9714 46.4791 6.2339 31.8892 32.0709
Sweden 6.7967 11.6267 7.6132 ... 0.1988 1.0997 0.0671 1.9827 9.2418 1.2395 6.3408 6.3769
Switzerland 0.8928 1.5272 ... 0.1314 0.0261 0.1444 0.0088 0.2604 1.2139 0.1628 0.8329 0.8376
U.K. 0.5846 ... 0.6548 0.0860 0.0171 0.0946 0.0058 0.1705 0.7949 0.1066 0.5454 0.5485
U.S. ... 1.7106 1.1201 0.1471 0.0293 0.1618 0.0099 0.2917 1.3598 0.1824 0.9329 0.9382
Source: ICAPPlc.
MSCI indexes
Developed and emerging-market regional and country indexes
fromMSCI as of July 11, 2014
Price-to- LOCAL-CURRENCY
Dividend earnings PERFORMANCE
yield ratio MSCI Index Last Daily YTD 52-wk.
2.50% 17 MSCI ACWI* 427.30 0.58% 4.6% 20.1%
2.40 18 World(DevelopedMarkets) 1,734.48 0.67 4.4 21.0
2.30 18 Worldex-EMU 212.84 0.51 5.1 20.3
2.30 18 Worldex-UK 1,750.78 0.65 4.6 21.0
3.00 16 EAFE 1,943.87 0.99 1.5 18.6
2.70 12 EmergingMarkets (EM) 1,062.37 -0.14 6.0 13.0
3.20 17 EUROPE 114.95 -1.04 2.5 17.7
3.10 19 EMU 197.50 1.80 -0.1 26.6
3.10 19 Europe ex-UK 122.82 -1.28 2.1 18.8
4.10 14 Europe Value 116.82 -1.14 2.9 21.6
2.30 22 Europe Growth 108.86 -0.94 2.1 13.7
2.30 18 Europe Small Cap 267.39 -1.22 2.6 26.0
3.60 8 EMEurope 274.80 -0.99 0.1 0.9
3.50 15 UK 1,969.12 -0.66 -1.2 7.2
3.30 16 Nordic Countries 207.95 -1.06 3.1 20.3
4.20 5 Russia 775.97 -1.11 -2.1 11.0
2.80 19 SouthAfrica 1,248.97 -1.05 9.8 27.1
3.00 13 ACASIAPACIFICEX-JAPAN 498.84 -0.25 6.6 15.4
1.90 15 Japan 772.04 -0.88 -4.1 9.8
3.40 9 China 62.06 0.33 -1.6 13.7
1.40 19 India 955.89 -0.06 17.0 26.4
1.10 10 Korea 579.39 0.22 -1.7 8.5
2.70 17 Taiwan 347.39 0.88 14.8 20.1
1.90 20 USBROADMARKET 2,228.93 0.46 5.8 22.7
1.40 32 USSmall Cap 3,310.63 0.79 2.5 21.8
3.40 17 EMLATINAMERICA 3,421.82 -0.50 6.9 7.4
*Twenty-four developed and 21 emerging markets Source: MSCI
S&PDowJones Indices
Price-to-
Dividend earnings PERFORMANCE(euros) PERFORMANCE(U.S.dollars)
yield* ratio* S&PDowJones Index Last Daily 52-wk. Last Daily 52-wk.
2.36%19.68 Global TSM 3384.24 0.00% 15.8%
2.80 19.91 Global DOW 1799.46 0.15% 13.3% 2598.85 0.13 18.1
2.90 15.20 Global Titans 50 240.29 0.01 9.4 244.05 0.00 13.9
3.14 21.72 DevEurope TSM 3449.04 0.15 19.6
2.31 20.61 DevelopedMarkets TSM 3398.49 0.01 16.1
2.79 14.05 S&PBMI EmgMarkets 220.23 -0.22 7.9 272.08 -0.24 12.4
3.30 21.46 S&PEurope 350 1382.21 0.16 14.3 1688.87 0.14 19.2
3.14 26.06 S&PEuro 1358.61 0.17 18.2 1682.32 0.15 23.2
3.74 26.76 Europe Dow 1406.37 0.07 15.0 2031.15 0.05 19.8
3.44 9.74 BRIC50 408.58 -0.19 12.0 529.72 -0.21 16.7
1.87 21.27 U.S. TSM 20554.98 0.10 17.0
Kuwait Titans 30 -c 209.55 0.74 5.4
Price-to-
TurkeyTitans 20 -c 818.85 1.09% 9.7%
5.05%17.08 Global Select Div 227.30 0.20% 16.4% 264.53 0.19 21.2
5.22 17.46 Asia/Pacific Select Div 311.47 0.14 5.9 362.49 0.13 10.3
U.S. Select Dividend -d 1323.31 -0.07 13.4 1344.02 -0.09 18.2
3.08 29.38 S&PGlbNat Resources 2127.95 -0.14 8.7 2875.11 -0.15 13.3
2.08 20.35 Islamic Market 2899.74 -0.02 17.1
2.38 18.13 Islamic Market 100 2741.07 -0.02 13.3 3190.06 -0.03 18.0
Islamic Turkey -c 4478.51 -0.08 1.9
3.24 23.42 Sustainability Europe 112.42 0.13 15.2 168.05 0.11 20.0
3.39 30.41 S&PGlbInfrastructure 1658.04 0.23 16.4 2546.90 0.21 21.3
2.05 16.88 Luxury 1764.26 0.08 3.6 2034.01 0.06 8.0
DJ Commodity 688.50 -0.91 -1.1
*Fundamentals are based on data in U.S. dollar. Footnotes: a-in USdollar. b-dividends reinvested. c-in local currency. Note:All data as of 2 p.m.ET. Source: S&PDowJones Indices
GLOBAL MARKETS LINEUP
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Commodities Prices of futures contracts withthe most openinterest
EXCHANGE LEGEND: CBOT: Chicago Board of Trade; CME: Chicago Mercantile Exchange; ICE-US: ICE Futures U.S.MDEX: Bursa Malaysia
Derivatives Berhad; LIFFE: London International Financial Futures Exchange; COMEX: Commodity Exchange; LME: London Metals Exchange;
NYMEX: NewYork Mercantile Exchange;ICE-EU: ICE Futures Europe *Data as of July 10, 2014
ONE-DAY CHANGE Year Year
Commodity Exchange Last price Net Percentage high low
Corn (cents/bu.) CBOT 383.50 -9.25 -2.36% 517.00 382.50
Soybeans (cents/bu.) CBOT 1075.75 -17.25 -1.58 1,279.25 1,064.50
Wheat (cents/bu.) CBOT 526.25 -22.25 -4.06 751.50 525.00
Live cattle (cents/lb.) CME 151.800 1.075 0.71% 158.000 130.900
Cocoa ($/ton) ICE-US 3,088 7 0.23 3,149 2,650
Coffee (cents/lb.) ICE-US 161.25 -1.75 -1.07 220.60 116.70
Sugar (cents/lb.) ICE-US 17.04 -0.25 -1.45 18.91 15.72
Cotton (cents/lb.) ICE-US 68.07 -0.48 -0.70 84.74 67.10
Rapeseed (euro/ton) LIFFE 332.25 -2.25 -0.67 386 327
Cocoa (pounds/ton) LIFFE 1,905 10 0.53 1,945 1,651
Robusta coffee ($/ton) LIFFE 1,997 -12 -0.60 2,216 1,568
Copper ($/lb.) COMEX 3.2695 0.0025 0.08 3.3855 2.8780
Gold ($/troy oz.) COMEX 1338.50 -0.70 -0.05 1,392.00 1,215.20
Silver ($/troy oz.) COMEX 21.495 -0.013 -0.06 22.160 18.650
Aluminum($/ton)* LME 1,910.50 -40.50 -2.08 1,951.00 1,686.50
Tin ($/ton)* LME 22,100.00 -130.00 -0.58 23,770.00 21,410.00
Copper ($/ton)* LME 7,090.50 -65.50 -0.92 7,422.00 6,430.00
Lead ($/ton)* LME 2,172.00 -47.00 -2.12 2,242.00 2,033.00
Zinc ($/ton)* LME 2,260.00 -42.50 -1.85 2,302.50 1,948.00
Nickel ($/ton)* LME 19,050 -575 -2.93 21,100 13,425
Crude oil ($/bbl.) NYMEX 100.10 -2.30 -2.25 106.64 88.93
Heating oil ($/gal.) NYMEX 2.8725 -0.0338 -1.16 3.0848 2.8427
RBOBgasoline ($/gal.) NYMEX 2.8796 -0.0495 -1.69 3.0732 2.6607
Natural gas ($/mmBtu) NYMEX 4.133 0.020 0.49 4.8850 3.9090
Brent crude ($/bbl.) ICE-EU 107.07 -1.94 -1.78 115.09 102.75
Gas oil ($/ton) ICE-EU 881.50 -6.00 -0.68 947.00 874.00
Sources: SIX Financial Information; WSJ Market Data Group
Currencies Londonclose onJuly 11
Per In
AMERICAS Per euro In euros U.S. dollar U.S. dollars
Argentina peso-a 11.0823 0.0902 8.1503 0.1227
Brazil real 3.0195 0.3312 2.2207 0.4503
Canada dollar 1.4575 0.6861 1.0719 0.9329
Chile peso 753.84 0.001327 554.40 0.001804
Colombia peso 2521.49 0.0003966 1854.37 0.0005393
Ecuador US dollar-f 1.3598 0.7354 1 1
Mexico peso-a 17.6543 0.0566 12.9835 0.0770
Peru sol 3.7819 0.2644 2.7814 0.3595
Uruguay peso-e 31.182 0.0321 22.932 0.0436
U.S. dollar 1.3598 0.7354 1 1
Venezuela bolivar 8.63 0.115816 6.35 0.157480
ASIA-PACIFIC
Australia dollar 1.4493 0.6900 1.0658 0.9382
1-mo. forward 1.4525 0.6885 1.0682 0.9362
3-mos. forward 1.4586 0.6856 1.0727 0.9322
6-mos. forward 1.4677 0.6813 1.0794 0.9265
China yuan 8.4356 0.1185 6.2038 0.1612
Hong Kong dollar 10.5382 0.0949 7.7501 0.1290
India rupee 81.6618 0.0122 60.0565 0.0167
Indonesia rupiah 15796 0.0000633 11617 0.0000861
Japan yen 137.78 0.007258 101.33 0.009869
1-mo. forward 137.76 0.007259 101.31 0.009871
3-mos. forward 137.70 0.007262 101.27 0.009875
6-mos. forward 137.58 0.007269 101.18 0.009884
Malaysia ringgit-c 4.3321 0.2308 3.1860 0.3139
NewZealand dollar 1.5447 0.6474 1.1360 0.8802
Pakistan rupee 134.201 0.0075 98.695 0.0101
Philippines peso 59.114 0.0169 43.475 0.0230
Singapore dollar 1.6876 0.5926 1.2411 0.8057
South Korea won 1386.33 0.0007213 1019.55 0.0009808
Taiwan dollar 40.827 0.02449 30.026 0.03331
Thailand baht 43.704 0.02288 32.142 0.03111
Per In
EUROPE Per euro In euros U.S. dollar U.S. dollars
Euro zone euro 1 1 0.7354 1.3598
1-mo. forward 0.9999 1.0001 0.7353 1.3599
3-mos. forward 0.9996 1.0004 0.7352 1.3603
6-mos. forward 0.9992 1.0008 0.7348 1.3609
Czech Rep. koruna-b 27.438 0.0364 20.179 0.0496
Denmark krone 7.4559 0.1341 5.4833 0.1824
Hungary forint 310.13 0.003225 228.08 0.004385
Norway krone 8.4040 0.1190 6.1805 0.1618
Poland zloty 4.1421 0.2414 3.0462 0.3283
Russia ruble-d 46.479 0.02152 34.182 0.02926
Sweden krona 9.2418 0.1082 6.7967 0.1471
Switzerland franc 1.2139 0.8238 0.8928 1.1201
1-mo. forward 1.2136 0.8240 0.8925 1.1204
3-mos. forward 1.2130 0.8244 0.8921 1.1210
6-mos. forward 1.2119 0.8252 0.8912 1.1220
Turkey lira 2.8817 0.3470 2.1193 0.4719
U.K. pound 0.7949 1.2581 0.5846 1.7106
1-mo. forward 0.7951 1.2578 0.5847 1.7102
3-mos. forward 0.7955 1.2571 0.5850 1.7093
6-mos. forward 0.7964 1.2557 0.5857 1.7074
MIDDLE EAST/AFRICA
Bahrain dinar 0.5125 1.9512 0.3769 2.6531
Egypt pound-a 9.7233 0.1028 7.1508 0.1398
Israel shekel 4.6612 0.2145 3.4280 0.2917
Jordan dinar 0.9636 1.0378 0.7087 1.4111
Kuwait dinar 0.3834 2.6079 0.2820 3.5461
Lebanon pound 2056.55 0.0004863 1512.45 0.0006612
Saudi Arabia riyal 5.0991 0.1961 3.7501 0.2667
South Africa rand 14.5749 0.0686 10.7188 0.0933
United Arab dirham 4.9944 0.2002 3.6730 0.2723
a-floating rate b-financial c-government rate c-commercial
rate d-Russian Central Bank rate.
Source: ICAPPlc.
Iraqs Political Impasse Is Prolonged
BAGHDADIraqs parliament
failed to agree on a new speaker
during its second session on Sunday,
prolonging a political impasse that
has dashed hopes of reaching a res-
olution to the worst security crisis
since the U.S.-led invasion in 2003.
U.S. diplomats and others have
urged Iraqi politicians to reach a
quick agreement over the three key
government positionsthe parlia-
ment speaker, president and prime
ministerwho are traditionally di-
vided up between Sunni Arabs,
Kurds and Shiite Arabs, respec-
tively.
Parliamentarians met briefly but
adjourned almost immediately after
Mehdi Hafez, the legislatures interim
speaker, announced that deputies
hadnt yet reached an agreement on
a new speaker.
The next session will be held on
Tuesday, he said.
But the abiding political dead-
lock has raised concerns among
Iraqi politicians and international
observers that Iraqs political class
is busy bickering even as its country
is riven by a powerful Sunni Islamist
insurgency.
Failing to move forward on
electing a new speaker, a new presi-
dent and a new government risks
plunging the country into chaos,
the United Nations special repre-
sentative for Iraq, Nickolay Mlade-
nov, said Saturday. If serious solu-
tions to the current problems are
not found, then all political leaders
will have to share their responsibil-
ity for failing to act with the neces-
sary sense of duty at a time of cri-
sis.
The primary barrier to forming a
new government is the widespread
opposition to Prime Minister Nouri
al-Maliki, who is seeking his third
four-year term. Mr. Malikis coali-
tion won a plurality of votes in the
April polls and he has refused to
step down.
An Islamist group calling itself the
Islamic State took over Iraqs second-
largest city of Mosul on June 10,
pushing Iraqs U.S.-trained military
into a frenzied retreat. In the next
two days, the group previously known
as the Islamic State of Iraq and al-
Sham, quickly advanced to within
reach of Iraqs capital of Baghdad.
The first session of parliament,
which was elected in April, ended in
a shouting match between represen-
tatives of the countrys Kurdish mi-
nority and Arab Shiites.
After a short break, most of the
bodys Sunni Arab and Kurdish rep-
resentatives walked out.
Sundays session was quieter, but
the lawmakers still elicited frustra-
tion from their fellow parliamentari-
ans.
This is a big risk for Iraq, said
Mr. Mehdi as he chided the repre-
sentatives before adjourning the
session. We cant continue on in
this way.
The countrys constitution
obliges parliament members to se-
lect a speaker during its first seat-
ing. But the body continued to meet
without a new speaker in violation
of the charter.
Deputies have been meeting in
their blocs for hours a day, often
into the early hours of the morning,
for weeks.
A bloc of Sunni parliamentarians
have reportedly agreed to nominate
Salim al-Jabouri, a Sunni lawmaker
and the chairman of the parliamen-
tary committee on human rights, as
speaker. Osama al-Nujaifi, the previ-
ous parliament speaker, announced
on Sunday that they were ready to
nominate Mr. Jabouri.
But the Sunni bloc is unlikely to
move ahead on a vote for speaker
before the body has reached agree-
ments on the president and prime
minister.
BY MATT BRADLEY
Iraqi Prime Minister Nouri al-Maliki has defied growing pressure to step aside.
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WORLD NEWS
ChineseRing
Accused In
NewHacking
Investigation
WASHINGTONThe Justice De-
partment has charged the owner of
a Chinese aviation technology com-
pany with stealing reams of infor-
mation from U.S. defense contrac-
tors about key American
technologythe latest in an effort
to criminally prosecute what Ameri-
can officials allege is rampant Chi-
nese industrial espionage.
The charges against Su Bin, a
Chinese citizen living in Canada,
shed new light on an alleged hack-
ing ecosystem that officials have
long said poses a threat to many
U.S. companies.
Tensions between the U.S. and
China over cyberespionage remain
high. Secretary of State John Kerry,
visiting China this week, raised the
chilling effect hacking has on U.S.
firms. The Chinese, in turn, see
themselves as victims of cyberespio-
nage. On Friday, state broadcaster
China Central Television called a lo-
cation-tracking function offered by
Apple Inc.s iPhone a national secu-
rity concern.
Prosecutors in Los Angeles un-
sealed a 50-page complaint accusing
Mr. Su of working with two co-con-
spirators in China between 2009
and 2013 to break into computers at
Boeing Co. and other defense con-
tractors, steal technology and pass
it to entities in China.
The trio allegedly stole sensitive
information about Boeings C-17 mil-
itary transport plane and two of the
Pentagons most advanced fighter
jets, the F-22 and F-35, built by
Lockheed Martin Corp., among
other projects.
Unlike five Chinese military of-
ficers who were charged in May
with hacking into U.S. companies,
Mr. Su appears to have been work-
ing for himself, according to the
complaint. After a request from the
U.S., Mr. Su was arrested June 28 in
Canada, a spokeswoman for the Ca-
nadian Department of Justice said.
He faces extradition proceedings. A
lawyer for Mr. Su didnt respond to
a request for comment.
The F-35 has been a long-stand-
ing target of suspected overseas
hackers. The Wall Street Journal re-
ported in 2009 that hackers, possi-
bly Chinese, had penetrated Penta-
gon computers containing
information about the program.
The complaint helped to answer
one question about Chinas sprawl-
ing hacking-industrial complex. The
countrys cyberwarriors, some of
whom work for the military and
others on their own, hit so many
targets and vacuum up so much in-
formation, that it can at times it can
be hard to tell who is directing
them, a former U.S. official said.
Many hackers work as freelanc-
ers, sometimes during off hours,
then try to sell stolen information
to state-owned firms.
In the Boeing case, the effort ap-
peared to be directed not by Chinas
central government but by Mr. Su,
owner of a firm named Beijing Lode
Technology Co. Ltd. The firm de-
scribes itself as an aerospace tech-
nology company on its website. The
complaint said the company is in
contact with military and commer-
cial entities involved in aerospace
technology in China.
BY ANDREWGROSSMAN
AND DANNY YADRON
Gazans Flee After Israel Warning
More than ten thousand Palestin-
ians in the northern Gaza Strip fled
their homes for United Nations shel-
ters after the Israeli military warned
them with leaflets and phone calls
to evacuate ahead of an intensified
offensive.
Columns of cars, donkey carts
and scooters loaded with luggage
packed escape routes from the farm-
ing village of Beit Lahiya. Ignoring
calls from the territorys Hamas rul-
ers to stay, residents said that after
hearing a fierce gunbattle in the
early morning between militants
and Israeli commandos, they de-
cided to take the warning seriously.
The warnings followed a navy
commando raid on Saturday night
that Israel said killed three militants
and destroyed rocket launchers. It
was the first time in this round of
hostilities that Israel dispatched
commandos instead of launching
airstrikes.
An Israeli military spokeswoman
said the offensive in Beit Lahiya
would involve a significant number
of targets but would be from the
air and wont include a ground in-
cursion. A senior Air Force officer
said the military would spend sev-
eral hours to determine whether the
neighborhoods had been evacuated.
Israeli Prime Minister Benjamin
Netanyahu has said all options are
open, including a ground invasion,
to stop rocket barrages from Gaza
on Israel.
Israeli forces are massed on the
border between southern Israel and
Gaza, poised for a possible ground
operation. Israel had called up
36,000 reservists as of Sunday.
Kerry spoke by phone to Mr. Netan-
yahu on Sunday and reiterated U.S.
readiness to facilitate a cease-fire,
according to a senior State Depart-
ment official.
The secretary condemned the
rocket attacks from Gaza into Israel,
and stressed Israels right to defend
itself, the official said.
Mr. Netanyahu defended the of-
fensive in U.S. television interviews
on Sunday, saying Hamas was to
blame for civilian deaths in Gaza.
Were using missile defense to
protect our civilians, and theyre us-
ing civilians to protect their mis-
siles, he said on Fox News Sunday.
Moussa Abu Marzook, a senior
Hamas figure, said in an online mes-
sage that even if a cease-fire is
reached, it would mark only a tem-
porary pause.
The Palestinian death toll for
nearly a week of fighting reached
165 with more than 1,000 injured,
according to the Gaza Health Minis-
try. The U.N. said 70% of the fatali-
ties were noncombatants. No Israe-
lis have been killed.
Israels leaflets addressed to the
residents of Beit Lahiya warned of a
short and temporary campaign
against militants, adding that those
who ignored the warning would en-
danger the lives of their family. Is-
rael has also argued that warnings
such as calls and leafleting are re-
ducing civilian casualties from its
strikes on Gaza.
The U.N.s refugee agency,
UNRWA, said about 10,000 people
had reached the shelters, and called
on both sides to respect the invio-
lability of the shelters. Not all
those who fled took refuge at the
shelters, however, with some going
to join families elsewhere.
Displaced Gazans crammed into
U.N. schoolhouses, laying out blan-
kets as children played soccer out-
side.
Ahmed Al Attar, a 61-year-old
farmer, said his extended family of
30 set off on foot at 3 a.m. under
the full moon and walked about 7
miles to two schools out of the tar-
get zones. He said he feared a new
bombardment would destroy about
$7,000 of investments he had made
to his farm where he grows cucum-
bers and which was leveled in the
last Israel-Hamas conflict in 2012.
Each couple of years, another
war, he said. I would prefer to
leave this country.
At another U.N. school, Sabreen
Shunnar, 35 years old, sat with her
elderly mother and a number of her
children. They too had been hit by
fighting before in 2009, which lev-
eled their home. As the children
played, the mother, Hoson Jarbuo,
flipped through pictures of their
house.
Im expecting to go back and
find rubble, she said.
Ms. Shunnar said that despite
Hamass calls for people to stay put,
that her decision to leave didnt
mean she didnt still support the
militants in their fight against Is-
rael, only that she wanted to remain
safe.
I blame the Israeli occupation
for this situation, she said.
An Israeli airstrike on Saturday
evening on the home of Gazas po-
lice chief killed 18 people as they
were leaving after prayers at a
nearby mosque, officials said. The
police chief survived. The senior Air
Force officer said the attack was be-
ing reviewed.
Mohammed Arafah Abu Haloob,
an 80-year-old man who owns an
orange grove a short walk from the
northern border, said he received
six phone calls from Israelis telling
him to leave his home. But he stayed
put, saying there were too many
valuables in his home.
He left only when his son and
daughterwho had already fled
came to his house and refused to
leave if he didnt do the same. He is
still considering returning, he said.
By Nicholas Casey
in Gaza City and
Joshua Mitnick in Tel Aviv
Palestinian mourners in a van carrying bodies to a funeral on Sunday.
Z
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EURHighYieldBond
Funds that invest in higher yielding securities denominated/hedged in European
currencies 40% of assets in securities with a credit quality equivalent to BB, or lower.
Rankedon%total return(dividendsreinvested) inEurosfor oneyear endingJuly11, 2014
Leading 10Performers
FUND FUND LEGAL %Return in $US **
RATING* NAME FUNDMGM'T CO. CURR. BASE YTD 1-YR 2-YR 5-YR
3 Anima Fix Anima Sgr S.p.A EURITA 6.19 15.33 13.70 12.48
High Yield A
NS Anima Anima Sgr S.p.A EURITA 5.92 15.23 9.34 4.39
Obbligazionario High Yield A
4 Aberdeen Aberdeen Global GBPLUX 5.93 14.72 13.70 19.53
Global Sel High Yield Bd D1 Services S.A.
NS Henderson Henderson EURLUX 5.59 14.53 NS NS
Horizon Euro Hi Yld Bd A1 EUR Management S.A.
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Alpha Haut Rendement Acc Gestion
NS Danske Danske Invest EURLUX 5.22 13.68 NS NS
Invest SICAVEuro HYBond A Management Company S.A.
5 Fidelity Fidelity (FIL Inv EURLUX 6.15 13.61 15.13 NS
Inst Euro High Yield I-Acc-EUR Mgmt (Lux) S.A.)
NS Danske Danske Invest DKKDNK 5.77 13.16 15.71 NS
Invest Euro HYObl Akk KL DKKh
4 Schelcher Schelcher Prince EURFRA 4.75 13.13 19.88 13.91
Prince Haut Rendement I Gestion
4 CNP-Assur-HY CCRAsset EURFRA 5.20 12.93 13.20 13.64
A/I Management
NOTE: Changes in currency rates will affect performance and rankings. Source: Morningstar, Ltd
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MARKETS
Fund Scorecard
Analysts Question
Spanish Bank Data
ures for nonperforming assets.
The information that banks re-
port each quarter is often insuffi-
cient to determine the total volume
of bad assets, says Alberto Postigo,
a Moodys Investors Service analyst
in Madrid.
Nonperforming loans at the six
largest Spanish banks fell or were
flat in the first quarter of this year
compared with the fourth quarter of
2013. But nonperforming assets at
four of those banksCaixabank SA,
Banco de Sabadell SA, Bankia SA
and Banco Bilbao Vizcaya Argen-
taria SAdeclined less quickly, and
actually increased at Banco Popular
Espaol SA, according to Sergio
Gamez, a Bank of America Merrill
Lynch analyst.
Mr. Gamez estimates that Span-
ish banks total nonperforming as-
sets are equivalent to 433 billion,
or 40% of the Spanish economy.
Caixabank, for instance, recorded
a 5.3% fall in nonperforming-loan
volume from the fourth quarter of
2013 to the first quarter of this year,
but only a 2.5% drop in nonperform-
ing assets, according to Mr. Gamez.
Banco Santander SA was the ex-
ception. The lender reported no
change in its nonperforming loans
quarter over quarter and a 0.9% de-
crease in nonperforming assets in
its Spanish unit, according to Mr.
Gamez.
Representatives for Caixabank,
Sabadell, Bankia and Santander de-
clined to comment. A BBVA spokes-
woman says nonperforming loans
are a better way to measure trends
in asset quality because they are a
leading indicator of loan defaults.
A Banco Popular spokesman says
he disagrees with the Bank of
America analysis. The banks non-
performing loans and assets both
fell, he says.
One potential explanation for the
discrepancy between nonperforming
loans and assets: Banks could be ac-
celerating foreclosures, analysts
suggest. Foreclosing on a home
would move an overdue mortgage
loan from the nonperforming-loans
Continued from page 15 bucket into the one for nonperform-
ing assets.
Indeed, an analysis by Mr. Gamez
shows that the six largest Spanish
banks increased the number of fore-
closures by an average 2.2% from
the fourth quarter of 2013 to the
first quarter of this year.
Banks are likely to have to step
up what they disclose, and how of-
ten, when the European Central
Bank takes over in November as the
regulator for the euro zones largest
banks, says Robert Tornabell, a pro-
fessor of banking at ESADE Business
School in Barcelona.
An ECB spokeswoman says that
every quarter, banks will have to
disclose their nonperforming ex-
posures, which includes loans and
other credit risks, although that
change wont take effect in Novem-
ber. The majority of banks will have
to disclose foreclosures and repos-
sessions regularly, she added.
For now, Spanish banks continue
to highlight their nonperforming
loans.
Banco Popular Chairman ngel
Ron touted the first-quarter im-
provement in the banks nonper-
forming-loan volume during a June
conference in the northern Spanish
city of Santander, titled Europe
Leaves the Crisis Behind.
Based on the internal numbers
that we have at the bank, we would
anticipate that we are going to see
an improvement in bad loans in up-
coming quarters as well, Mr. Ron
said. This is very good news.
But Banco Populars nonperform-
ing assets actually grew 0.3% from
the fourth quarter to the first quar-
ter, according to Mr. Gamez. The
Banco Popular spokesman disagrees.
He says the banks nonperforming
assets fell 0.9%.
Bank-Driven Drop Seen as Blip
3.98% on Thursday.
Nonetheless, assets of every
stripe, from the safest to the riskiest,
have rallied so much in recent
months that some arent so quick to
shrug off last week as a passing blip.
People remember the European
crisis, and they get very much
afraid, said Andrew Wilmont, lead
portfolio manager for European
high-yield investments at Neu-
berger Berman Group LLC, which
manages $30 billion in high-yield
bonds. High-yield bonds were some
of the hardest hit last week.
Some investors have also cited
lofty valuations as a source of con-
cern and an indication that a correc-
tion could be imminent. The Dow
Jones Index smashed through 17000
for the first time early in July. Since
this time last year, the index has
gained more than 9%. The compa-
nies in the S&P 500 index are trad-
ing at a price-to-earnings ratio of
19.4, based on the past 12 months
earnings, up from 18.4 a year ago.
But even in the throes of last
weeks shakeout in bonds, investors
demonstrated that they are willing
to buy. Italy, a country that is usu-
ally the first affected by contagion
when financial jitters arise in Spain,
Portugal or Greece, sold its maxi-
mum targeted 7.5 billion ($10.2 bil-
lion) of debt of varying maturities
on Friday.
Elsewhere, Fiat SpA sold an
850 million eight-year bond in It-
aly on Thursday, even though simi-
lar bond deals were postponed as
far afield as Mongolia, where vola-
tility prompted the Trade and De-
velopment Bank of Mongolia to de-
lay a dollar bond on Friday.
Of course we have to take it se-
riouslywhen there is a strong and
sudden reaction like this, there is al-
ways a reason for it. But we are also
quite happy buying into the weak-
ness, as we dont think that the re-
covery is over yet, said Mike Frank-
lin, chief investment strategist at
Beaufort Securities in London. His
investment focus is U.K. stocks, but
he said that he is still buying equi-
ties with exposure to Southern Eu-
ropea, such as Vodafone PLC, which
has mobile-phone networks in Spain
and Italy.
Continued from first page
In corporate- and bank-debt mar-
kets, Alberto Gallo, a strategist at
Royal Bank of Scotland, argues for
the lasting appeal of credit in Spain,
Portugal and Italy.
We shouldnt doubt Europes re-
covery or the health of Europes
banks, and this is not a turn in the
peripherys fortunes, he said. Eu-
rope still stands out he said, com-
pared with the U.S. and U.K. where,
in contrast to the euro zone, central
banks appear to be preparing to
bump up interest rates.
Even though Portugals stock in-
dex declined around 4% on Thurs-
day, it rose 0.9% on Friday and has
recorded a 30% gain over the last
two years, mirroring movements in
other asset classes in Europe and
beyond.
The pan-European Stoxx Europe
600 Index fell 3.2% for the week af-
ter a 1% drop on Thursday, but
inched up Friday and is up 6.1%
from its closing low this year, set on
Feb. 4.
Dan Skelly, equity strategist at
Morgan Stanley Wealth Manage-
ment, which oversees $1.9 trillion in
client assets, remains bullish on Eu-
ropean stocks and describes what
has happened in Portugal as an iso-
lated event.
He notes that the European econ-
omy is in far better shape than it was
during the height of the sovereign-
debt crisis, when financial markets
around the world swung wildly on al-
most every twist and turn.
Im worried about things like
potential U.S. wage inflation. Im
worried about premature Fed tight-
ening. Im worried about a slow-
down in the emerging markets.
What I am explicitly not worried
about is Banco Esprito Santo, said
Krishna Memani, chief investment
officer at OppenheimerFunds.
While the bank may not be pris-
tine, regulators certainly have the
means to control the situation at
this particular institution. If we
learned anything in 2008-09 in the
U.S. and 2011-12 in Europe, its that
regulators have a range of ways to
contain damage at the bank and
banking-system level, if they want
to.
Economists at Barclays PLC,
meanwhile, wrote in a note that
while what happened in Portugal
may raise reputational problems for
some of the institutions involved, it
is not a threat to the general bank-
ing system.
It wont help the already weak
sentiment to such names but it also
shouldnt escalate much beyond the
immediately impacted entities, said
Deutsche Bank strategist Jim Reid.
Tommy Stubbington,
Dan Strumpf and Matt Wirz
Source: WSJ Market Data Group The Wall Street Journal
Falling Out
A sharp selloff in Portugals stock market has barely dented a long-running rally
in European shares.
45
30
15
0
15
30
%
13 14 2012
Stoxx Europe 600
Portugals PSI-20 index
CME, Thomson to Make Over Silver Fix
The silver market is about to un-
dergo a historic makeover as a
switch is flicked on a new price-
benchmarking system that will allow,
at a price, an unprecedented glimpse
into the workings of the silver fix.
The London Bullion Market Asso-
ciation said Friday that the existing
daily fix, which is set over the phone
by a small group of banks, will be re-
placed Aug. 15 by a new system pro-
vided jointly by CME Group Inc. and
Thomson Reuters Corp.
The crowning of CME and Thom-
son Reuters as the new custodians
of the silver fix brings to a close a
117-year-old City of London institu-
tion that is used to price, for exam-
ple, mining sales contracts and ex-
change-traded funds, totaling
billions of dollars each year.
The new method offers an auc-
tion-based, auditable electronic sys-
tem that will match buying and sell-
ing orders to reach a benchmark for
the price of silver.
Dan Rees, head of strategy for
commodities at Thomson Reuters,
said that to facilitate a smooth tran-
sition, there will be no other major
alterations for a six-month period.
After this point, however, a fee to
access the data is likely to be in-
stated. Mr. Rees said this is likely to
be sensible, rather than excessive.
Any income from the fee will
likely be split between the LBMA in-
dustry group, CME Group and Thom-
son Reuters, but the level of the fee
hasnt been determined, according to
people familiar with the plans. Other
global financial benchmarks charge
for data packages. Euribor-EBF, for
example, offers annual licensing
packages for its interbank lending
rates priced in a range of 500 to
40,000, depending on the type of
institution buying the data and in
how many locations it will be used.
IntercontinentalExchange Inc.
charges for use of Libor data.
A CME Group spokeswoman de-
clined to comment on whether the
exchange would charge participants
a fee to take part in the auction pro-
cess that sets the fix. Under the ex-
isting system that will end Aug. 14,
the banks determining the price
benchmark get a small commission
on each transaction.
The old silver fix was effectively
killed off in April when Deutsche
Bank AG withdrew from the process
as part of a wider retrenchment of
its commodities business. This left
only two banks on the fixing panel
Bank of Nova Scotia and HSBC Hold-
ings PLCrendering the process un-
viable, according to people familiar
with the matter. The LBMA-led
search for an alternative came as
market regulators have scrutinized
benchmarks across the financial sec-
tor in the wake of a scandal involv-
ing rigging of interest rates.
CME Group and Thomson Reut-
ers shook off competition from a
range of exchanges and information
providers to host the new fix.
This is a big win for the CME,
said Courtney Lynn, treasurer of Co-
eur Mining Inc., the largest listed U.S.
primary-silver producer. Prior to the
LBMA seminar [in which each pro-
posal was pitched], many expected
that the LME would win this busi-
ness. The CME came in as the dark
horse and walked away with not only
the silver fix, but a strong likelihood
that they will also have the gold fix-
ing business eventually as well.
The future of the London gold
fix, which dates back to 1919, is
shrouded in uncertainty.
BY FRANCESCA FREEMAN
Two measures of credit
quality paint different
pictures about lenders.
Broker Faces Probe on Libya Deals
charges, according to people familiar with
the matter. The U.S. Securities and Ex-
change Commission and the Justice Depart-
ment are examining whether the firm or its
employees were part of what authorities
believe was a broad pattern in which West-
ern companies used improper means to
curry favor with officials in the Gadhafi re-
gime, said people familiar with the investi-
gations.
A spokesman for Tradition, which hasnt
been accused of wrongdoing, said it is co-
operating with British investigators and
isnt aware of U.S. investigations. The
spokesman said former employees, not the
firm itself, are the subject of the U.K. inves-
tigation, and described the firm as a victim
of employees who submitted fraudulent ex-
pense claims for inappropriate entertain-
ment, most of it unrelated to clients.
Tradition is just one of a number of
banks, brokerage houses and investment
firms under scrutiny for their efforts to
woo Libyans. Others include Goldman Sachs
Group Inc., French bank Socit Gnrale
SA, hedge-fund firm Och-Ziff Capital Man-
agement Group LLC and private-equity firm
Blackstone Group LP, according to those fa-
miliar with the probes. The firms declined
to comment.
The U.S. investigations are based on the
Foreign Corrupt Practices Act, which pro-
hibits giving or offering bribes to foreign
officials to gain a business advantage.
Businesses are allowed to provide some
hospitality and pay some expenses for for-
eign officials, the Justice Department and
SEC said in a guide to the law published
two years ago. But gifts or payments can be
considered bribes, the agencies said, if they
appear to be given with corrupt intent,
which could be demonstrated by a pattern
Continued from first page of gifts that are extravagant or payment for
travel that is primarily for enjoyment
rather than business. Likewise, the hiring of
relatives of foreign officials is permissible if
not done for the purpose of winning busi-
ness.
At Tradition, we do not believe that any
misconduct amounted to corruption, the
firms spokesman said. Hospitality offered
in accordance with Tradition policy was ap-
propriate.
Gadhafis death in October 2011 sparked
investigations within Libya as well, as the
new authorities audited its main sovereign-
wealth fund and launched a legal cam-
paignstill in progressto recover losses
suffered in the Gadhafi era. Earlier this
year, the Libyan wealth fund sued Goldman
and Socit Gnrale in Londons High
Court over deals that went sour. The banks
have denied wrongdoing in the lawsuits.
Tradition, based in Lausanne, Switzer-
land, has operations in 28 countries. It spe-
cializes in matching buyers and sellers of fi-
nancial products such as derivatives and
large blocks of stock outside of public ex-
changes. The firm is majority-owned by
Viel & Cie, a French investment company.
Former employees describe a rambunc-
tious culture at Tradition. One said if he
walked away for a few minutes, colleagues
would sometimes send raunchy messages
from his computer to colleagues or clients.
The firm had an eat what you kill mental-
ity in which brokers pay was determined
by revenue they brought in.
A decade ago, Tradition launched an eq-
uity-brokerage department and to run it re-
cruited Robert Bailey, an American who had
worked at Knight Capital Group. Mr. Bai-
ley, 45 years old, has since been questioned
by British investigators, and the U.S. SEC
has also sought to interview him, said peo-
ple familiar with the inquiries. Mr. Bailey,
whom authorities havent accused of any
wrongdoing, didnt respond to emails,
phone calls and a letter seeking comment.
A period of rapid expansion got under
way at Tradition around the time of Mr.
Baileys arrival. From 2005 to 2009, its rev-
enue nearly doubled and its profit more
than doubled.
Some of that success stemmed from
Libya, former employees say.
The Gadhafi governments first sover-
eign-wealth fund, known as the Libyan Arab
Foreign Investment Co., or Lafico, dated
back to 1981. The fund later assigned re-
sponsibility for part of its securities trading
to a government-controlled firm called
Arab Banking Corp.
The lifting of international sanctions
against Libya in 2003 and 2004, after Gad-
hafi agreed to forswear weapons of mass
destruction, ignited a gold rush among
Western financial institutions.
By 2005, an Arab Banking Corp. portfo-
lio manager, Mahmoud Zewam, had handed
Tradition responsibility for handling trades
in a Lafico stock portfolio.
Libya formed a new sovereign-wealth
fund, the Libyan Investment Authority, in
2007, placing the older Lafico fund under
its auspices. The new fund soon became a
heavyweight global investor. Estimates of
its assets topped $60 billion. Arab Banking
Corp. was responsible for managing large
portions of the fortune.
The Libyan funds holdings included a
modern, rose-colored building in London
that housed Traditions offices, according to
U.K. records.
Mr. Baileys mission was to protect and
expand this business relationship in the
face of competition. His ambitious Libyan
growth strategy stirred excitement among
Tradition executives, who viewed Mr. Bailey
as an excellent broker.
In 2008, according to past and current
Tradition employees, Mr. Baileys initiatives
included hiring Sakher Koussa, who was a
son of Gadhafis longtime spy chief, Moussa
Koussa, and was a veteran of Arab Banking
Corp.
The next year Mr. Bailey hired Haitem
Zarti, whose older brother Mustafa was the
deputy chief of the Libyan Investment Au-
thority and a college friend of one of Gad-
hafis sons, Seif al-Islam Gadhafi. Haitem
Zarti had previously worked as a paid in-
tern at Goldman.
Mr. Baileys team in London began a
campaign to impress important Libyans, ac-
cording to former employees. Mr. Bailey
gave Seif Gadhafi a gift of a $1,900 Apple
laptop in New York in November 2008, Mr.
Bailey later told British investigators, said
people familiar with the inquiry.
Seif Gadhafi, now jailed in Libya,
couldnt be reached for comment. Sakher
Koussa and Haitem Zarti also couldnt be
reached. Records in Bahrain list those two
as owners of a consulting firm there; a law-
yer for that firm didnt respond to requests
for comment.
A particular focus for Tradition was
Arab Banking Corp.s Mr. Zewam, who had
joined the board of the Libyan Investment
Authority. He regularly visited Traditions
London office, where Mr. Bailey escorted
him to meetings with Traditions top Euro-
pean executive, Michael Leibowitz, accord-
ing to a person familiar with the visits. Mr.
Zewam came across as a family man, often
talking about his wife and children, said
past and present Tradition employees.
Tradition organized luxury vacations in
Marrakesh in 2009 and 2010. Mr. Baileys
team rented a large villa and invited Mr.
The London offices of Tradition Financial Services, a building owned by the Libyan Investment Authority. Tradition for years handled investments for the countrys oil-rich sovereign-wealth funds.
D
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IN DEPTH
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Data as shown is for information purposes only. No offer is being made by Morningstar, Ltd. or this publication. Funds shown arent registered with the U.S. Securities and Exchange Commission and arent available for sale to United States citizens and/or residents
except as noted. Prices are in local currencies. All performance figures are calculated using the most recent prices available. 12-month and 2-year returns may be calculated over 11- and 23-month periods pending receipt and publication of the last month end price.
NAV %RETURN
FUNDNAME GF AT LB DATE CR NAV YTD 12-MO 2-YR
NAV %RETURN
NAV %RETURN
NAV %RETURN
INDICES
NAV %RETURN
FUNDNAME GF DATE CR NAV 1-WK 1-MO 1-Q 1-YR 2-YR
nARIXABSOLUTERETURNINVESTABLEINDEX
Feri Institutional Advisors, www.feri.de
ARIXComposite Gross USD OT OT GBR 06/30.00 USD1631.22 1.8 6.1 6.9
nCGPortfolioFundLtd
NAV OT OT CYM 06/07.00 GBP25839.68 5.3 10.9 9.8
Penny Stock Defies Gravity, Stirs SEC
The Securities and Exchange
Commission is investigating how
Cynk Technology Corp., a social
network that reports zero assets, no
revenue and one employee, soared
to a $6 billion valuation, according
to people close to the probe.
The SEC on Friday halted trading
in Cynkwhose price had shot up
more than 100-fold since mid-
Junebecause of concerns about
potentially manipulative transac-
tions in the stock, the regulator
said.
The sole employee Cynk has
listed couldnt be reached for com-
ment.
The SECs move comes as prose-
cutors and regulators ramp up ef-
forts to tackle possible fraud in the
penny-stock markets, where thou-
sands of tiny companies trade with
little, if any, formal scrutiny of their
financial health or operations.
As part of this effort, the SEC
has suspended trading in more than
1,300 companies in the past two
years. The government also is in-
creasing its use of sting operations
to catch alleged fraudsters.
In the case of Cynk, SEC officials
think they shut down trading before
large numbers of investors were
harmed, according to people close
to the investigation of the meteoric
stock rise.
Cynk shares, after not trading for
about a month, on June 17 suddenly
jumped to $2.25 from 6 cents.
That day, various stock promot-
ers on Twitter raved about the
stock, saying it keeps surging
higher!! and this could be EPIC!!!
The stock climbed over the next
several weeks before nearly tripling
to $14.71 on Wednesday.
Volumes, though up sharply,
were still relatively low, with
386,000 shares traded Thursday.
The SEC believes it stopped trading
before any attempt could be made
to offload the inflated shares to re-
tail investors via possible spam
emails or press releases, said the
people close to the probe.
The regulators acted in part be-
cause of a plethora of red flags, the
people added.
Cromwell Coulson, president and
chief executive of OTC Markets
Group Inc., which owns the plat-
form on which Cynk traded along-
side thousands of other companies,
said the information was there for
any investor to know they should
avoid Cynk.
He added that the limited supply
of Cynk shares, along with brokerage
firms restrictions on large sellers of
the stock may have helped any manip-
ulators drive the price up.
Cynk, a Nevada-based company
with a business address in Belize City,
Belize, is based on the premise that
people will pay for introductions that
are meaningful, its federal filings say.
As of its quarterly report in Novem-
ber, it had yet to generate any reve-
nue. The address in its regulatory fil-
ing is inaccurate and the business
plan vague. The company itself said in
its annual report in May 2013 that it
lacked effective internal controls.
Cynk has had four chief executives
since 2008. The latestthe sole em-
ployeeis Javier Romero, whose ad-
dress is listed as in Belize. Mr.
Romero bought 210 million shares in
February, giving his stake a notional
value of more than $3.5 billion when
the stock price peaked Thursday. He
couldnt be reached for comment.
According to Cynks regulatory fil-
ings, the company was founded in Las
Vegas by John Kueber in 2008 in Las
Vegas with the name Introbuzz and
six million shares outstanding. Mr.
Kueber, who is chief operating officer
of Tiger Oak Media in Seattle, said in
an interview Friday he no longer has
a connection with the company. I
read about it on the news, he said.
The company in its filings said it
planned to launch a website called In-
trobizz.com in the second quarter of
2012. That site doesnt appear to have
ever launched, but Cynk operates a
site called Introbiz.com with the ban-
ner headline The Social Marketplace.
The site says it allows users to re-
ceive contact information of celebri-
ties such as Leonardo DiCaprio for
$50 or to connect with professionals
in various areas of business for a
larger fee. It isnt clear when Intro-
biz.com launched.
Over six years, the companys
shares have been transferred three
separate times. The four people in-
volved all served as the lone em-
ployee and chief executive.
Kenneth Carter became the com-
panys sole employee and CEO in Oc-
tober 2011 after buying six million
shares for $600, according to a filing,
which said he bought them from Mr.
Kueber. Mr. Carter said in an inter-
view Wednesday that he had the ini-
tial idea for the social network and re-
ceived support fromoutside investors,
whom he declined to specify. He said
the investors took the company in a
different direction from what he had
in mind, so he quit and sold all his
shares. My lawyer said, You better
get out now, he said.
Mr. Carter resigned in March 2013
and his shares were canceled, Cynk
said in a filing. A month later, Marlon
Luis Sanchez was granted 2.8 million
shares, a 72% stake, and took over as
CEO.
According to the filings, Mr. San-
chez is a partner in Sanchez Medical
Services providing medical services
to the Southern California market. He
is also listed there as the primary
spokesperson for the Medical Tour-
ism Industry council in Tijuana, Mex-
ico.
Reached by phone on Thursday,
Mr. Sanchez said he left the company
several months ago. I worked my
magic for a year, my friend, and now
you can see the results, he said, add-
ing that he couldnt speak further at
this time.
Mr. Sanchez sold 210 million
shares to Mr. Romero, the current
CEO, according to a letter sent by a
lawyer in Las Vegas to OTC Markets
Group.
The June 11 lettersent by Harold
P. Gewerter six days before Cynks
stock began taking off stated that
he had been hired by Cynk to review
all of the companys corporate re-
cords, such as disclosure statements,
financial reports and bylaws, and that
such records were adequate under
SEC rules.
Mr. Gewerter wrote that he per-
sonally met with Mr. Romero and con-
firmed his address as one being in a
business center in Belize City.
That address, which also appears
in Cynks quarterly reports from 2013
when Mr. Sanchez was CEO, isnt
valid, according to the manager of
that building in Belize.
The building manager asked Cynk
by email why it listed that address.
The company apologized and said it
was a mistake.
Mr. Gewerter said in an email that
he no longer represents the company.
Michael Calia and Scott Austin
BY JEAN EAGLESHAM
AND JEFF ELDER
MARKETS
Source: FactSet The Wall Street Journal
Cynk Up
Market regulators suspended trading in
Cynk Technology shares, following a
sharp spike in recent weeks.
$20
0
5
10
15
June July
CYNK CLOSING SHARE PRICE
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The SEC halted trading in Cynk, whose valuation had soared to $6 billion.
B
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IN DEPTH
Zewam, other officials of Arab Banking
Corp. and the Libyan Investment Authority
and bank traders, according to people who
attended and to electronic-chat and email
transcripts obtained by U.S. and British in-
vestigators.
The transcripts, reviewed by The Wall
Street Journal, show crude banter between
Tradition brokers and Arab Banking Corp.
officials, interspersed with snippets about
trades and financial news. Mr. Bailey
dubbed the group Team Morocco.
In an April 2009 email to Mr. Bailey, ac-
cording to the transcripts, Mr. Zewam re-
ferred to a coming Marrakesh trip as a
week [of] joy in the NSL zone. That stood
for no sperm left, according to people fa-
miliar with the expression. A message from
a Tradition employee referred to procuring
organic viagra.
Mr. Baileys team also entertained Mr.
Zewam and his colleagues in London, at
tamer events. For one, Mr. Bailey invited
Mr. Zewam to a private Fashion Week linge-
rie-modeling party in February 2010.
In September 2008 Mr. Zewam asked
Mr. Bailey about whether he could help him
get a Cartier watch with a sapphire-
crowned winding mechanism, specifying
that he preferred the gold version with no
diamonds, according to an electronic-chat
transcript. British investigators interpreted
that as a request for Mr. Bailey to buy him
the watch. It isnt clear whether Mr. Bailey
did so. The spokesman for Tradition said it
has no knowledge of such a watch being
purchased.
Tradition appears to have paid for much
of Mr. Zewams travel to Marrakesh, as well
as his airfare and hotel stays in London and
Dubai, based on a spreadsheet of expenses
compiled by British regulators and re-
viewed by the Journal.
On some of the London and Dubai trips,
Sakher Koussa accompanied Mr. Zewam, ac-
cording to the spreadsheet. It identified
more than 72,000 (roughly $108,000) of
expenses from late 2007 through April
2010, although it noted that Mr. Zewam or
Arab Banking Corp. covered several thou-
sand pounds of them.
Mr. Zewam, now Arab Banking Corp.s
head of asset management, declined to
comment. A spokesman for the firm didnt
respond to requests for comment.
Tradition charged it commissions that
were sometimes three timesand up to 20
timeswhat Tradition would often get from
other clients, according to former employ-
ees and others familiar with the relation-
ship. The U.K. financial regulator estimated
Tradition collected 8.9 million ($15 million
at the time) in Libyan commissions in 2008
and 2009, said a person familiar with the
matter.
The Tradition spokesman disputed the
estimate but didnt provide another figure.
He said the firm charged a variety of rates
dependent upon the circumstances of each
trade.
Tradition also set up Libyan officials
with hedge-fund managers and bank trad-
ers. Two London-based traders at Bank of
America Corp. were introduced to Libyans
at Marrakesh parties. Bank of America later
fired them. Reached by phone, they de-
clined to comment.
U.S. investigators have also looked into
the Libyan activities of a hedge-fund man-
ager, Philip Falcone of Harbinger Capital
Management, according to people familiar
with the probe.
In early 2009 he was seeking to raise
money from sovereign-wealth funds. A Tra-
dition broker in New York asked Mr. Bailey
to set up a meeting for Mr. Falcone with
Libyan officials, according to electronic-
chat transcripts. The broker messaged Mr.
Bailey about Mr. Falcone, saying, I told his
trader to show u some love. Harbinger be-
gan using Traditions London office for
more trades around that time, according to
a former Tradition employee.
Mr. Falcone later met with Arab Bank-
ing Corp. and Libyan Investment Authority
officials about potential investments, but
none resulted, said people familiar with the
meetings. Mr. Falcone hasnt been accused
of any wrongdoing. It is unclear whether
authorities are still looking at his activities.
In a matter unrelated to Libya, Mr. Fal-
cones firm currently is fulfilling investor
redemption requests under the settlement
of a civil case in which the SEC accused him
of improperly borrowing from one of his
hedge funds to pay his taxes. He admitted
wrongdoing and agreed to a fine and five-
year ban from the securities industry. He
now is involved in acquisitions as chairman
of Harbinger Group. Tradition declined to
comment on the Harbinger relationship.
Traditions practices, including its enter-
tainment of Libyan officials, made some
employees uncomfortable. Employees on at
least two occasions expressed concerns to
the firms Mr. Leibowitz, said two ex-mem-
bers of Mr. Baileys team and a person fa-
miliar with the U.K. investigation. Later, in
April 2010, Mr. Bailey and some of his team
left Tradition, U.K. records show.
When questioned by British investiga-
tors, Mr. Bailey said what he did with re-
gard to Libyans was known to Mr. Leibow-
itz and other Tradition executives,
according to a person who was present. The
Tradition spokesman denied that Mr. Lei-
bowitz knew about Mr. Baileys tactics or
that any member of Mr. Baileys team com-
plained.
In recent weeks, British authorities have
summoned some former Tradition employ-
ees for additional questioning, according to
people familiar with those meetings.
Mr. Baileys wife, Maria, said her hus-
bands alleged actions were being blown out
of proportion.
Its just a big stink, she said, standing
outside their large white house, named
Greensleeves, in Londons northern exurbs.
Told that Tradition describes itself as a
victim of misdeeds by Mr. Bailey and other
employees, she shook her head and said:
Its the big guy pointing the finger at the
little guy.
Tradition Financial Services hired a brother of Mustafa Zarti, right, seen here in 2010 with Seif Gadhafi, a son of the late Libyan ruler. Mustafa Zarti was deputy chief of the Libyan Investment Authority.
Tradition gave fund manager Philip Falcone access to Libyan officials, though no deal resulted.
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BUSINESS & FINANCE
U.S. Tobacco Firms Near Deal
Combination of Reynolds American, Lorillard Could Create $50 Billion Behemoth
Reynolds American Inc. is nearing
a deal to acquire Lorillard Inc. that, if
successful, would transform the U.S.
tobacco industry and put additional
corporate muscle behind the already
hot electronic-cigarette market.
The companies on Friday con-
firmed talks about a deal that would
combine Reynolds Camel and Pall
Mall cigarettes with Lorillards popu-
lar Newport menthol brand to create
a more powerful No. 2 to U.S. industry
leader Altria Inc., maker of Marlboro.
Reynolds and Lorillard have a com-
bined stock-market capitalization of
more than $50 billion.
The potential tie-up faces signifi-
cant risks, including tough antitrust
scrutiny. The U.S. Food and Drug Ad-
ministration is also weighing a possi-
ble crackdown on menthol cigarettes,
which fuel more than 80% of Loril-
lards sales, after the agency banned
all other cigarette flavors in 2009.
The companies confirmed they are
in talks to sell certain brands to Impe-
rial Tobacco Group PLC, a move that
would likely ease regulatory concerns.
A deal would give Reynolds a jump
on Altria in electronic cigarettes, the
small but fast-growing alternative to
traditional smokes. Both companies
had been slow to enter that market,
only beginning to roll out their brands
nationally this summer. As part of a
merger, Reynolds would get Lorillards
Blu e-cigarette brand, which has more
than a 40% market share in U.S. con-
venience stores.
The potential combination comes
as tobacco majors try to increase scale
and cut costs amid a yearslong decline
in U.S. cigarette consumption, includ-
ing an estimated 4% contraction last
year, even as profits remain robust.
Two rare pockets of growth in the
$100 billion U.S. tobacco market are e-
cigarettes and menthol cigarettes.
Lorillard is the market leader in both.
The companies face many hurdles
to closing a deal. For starters, the ac-
quisition would result in much greater
consolidation in the U.S. tobacco in-
dustry. Altria has roughly 50% of the
U.S. cigarette market. Reynolds and
Lorillard have roughly 25% and 15%
U.S. market shares, respectively. With-
out divestments, 90% of the U.S. mar-
ket would be in the hands of two com-
panies.
In almost every industry, three-
to-two mergers are a bright line, said
John Briggs, an antitrust lawyer with
Axinn, Veltrop & Harkrider LLP, refer-
ring to industry dominance by two
companies versus three.
Altria declined to comment.
Any tie-upand its potential to
lead to higher pricescould bring out
different views from various corners
of the federal government.
Public-health officials have urged
people to quit smoking, and studies
have shown that higher prices lower
consumption. Yet competition author-
ities focus on protecting customers
from deals that raise prices or limit
choices. The Justice Department and
Federal Trade Commission declined to
comment.
Adding another layer of complex-
ity are the number of players in-
volved. British American Tobacco
PLC and Imperial Tobacco, two U.K.
cigarette giants, are participating in
the talks.
British American, or BAT, which
owns a 42% stake in Reynolds, said
Friday it expects to support the acqui-
sition of Lorillard if it proceeds. BAT,
the second-largest international ciga-
rette company, with brands including
Kent and Dunhill, said it would invest
to keep its stake in Reynolds at 42%.
Imperial Tobacco, which has
around a 3% share of U.S. cigarette
sales, largely behind its USA Gold dis-
count brand, is being enlisted to allay
antitrust concerns and help finance
the deal. It said Friday it is in talks to
buy assets from Reynolds and Loril-
lard. Those would likely be smaller
brands like Reynolds Kool and Salem
or Lorillards Maverick.
An agreement could be announced
as early as Monday, according to a
person familiar with the discussions,
but the companies cautioned there
was no assurance a deal would come
together. Shares of Lorillard rose 4.7%
to $66.01 on Friday while Reynolds fell
0.8% to $61.75.
A deal would also thrust men-
tholabout a third of U.S. cigarette
salesfurther into the regulatory
spotlight.
Lorillards crown jewel is Newport,
whose share of the U.S. cigarette mar-
ket rose from 9.7% in 2008 to 12.2%
last year, trailing only Marlboro, ac-
cording to Euromonitor. The leading
menthol brand also skews younger
than most brands, giving Lorillard a
22.5% share of consumers aged 18 to
25, RBC Capital Markets recently esti-
mated.
The FDA, which began regulating
tobacco products in 2009, said last
year that the mint-flavored smokes
likely make it easier for teenagers to
start smoking and harder for smokers
to quit.
That has set the stage for potential
restrictions on their sale, including
the possibility of a ban. Any proposed
FDA curbs are still likely months if not
years away, and companies could chal-
lenge a menthol ban in court.
The FDA is also considering curbs
on e-cigarettes, the battery-powered
devices that turn nicotine-laced liquid
into vapor. Such regulations, though,
could be years away as authorities try
to determine if e-cigarettes help wean
smokers off more-harmful combusti-
ble cigarettes or act as a gateway to
more smoking.
E-cigarette sales more than dou-
bled last year and are expected to top
$2 billion in 2014. Reynolds and Altria
are scrambling to catch up after Loril-
lard jumped to an early lead by ac-
quiring Blu in 2012 and quickly ramp-
ing up distribution across tens of
thousands of U.S. stores. Reynolds
only began rolling out its Vuse e-ciga-
rette brand nationally last month. Al-
tria is also starting a national rollout
of its MarkTen brand this summer.
BAT and Imperial Tobacco have
signaled their appetite for more expo-
sure to the U.S. market. Sales in Eu-
rope and some emerging markets are
shrinking or slowing, as authorities
crack down on smoking.
Cigarette volumes in the European
Union fell an estimated 7.5% last year,
nearly twice the rate of the U.S. de-
cline, according to Citi Research.
While smoking has been under siege
in the U.S. for decades, the business is
still very profitable despite a lingering
threat of expensive U.S. lawsuits for
tobacco companies.
Liz Hoffman
and Shayndi Raice
BY MIKE ESTERL
AND PETER EVANS
The Wall Street Journal Source: Euromonitor International
40
30
20
10
0
10%
1999 02 05 07 09 11 13
Global
9.7% gain
since 1999
5.7 trillion
cigarettes
sold in 2013
Up in Smoke
Change in cigarette
consumption
U.S.
34.5% drop
since 1999
285 billion
cigarettes
sold in 2013
Trading
Slump Frays
Nerves on
Wall Street
crisis, regulators have limited their
ability to take risks with their own
money, and have made the process
costlier, prompting many to dial
back or push in different directions.
At the same time, global markets
have fallen into an unusually placid
pattern that has damped clients de-
sire to make trades.
Its been absolutely dead, said
Jarrod Dean, a municipal-bond
trader at Sierra Pacific Securities
in Las Vegas. Municipal-bond trad-
ing volumes are down about 30%
since last August, he said, while
profits are down more than 70%.
The malaise has prompted an ex-
odus of traders from big firms to
smaller ones that are less subject to
government oversight.
Late last year, Sound Point Capi-
tal Management LP, a New York
money manager, scooped up five
credit traders and analysts from UBS.
The rowdy atmosphere once cel-
ebrated on Wall Street already was
on the wane when the crisis hit, as
electronic-trading platforms began
ushering in a quieter era. But the
downturn and the new rules that
followed have emptied desks and
left fewer people to make sales calls
and trade securities.
Down the road from UBS in Stam-
ford, the U.K.s Royal Bank of Scot-
land Group PLC has faced similar
struggles. In 2005, RBS accepted
$100 million of tax breaks in ex-
change for spending $345 million on
a gleaming new headquarters in
Stamford, creating 1,150 new jobs and
retaining 700 employees in the state.
Two months ago, the bank,
which is now majority-owned by the
British government after a crisis-era
bailout, said it planned to cut 400
jobs, in part to refocus the banks
attention on the U.K. market.
A spokeswoman for RBS con-
firmed the intention to reduce staff
and said it met the requirements
under its agreement with the state
of Connecticut, but otherwise de-
clined to comment.
As a sign of the anxiety being
felt on trading floors, a scuffle
erupted in the trading pits of the
New York Mercantile Exchange
floor on June 24, according to wit-
nesses. One combatants shirt was
torn, a trader said.
Witnesses said the skirmish began
when two traders argued over where
they could stand in the pits. A spokes-
man for CME Group, which owns the
Nymex, declined to comment.
Tempers can be short on the
Nymex floor. That is especially so
when markets are slow and, as one
trader said, nobodys making
money.
Morgan Stanley has beaten the
hastiest retreat from FICC of any
U.S. firm. In 2010, the New York
firm began shifting toward steadier
businesses like wealth management.
Today Morgan Stanleys FICC opera-
tion, once considered a great fron-
tier for expansion, employs just
1,600 people, down about 20% since
2010, according to people familiar
with the matter.
Some firms, like Goldman Sachs
Group Inc. and Deutsche Bank AG,
have argued their decisions to stay
the course will pay dividends later
when more clients return to the
markets to trade and find fewer
banks willing to trade with them.
Intel Feeds Chinas Cheap Tablet Boom
of brand-name tablets in industrial-
ized countries. Where IDC says
overall global shipments of tablets
rose 3% in the first quarter, ship-
ments from the smaller companies
rose 13%.
One reason for low tablet prices
has been competition among makers
of ARM-based chips, which include
Taiwans MediaTek Corp. and
Chinas Fuzhou Rockchip Electronics
Co. So Intel recently cut a deal with
Rockchip to develop and sell chips
based on Intel technology.
Intel, whose CEO has vowed to
put its technology in 40 million tab-
lets this year, also has moved to re-
duce the cost penalty for shifting
away from ARM.
Under a plan the company de-
scribes as contra revenues, Intel
offers discounts on chips as well as
financial help for one-time engi-
neering work associated with de-
signing Intel-based tablets.
But new customers like Ham-
poos chief executive, Mr. Wang,
whose company had previously been
using ARM-based chips from Texas
Instruments Inc., cite other bene-
Continued from page 15
fits. Despite his initial incredulity,
he quickly realized that Intel was of-
fering unheard-of service for such a
big company.
We had some technical issues,
and Intel sent an engineer to stay
with us for a month and a half,
working late until 10:30 p.m. or
even midnight, to solve the prob-
lems, he said. When we had a
component shortage, Intel went to
talk with suppliers to ensure we
would get the components we
needed.
Mr. Wang, who makes tablets
used by a number of Chinese tablet
brands, said he has shifted all chip
purchases to Intel this year.
Similar stories are told at Ra-
mos, one of Chinas up-and-coming
local brands. Sitting at his office in
one of Shenzhens sleek high-tech
industrial parks, Chief Executive
Wan Qiuyang said Intel helped him
find new overseas customers, and
provided domestic promotional sup-
port for Ramos, whose Chinese
name Lan Mo means Blue Magic.
Mr. Wan said Intel managers en-
couraged his company by saying Ra-
mos could be as big as Lenovo. We
take it jokingly, because we are so
small, but it is true that a lot of In-
tels partners have become success-
ful brands, Mr. Wan said.
Mr. Wan said more than 70% of
the roughly 1.2 million tablets he
will sell this year will have Intel
chips inside, with the rest coming
from MediaTek.
Among other tactics, Intel has
taken a cue from Chinese chip mak-
ers and last year began offering
reference designs"essentially
ready-made tablet designs that al-
low manufacturers to create a prod-
uct in as little as one month, said
Stephanie Hallford, director of busi-
ness development for Intels China
mobile team. Intel has also sped up
its chip development time to match
the rapid product cycles in China,
she said.
It isnt just Intel with its eye on
Shenzhen. Microsoft Corp., eager to
break into a field dominated by
Google Inc.s Android software, has
also been visiting since last year to
discuss partnerships, Mr. Wan said.
34.2%
Others
32.5%
Apple
22.3%
Samsung
5.0%
Asus
4.1%
Lenovo
1.9%
Amazon
Smaller tablet makers
are gaining global market
share*
1Q 2014
50.4
MILLION
SHIPMENTS
Keeping Tabs
Source: IDC
Preliminary
*By shipments
OPINION: REVIEW & OUTLOOK
E
very July 12, after lighting hun-
dreds of bonfires across the re-
gion, thousands of Northern Ire-
land unionists pass through the streets
of Belfast and other towns and cities
to commemorate the 1690 victory of
King William III over his Catholic ri-
val, King James, in the
Battle of the Boyne. The
centuries-old sectarian
tensions and the trium-
phalist tone of the
marches have in previ-
ous years triggered bru-
tal violence and mass
rioting.
So its a relief that this years
march passed peacefully. Only six peo-
ple were arrested with public-order of-
fenses, down from more than 600 last
year. Yet in Northern Ireland, peaceful
is always a relative term. Three men
were stabbed in separate incidents,
and a letter bomb was found in a
postal sorting center in Mallusk. Army
technicians successfully defused the
device.
The most potentially explosive inci-
dent occurred in Antrim, where an ef-
figy of Gerry Adams was hung from a
unionist bonfire. The Sinn Fein leader
called the incident a disturbing esca-
lation of sectarian and
hate crime. That it was,
though its worth noting
that Mr. Adams himself
too often misses oppor-
tunities to disavow his
own association with the
terrorist Irish Republi-
can Army.
The bill for policing Northern Ire-
lands sectarian fault lines over the
past 18 months reached 55 million,
and some 3,500 police officers were
mobilized across the region for the
Twelfth of July march, according to
the Irish Independent.
Northern Ireland has come a long
away from the days of the Troubles
the three-decade
sectarian civil
war that scarred
the region begin-
ning in the 1970s
until the 1998
Good Friday
A g r e e m e n t
brought it to a
close.
A sign of the
regions maturity
came when
unionist march-
ers, prevented
from walking
through certain
republican neigh-
borhoods, re-
solved to register
a political pro-
test rather than
resort to rioting.
Todays Europe is one of resurgent
extremes. With slow growth and high
rates of jobless-
ness across much
of the Continent,
far-right and na-
tionalist parties
are on the rise.
While its econ-
omy is witness-
ing a modest re-
covery, Britain
isnt immune
from such pres-
sures.
Leaders in
London and Bel-
fast would thus
be amiss to as-
sume that the
status quo will
last in perpetuity
without contin-
ued efforts at
r econc i l i at i on
and engagementand backed by vigi-
lant policing.
C
ongress has been working for more
than a year to get to the bottom of
the IRS political targeting scandal,
and the Obama Administration has re-
sisted across the board. So hurrah to the
judicial branch, which this week stepped
into the fray with orders that could force
the IRS to start coughing up some an-
swers.
U.S. District Judge Emmet G. Sullivan
on Thursday ordered the IRS to provide
for him, within a month, a sworn declara-
tion explaining how the agency came to
lose two years worth of email belonging
to former Director of Exempt Organiza-
tions Lois Lerner. Judge Sullivan also as-
signed a federal magistrate, John Facciola,
to conduct his own query into whether
Ms. Lerners emails might be obtained by
other means. The order
suggested that Judge Sulli-
van was far from satisfied
with the IRSs cursory ex-
planations of crashed hard
drives and irretrievable in-
formation.
On Friday a second federal judge, Reg-
gie B. Walton, issued another order, de-
manding the IRS provide under oath an
affidavit outlining what happened to Ms.
Lerners hard drive, the qualifications of
anybody who attempted to retrieve her
lost email, and the status of the IRS In-
spector Generals investigation into these
issues. Judge Walton gave
the IRS one week to re-
spond.
Now were getting
somewhere. The IRS has
slow-rolled document pro-
duction for Congress and
then it waited two months to tell its legis-
lative overseers that Ms. Lerners emails
had vanished. The Justice Department
and FBI, meanwhile, have leaked to the
press that their probes have found noth-
ing wrong.
Both of these judicial orders are the re-
sult of litigation filed by outside groups
Judge Sullivans in response to the watch-
dog group Judicial Watch and Judge
Waltons to True the Vote, one of the con-
servative groups that the IRS mistreated.
Judges take due process and discovery
claims seriously, especially when they in-
volve concerns over the infringement of
the right to free political speech. And they
rightly dont take kindly to evasion or fail-
ure to produce evidence. We look forward
to the IRSs answers.
W
hen President Obama an-
nounced in May that he would
withdraw all remaining U.S.
forces from Afghanistan by the end of
2016, he insisted that the future of Af-
ghanistan must be decided by Afghans.
True enough, though they could still use
some help in that department too.
Afghanistans election commission
declared Monday that former Finance
Minister Ashraf Ghani leads Abdullah
Abdullah, his rival in the countrys run-
off presidential vote, 56.4% to 43.6% in
a preliminary vote count. Mr. Abdullah
immediately denounced the result as
fraudulent and suggested he might set
up a parallel administration even if Mr.
Ghani is declared the winner.
On the question of the vote counts
validity, Mr. Abdullah may have a strong
case. The former foreign minister was
the victim of widespread vote fraud
when he ran against current President
Hamid Karzai in 2009. This time around
he led Mr. Ghani 45% to 31% in the first
round of voting in April and was
promptly endorsed by third-place fin-
isher Zalmai Rassoul, who had 11%.
Mr. Abdullah claims that Mr. Ghanis
unexpected gains are the result of some
two million stuffed ballots. In Wardak
province, near Kabul, Mr. Ghanis vote
share rose tenfold to 170,000 between
the first and second votes, while turn-
out in rural areas vastly exceeded turn-
out in towns and cities. The head of the
European Unions Election Assessment
Team, Thijs Berman, has criticized the
limited investigation un-
dertaken by Afghan elec-
tion officials. The num-
ber of problematic polling
stations could well exceed
6,000 out of a total of
22,828, Mr. Berman told
Deutsche Welle.
These findings make it
essential to have a comprehensive re-
count and Mr. Ghani deserves credit for
publicly endorsing the most extensive
and intensive audit possible. Both sides
agreed on Saturday to a full audit of the
election results, rather than an earlier
U.N. proposal that would have examined
only around 44% of ballots cast.
Messrs. Ghani and Abdullah also
promised on Saturday to form a na-
tional-unity government whatever the
outcome of the audit. How long that
pledge will last is another question,
however. Mr. Abdullah helped neither
his candidacy nor his country with his
categorical declarations of victory last
week, and whipped his supporters into
a frenzy of indignation. Some of Mr. Ab-
dullahs supporters called openly for
civil war if Mr. Ghani wins.
Thats never an idle threat in Af-
ghanistan, and it only plays into the
hands of the Taliban,
which has already been
emboldened by Mr.
Obamas departure dead-
line to step up its at-
tacks. Secretary of State
John Kerry brokered the
weekends audit deal,
though here too Mr.
Obamas premature promise of retreat
leaves his top diplomat with dramati-
cally less leverage than he might have
had even a year ago when it comes to
enforcing the pledge of a unity govern-
ment.
If the weekends deal doesnt stick,
one solution would be to hold a new
election. Short of that, the U.S. might
offer to broker a face-saving compro-
mise. One idea: Split the five-year presi-
dential term in half and alternate in of-
fice. Thats what Israels Shimon Peres
did with his rival Yitzhak Shamir in
1984, after a close vote prevented either
man from forming a government. Mr.
Peres took the premiership for the first
two years of the term, while Mr. Shamir
served as deputy prime minister and
foreign minister. They switched places
in 1986 and went to the polls again in
1988, an election Mr. Shamir won.
Such a formula seems especially use-
ful for Afghanistan, where the differ-
ences over the election are only sharp-
ened by the underlying ethnic rivalries
between the Pashtun Mr. Ghani and the
partly Tajik Mr. Abdullah. A 30-month
term for either man may not be a recipe
for the most effective government. But
it is a check on bad government and po-
litical cronyism.
Abiding by their unity-government
pledge or adopting some other compro-
mise if it comes to that would demon-
strate that both candidates are above
all interested in serving the Afghan peo-
ple as a whole, and not only their re-
spective camps. Afghanistan has an ur-
gent need for political consensus to
prepare for the Western drawdown and
to resist the Taliban. If the dueling can-
didates want to demonstrate their fit-
ness for the job to which they aspire,
they can start by putting their egos
aside.
A Fragile Ireland Peace
Judging the IRS
Afghan Standoff Solution
A pair of court orders
seek answers about
the vanishing emails.
A power-sharing deal
could avoid a
damaging political
breakdown.
Policing sectarian
fault lines over the
past 18 months cost
55 million.
Sinn Fein leader Gerry Adams.
G
e
t
t
y
I
m
a
g
e
s
BUSINESS & FINANCE
General Motors Co. Chief
Executive Mary Barra returns to
Capitol Hill this week for what
may be her last and toughest
hearings with U.S. lawmakers over
the auto makers botched response
to a faulty ignition-switch that has
landed GM in hot water with
federal regulators and the Justice
Department.
On Thursday, Ms. Barra will
face Sen. Richard Blumenthal (D.,
Conn.), one of her harshest critics,
and Sen. Claire McCaskill (D.,
Mo.), who remains skeptical of
GMs response to the issue and its
internal probe that cleared the
auto makers executive team and
pinned the lack of response on
lower-level engineers, lawyers and
a dysfunctional company culture.
It took the auto maker nearly 11
years to issue a recall for the 2.6
million Chevrolet Cobalt, Saturn
Ion and other older model vehicles
equipped with the faulty switch.
Ms. Barra needs a smooth
hearing process as she looks to
move the focus from the Detroit-
based auto makers recall woes
and back to the companys strong
sales and financial performance.
The auto maker is set to release
its second-quarter earnings later
this month. This will be Ms.
Barras second appearance before
a Senate subcommittee.
Most of the attention for the
past five months has been on the
ignition-switch issue. The
defective switch can slip from the
run to accessory position if
the key is jarred or bumped. As a
result, power can be cut to the
vehicle disabling the electronic
steering and air bag deployment.
GM has attributed 13 deaths to
accidents involving the faulty
ignition-switch although plaintiff
attorneys say the number is much
higher. The company has
dismissed 15 employees,
disciplined five others and recalled
millions of cars.
Compensation expert Kenneth
Feinberg, hired by GM to handle
payouts to victims, will also testify
and is expected to be asked for
more information on how many
people he estimates have been
hurt or killed. Mr. Feinberg has
declined to provide a figure until
he reviews claims. The claim
process runs from Aug. 1 through
the end of the year.
Chicago attorney Anton
Valukas, who handled GMs
internal probe, has also been
called to testify.
Rounding out the witness list
are Michael Millikin, GMs general
counsel, and Delphi Automotive
PLC CEO Rodney ONeal. As the
auto makers top lawyer, Mr.
Millikin is expected to face
questions about why he didnt
know about the ignition-switch
problem sooner since lower-level
lawyers were settling Cobalt crash
claims out of court.
Mr. ONeal will be asked how
his company interacted with GM in
the design and manufacturing of
the switch. Delphi contends it was
following GMs direction including
a move by former GM engineer
Raymond DeGiorgio, who modified
the switch in 2006 but approved
keeping the part identification
number unchanged. That move,
according to GMs internal report,
kept the switch issue hidden while
sidelining the auto makers ability
to detect the problem sooner.
The Week Ahead looks at coming
corporate events
More Questions for GM
[ The Week Ahead ]
BY JEFF BENNETT
GM chief Mary Barra will return to Washington, D.C., Thursday to address concerns about the firms ignition-switch recall.
B
l
o
o
m
b
e
r
g
N
e
w
s
Britain to Tighten
Its Takeover Rules
LONDONThe U.K. government
said it would stiffen laws governing
foreign takeovers of British compa-
nies, potentially raising new hurdles
for overseas acquirers amid height-
ened interest in British companies
as takeover targets.
The new measureswhich the
government hasnt detailed, but an-
nounced in general terms Sunday
come after U.S. drugs company
Pfizer Inc. failed to seal a nearly
$120 billion deal to buy rival Astra-
Zeneca PLC. The U.K. government
wasnt hostile to that bid but said it
would scrutinize it closely as con-
cerns emerged over potential job
cuts in Britain.
Vince Cable, business secretary
in the Conservative-Liberal Demo-
crat government of Prime Minister
David Cameron, said that he intends
to increase protection for British
companies during takeover negotia-
tions when the national interest is
at stake.
Mr. Cable, speaking during an in-
terview with the British Broadcast-
ing Corp., said there should be no
wiggle room for foreign companies
to renege on commitmentssuch as
maintaining jobsmade during ne-
gotiations.
The new tack comes amid a
frenzy of trans-Atlantic deal talks
and agreements. Part of that is be-
ing driven by U.S. companies seek-
ing partners that will allow them to
relocate out of the U.S. into a more
favorable tax regime. Targets for
these so-called inversions have in-
cluded a number of British compa-
nies, which enjoy a generally lower
tax rate than those in the U.S.
Mr. Cable said he wanted to pass
the laws as soon as possiblewith-
out saying precisely whenbecause
he expected the string of takeover
bids by foreign firms for U.K. com-
panies to continue.
Many other targets have been in
Ireland.
Mr. Cable told the BBC he had
discussed with the U.K. Takeover
Panel, an agency that sets rules for
takeovers and mergers involving
British companies, the possibility of
fining companies that dont live up
to promises made during negotia-
tions, in an attempt to make any
such commitments legally binding.
Mr. Cable added that he had
been influenced by the recent nego-
tiations between Pfizer and Astra-
Zeneca. That takeover ultimately
failed, but not before executives
from both companies were called
before parliamentary committees to
give commitments on the shape of a
combined company.
While the U.K. has sought such
assurances in past deals, it has
never had the legal backing to en-
force those assurances.
There will be cases, and this
was one, where there will be vital
national interestsin this case
large-scale [research and develop-
ment], and the question is how you
protect it, he said.
BY PETER EVANS
Aircraft Duopoly Looms Over Air Show
serious challenger to the pair, suf-
fered an engine failure during
ground testing in May and hasnt
flown since. Engine maker Pratt &
Whitney, a unit of United Technol-
ogies Corp., said Sunday it is now
testing a modification that will al-
low the jet to return to flying
within weeks.
Tens of thousands of people are
expected to flock to the show during
the four-day fair. For a lucky few at-
tendees who scored nearby bed-and-
breakfast roomswhich go for
about $515 a nightthe show is a
pleasant walk away. For the rest of
the industry, Monday will start off
in packed commuter trains from
central London or as part of a slow
caravan of hired cars snaking into
the airfield grounds.
Over the years, the event has
morphed along with the industry.
Meetings arent just about wooing
potential customers any more. As
Continued from page 15 the industry has become more inter-
connected, with suppliers spanning
the globe, the get-together serves as
much as caffeine-fueled staff and
contractor meetings. Amid the
screech of jets taking off and land-
ing, manufacturers are just as often
huddling with program partners as
they are trying to sell planes.
But the show is still one big
trade fair. Mom-and-pop aerospace
outfits vie for the attention of those
companies with sprawling custom-
built private pavilions.
Government officials from
around the world mingle with dark-
suited executives and uniformed
military brass, engaging in a speed-
dating-like pace of meetings and
cocktail parties that continue into
the night at rented-out London land-
marks such as the citys museums.
Western militaries continue to be
squeezed by budget austerity that
has hampered substantial arms pur-
chasing, dampening the military
side of the Farnborough and Paris
shows in recent years. But this year,
the show will serve to kick off the
Pentagons race to commission a
new bomber for the U.S., a program
that will help shape the future of
the U.S. defense industrial base.
Northrop Grumman Corp. and
Boeing have a lot riding on the con-
test, with the loser at risk of being
shut out of the U.S. militarys future
manned combat plane business as a
prime contractor. Lockheed Martin
Corp., maker of the F-35, is teamed
with Boeing.
For many, the highlight of the
military side of the show was ex-
pected to be the Lockheed Martin
F-35. The fighters excursion here
was intended to shore up overseas
support. Lockheed Martin needs or-
ders beyond the U.S. to meet cost-
reduction targets.
But the fighter is, for now, a no-
show, grounded after an engine fire
in Florida three weeks ago.
Lindt in Talks to Buy
Russell Stover Chocolates
Swiss candy maker Chocolade-
fabriken Lindt & Spruengli AG is in
talks to acquire Russell Stover, the
U.S. boxed-chocolate seller, accord-
ing to people familiar with the mat-
ter.
The price couldnt immediately
be learned, though first-round bids
earlier this year from other inter-
ested suitors valued Russell Stover
at more than $1 billion, The Wall
Street Journal reported in May.
Discussions with Lindt were re-
ported by the Financial Times.
Russell Stover, known for its
boxed chocolates, has annual sales
of about $600 million and around
$60 million in earnings before inter-
est, tax, depreciation and amortiza-
tion, a measure of cash flow, the
Journal reported earlier.
The Ward family, which bought
Russell Stover from its founders in
1960, put the company up for sale
earlier this year and hired Goldman
Sachs Group Inc. to run the process.
Russell Stover was founded in
1923 in the Denver home of Clara
and Russell Stover. Its brands in-
clude its namesake boxed choco-
lates, as well as Whitmans and
Pangburns of Texas. The company
has about 4,500 employees.
In going after Russell Stover, a
mass-market brand sold in pharma-
cies around the U.S., Lindt appears
to be challenging the prevailing
trend in the chocolate industry,
which has been to push upmarket.
Chocolate producers had to weather
a surge in cocoa-bean prices last
year that cut into profitability. To
counter the rising expense, many
chocolate companies have intro-
duced new premium products to jus-
tify higher prices.
American chocolate palates also
are getting more sophisticated and
darker chocolates are becoming in-
creasingly popular, in part because
of a health halo due to the antioxi-
dants found in cacao.
For example, Nestl SA, one of
the worlds largest chocolate mak-
ers, has rolled out fancier versions
of its Cailler chocolates. The food gi-
ant, based in Switzerland, has also
looked at Italys Ferrero SpA, the
maker of Ferrero Rocher chocolates.
Many chocolate companies, in-
cluding Lindt, are also pursuing
sales in emerging markets, particu-
larly in Asia, to diversify their sales.
Analysts said an acquisition of
Russell Stover would be an unusual
move for Lindt, which already has a
strong presence in the U.S., through
its ownership of the Ghirardelli
Chocolate Co. Lindts North America
region, which includes the U.S., gen-
erated $943.2 million in sales last
year, roughly a third of the com-
panys total revenue.
Jon Cox, a senior equity analyst
at Kepler Cheuvreux, said he had ex-
pected Lindt to consider purchases
in Brazil and Russia, big markets
where the company currently
doesnt have a significant presence.
Acquiring in the U.S. also is at odds
with Lindts strategy of pursuing or-
ganic growth in North America, he
said, referring to growth that
doesnt involve acquisitions.
John Letzing, John Revill
and Neil MacLucas
BY LIZ HOFFMAN
AND DANA MATTIOLI
OPINION
The Afghan electoral commis-
sion announced on Monday that
preliminary results showed Ashraf
Ghani a million votes ahead of Ab-
dullah Abdullah. Both camps im-
mediately claimed victory.
Mr. Abdullahs supporters have
taken to the streets, and he has
threatened to form a parallel gov-
ernment if the result is not over-
turned. The White House has said
that the formation of an extra-con-
stitutional body will mean the ter-
mination of U.S. aid to Afghani-
stan, and rightly so. This election
must be decided according to Af-
ghan law by the established elec-
toral bodies and without more mo-
bilization of street pressures. Any
other outcome will hurt all of the
Afghan people and seriously dam-
age U.S. and international interests
in South Asia.
This crisis is only superficially
complex. There was clearly a lot of
fraud, as there always is in Afghan
elections. President Hamid Karzais
political machine largely backed
Mr. Ghani, which means that there
was no doubt plenty of cheating
on his behalf. Mr. Abdullah also
surely benefited from ballot-box
manipulation, as he did in his
2009 effort to unseat Mr. Karzai.
The Afghan electoral system, sup-
ported by the international com-
munity, must investigate the vote
and ultimately certify a result that
is as clean as possible in
accordance with the Afghan con-
stitutional system.
It wont be surprising if it turns
out that Mr. Ghani won, even when
the fraud on both sides is sub-
tracted. The electoral coalitions
were built in typical Afghan style.
Mr. Ghani, a Pashtun, appealed to
that ethnic group, which is a plu-
rality of Afghan voters. His selec-
tion of Abdul Rashid Dostum, an
Uzbek warlord, as his running
mate no doubt secured him some
Uzbek support that ate into Mr.
Abdullahs base.
Mr. Abdullah, a member of the
Tajik minority, tried to run as a
candidate of all Afghans but was
seen as a Northern Alliance power-
broker, narrowing his appeal to
Pashtuns. Afghanistans demo-
graphics make it hard for a North-
ern Alliance candidate to win an
election fought along ethnic lines,
as this one was. Mr. Ghani also
campaigned for the runoff election
much more vigorously than did Mr.
Abdullah.
None of that matters now.
There are a limited number of sce-
narios for resolving the crisis: (1)
The result stands and Mr. Ghani
wins, with Mr. Abdullah ultimately
acquiescing; (2) the result is over-
turned and the victory given to Mr.
Abdullah, with Mr. Ghani submit-
ting; or (3) the whole process
breaks down and is discredited,
with Mr. Karzai continuing to rule
through emergency powers and ev-
eryone else trying to figure out
how to start over or, worse, aban-
doning the democratic and consti-
tutional process entirely.
sion was right to announce the
preliminary results on July 7 while
continuing its fraud investigations.
Departures from the constitution-
ally mandated process and time-
line risk tipping Afghanistan into
the abyss: If an impatient Mr.
Abdullah and his supporters
launch a parallel government, it
would fracture the country and
provoke civil war almost immedi-
ately.
Prolonging the electoral-review
process past its legally mandated
periodthe final results are due
on July 22allowing Mr. Karzais
continued rule, would alienate
most Afghans and all of Afghani-
stans international supporters.
Fears that Mr. Karzai might extend
his rule indefinitely would rise.
The consequences would be
dire. Aid would likely be sus-
pended or canceled. Mr. Karzai
would continue to refuse to sign
the status of forces agreement
allowing U.S. troops to stay in Af-
ghanistan after the end of this
year. President Obama would likely
order plans drawn up to withdraw
all U.S. troops by the end of 2014
and might even set that process in
motion.
Other troop-contributing na-
tions would do the same. Deprived
of military and humanitarian aid,
Afghanistan would be on track to
implode spectacularly.
The Taliban are no doubt
watching the crisis closely, heart-
ened by signs of dysfunction and
ready to step up pressure on an
Afghan National Security Force al-
ready frayed by the ethnic tensions
surrounding the election. If inter-
national forces begin to move out
faster than the current drawdown
calls for, significant battlefield fail-
ures are likely, heightening the im-
pression that the country is on the
verge of collapse. In response to
Taliban successes, the Northern
Alliance would likely mobilize, fur-
ther weakening the Afghan
National Security Force, because
former alliance commanders form
much of the militarys leadership.
Pakistan would reinforce the
Taliban and the Haqqani network.
India would be tempted to rein-
force the Northern Alliance. Rus-
sia, joined by Iran, might support
the alliance as well. The prospects
for an all-out civil war are high if
the electoral crisis is allowed to
fester.
Mr. Abdullah and his partisans,
in taking their defiant stands,
seem to have forgotten the risks of
the course they are pursuing. For
all his flaws, Mr. Ghani is not Mr.
Karzai. He is not a Pashtun su-
premacist and would not pose a
threat to Afghanistans northern
minorities. He has already an-
nounced his intention to form an
inclusive government, and his past
behavior provides ample reason to
believe him.
The U.S. and the international
community should bring as much
pressure to bear as possible on Mr.
Abdullahand on Mr. Ghani if it
becomes necessaryto let the con-
stitutional process play out. Other-
wise there may be no future for
Afghanistan.
Mr. Kagan is director of the Criti-
cal Threats Project at the Ameri-
can Enterprise Institute.
The late, great
economist Mancur
Olson taught us
that getting rid of
encrusted, inter-
est-group-sup-
ported bureaucracies like the U.S.
Export-Import Bank is nearly im-
possible, so we should seize on
any opportunity that the political
moment offers us, even if were
embarrassed by some of our al-
lies.
And, no, we are not referring
to the hands off my Medicare
small-government activists of the
tea party. These people dont de-
serve to be mocked. For genera-
tions Americans have been taught
to view Social Security and Medi-
care benefits as earned wealth,
paid for by hard work and payroll
taxes. A gross failure of Demo-
crats and Republicans alike has
been turning the payroll tax from
perceived wealth into a disincen-
tive to work by undermining the
long-term credibility of the gov-
ernments promises to retirees.
But lets not kid ourselves. Ex-
Im bashing for GOP leaders is a
freebie. It costs them nothing:
GE, Boeing and the Chamber of
Commerce may be irritated, but
they have many fish to fry in
Washington. They wont be hold-
ing grudgesor refusing to hold
fundraisersfor GOPers if the
bank goes down. And is there
anything more eye-rolling than
the sudden loathing for Ex-Im ex-
hibited by pundits and think-
tankers who previously failed to
notice its existence?
On any list of Washington out-
rages, Ex-Im Bank is among the
most execrableexcept all the
others. Farm programs not only
dish out billions to relatively
wealthy Americans who own
farms. Sugar quotas and dairy-
price supports directly inflate the
cost of food.
Or how about the $250 bil-
lion-a-year tax benefit for em-
ployer-provided health insur-
ance? This subsidy to corporate
Americas employment costs not
only disproportionately benefits
workers in the highest tax
bracket. It prices many less-
skilled workers out of the job
market altogether and is the
proximate reason take-home pay
for middle-class Americans has
stagnated for a genera-
tion.
Medicare, the most be-
loved of programs? For a
considerable number of
beneficiaries for a consid-
erable part of the time,
Medicare has become a gi-
ant subsidy to doctors
and hospitals to overtreat
seniors to the detriment
of their well-being.
Even to find the sub-
sidy in Ex-Im lending, in
contrast, you have to en-
gage in abstruse fair
value accounting, since
most years the program
returns a modest profit to
the Treasury.
The Ex-Im fight is ob-
viously a lot more about
politics than policy. The
fight comes two months
after the death of Marxist
historian Gabriel Kolko,
whose book Railroads
and Regulation graced
many a freshman night-
stand and earned him the
enduring admiration (which he
didnt reciprocate) of libertarians.
His shrewdest critics, though,
accused Kolko of a slight exag-
geration: Yes, the rise of railroad
regulation in the 19th century
was indeed shaped by railroad
lobbyists who sought to curb
competition and ensure the in-
dustrys profits. But the political
impetus still came from politi-
cians flogging up a populist re-
jection of the evils of big busi-
ness.
Please sue everyone from
your kindergarten teacher on up
if you are so poorly prepared for
life in our democracy as to be-
lieve the Ex-Im struggle
signals the beginning of a
crusade to purify our po-
litical life of influence
peddling. On the contrary,
populist revolt breeds cro-
nyism: The post-2008
mood gave us Dodd-Frank,
which sanctified too big
to fail; it gave us Obama-
Care, which requires all
Americans, under penalty
of law, to buy the insur-
ance industrys products
and makes insurers di-
rectly dependent on con-
gressional appropriations
for their profits.
Its no coincidence that
such exercises occur in
moments of populist fer-
ment when the reasonable
aspirations of Americans
are being thwarted by an
absence of growth. Growth
is the antithesis of the
Obama non-recovery weve
come to know, an era of
self-perpetuating stagna-
tion, grievance and intrin-
sically corrupting expansions of
government.
By all means, lets get rid of
Ex-Im. But if all voters can hope
for from Republicans over the
next two years is attempts to
outbid Democrats in reviling big
business and crony capitalism,
God help us.
[ Business World ]
BY HOLMAN W. JENKINS, JR.
Abdullah Abdullahs supporters protest in Kabul, July 11.
R
e
u
t
e
r
s
How to Avert Afghanistans Implosion
Our Sins Are Many, Ex-Im Is the Least
BY FREDERICK W. KAGAN
A
F
P
/
G
e
t
t
y
I
m
a
g
e
s
Populist revolts have the
peculiar result of breeding
new generations of cronyism.
Election-fraud charges must
be resolved by July 22.
The U.S. should do all it
can to make that happen.
Comments? The Journal
welcomes readers responses to
all articles and editorials. It is
important to include your full
name, address and telephone
number. Please send letters to
the editor to: Letters@WSJ.com
The U.S. Export-Import Bank in Washington.
INDEX TO BUSINESSES
Airbus Group.................15
Altria Group..................18
Amazon.com................. 27
Apple........................10,15
Arab Banking B.S.C......10
ARM Holdings...............15
AstraZeneca..................17
Banco Comercial
Portugues.................... 4
Banco Espirito Santo..... 1
Barclays.........................20
Beaufort Securities......20
Boeing........................... 15
Bombardier ................... 15
Box................................ 27
British American Tobacco
18
British Broadcasting
Corp............................17
Chocoladefabriken Lindt
& Spruengli................17
Citigroup.................... 1,16
CME Group...............18,20
Cynk Technology...........19
Delphi Automotive....... 17
Deutsche Bank....18,20,27
Development Bank of
Mongolia....................20
EMC...............................27
Federal Deposit
Insurance................... 16
Fiat................................20
General Motors.............17
Goldman Sachs Group....1
Google...................... 18,27
Harbinger Capital
Management..............11
Harbinger Group...........11
Hewlett-Packard...........15
Imperial Tobacco...........18
Intel...............................15
Intercontinental
Exchange....................20
Jefferies Group...............1
J.P. Morgan Chase..........1
KeyCorp.........................27
Knight Capital Group....10
Lenovo Group................15
Libyan Investment
Authority................... 10
Lockheed Martin...........17
Lorillard.........................18
Microsoft..................18,27
Mizuho International ..... 1
Morgan Stanley..............1
Morgan Stanley Wealth
Management..............20
Neuberger Berman
Group..........................20
New York Mercantile
Exchange....................18
Northrop Grumman......17
Nymex...........................18
OTC Markets Group......19
Pfizer.............................17
Portugal Telecom..........27
Pratt & Whitney...........17
Reynolds American...... 18
Rolls-Royce Holdings... 15
Royal Bank of
Scotland................18,20
Russell Stover.............. 17
Samsung Electronics....15
Sanchez Medical
Services..................... 19
Sierra Pacific
Securities...................18
Socit Gnrale.......... 10
Sound Point Capital
Management..............18
Southwest Airlines...... 23
Telekom Slovenije d.d. ... 4
Texas Instruments....... 18
Thomson Reuters.........20
Tiger Oak Media...........19
Tradition Financial
Services....................... 1
TRW Automotive
Holdings.....................16
UBS................................. 1
U.S. Steel......................16
Viel & Cie......................10
Vodafone.......................20
Wal-Mart Stores.......... 15
Wells Fargo...................27
ZF Friedrichshafen....... 16
Zions Bancorp...............27
Businesses
This index of businesses
mentioned in todays
issue of The Wall Street
Journal is intended to
include all significant
reference to companies.
First reference to the
companies appears in
bold face type in all
articles except those
on page one and the
editorial pages.
Corrections Amplifications
U.S. Steel Corp. said its plan to idle plants indefinitely in August
in McKeesport, Pa., and Bellville, Texas, is due in part to unfairly
priced foreign steel tubes. A Business & Finance article in the Fri-
day-Sunday edition incorrectly said the idling of the plants was
contingent upon the outcome of a tubular steel antidumping case.
ZF Friedrichshafen AG is a German auto-parts maker. The head-
line on a Business & Finance article in the Friday-Sunday edition
about ZFs offer for U.S.-based TRW Automotive Holdings Corp.
incorrectly called ZF an auto maker.
Readers can alert the London newsroom of The Wall Street Journal to any errors in
news articles by emailing wsjcontact@wsj.com or by calling +44 (0)20 7842 9901.
BUSINESS & FINANCE
Citi Mortgage Deal: Behind the Scenes
A $7 billion deal between Citi-
group Inc. and the U.S. Justice De-
partment, expected to be unveiled
Monday, nearly fell apart one day
last month.
Government officials, frustrated
by months of back-and-forth hag-
gling, warned the bank that a law-
suit would be filed the next day. But
hours before the deadline expired,
the Justice Department put its plans
on hold.
News had leaked that afternoon,
June 17, that the U.S. had captured
Ahmed Abu Khatallah, a key suspect
in the attacks on the American con-
sulate in Benghazi in 2012. Justice
Department officials didnt want the
announcement of the suit against
Citigroupand its accompanying lit-
any of alleged misdeeds related to
mortgage-backed securitiesto be
overshadowed by questions about
the Benghazi suspect and U.S. policy
on detainees. Citigroup, which
didnt want to raise its offer again
and had been preparing to be sued,
never again heard the threat of a
suit.
Instead, the two sides returned
to the table. Were it not for that un-
connected event, Citigroup and the
Justice Department might not have
the deal they are expected to an-
nounce this week.
This reconstruction of the events
leading up to the deal is based on
interviews with people close to the
talks.
The two sides had been negotiat-
ing for months. They had started
with numbers that were orders of
magnitude apart: Citigroup opened
negotiations with an offer of $363
million in cash to settle Justice De-
partment claims, plus more for con-
sumer relief. The Justice Depart-
ment had opened by demanding a
number that was roughly $12 bil-
lion, which would include consumer
relief.
A pivotal point came on June 17,
when Tony West, a lieutenant of At-
torney General Eric Holder, met
with his boss and presented him
with a choice: return to the negoti-
ating table, or move ahead with a
lawsuit the next day. Mr. Holder
chose the lawsuit. Mr. West called
Ted Wells, a top outside lawyer for
Citigroup, and told him the news.
The Justice Department began to
plan for an announcement. Colorado
U.S. Attorney John Walsh, whose of-
fice was working on the case along
with its counterpart in Brooklyn,
boarded a flight from Denver to
Washington for a news conference.
Citigroup by then had raised its of-
fer several times and told the Jus-
tice Department that it wasnt will-
ing to do so again. At the time, it
was offering $7 billion.
Then, the news of Mr. Khatallahs
capture broke. Justice Department
officials thought attention would be
focused on his interrogation and
prosecution, distracting from the
announcement of the lawsuit.
So that evening, Mr. West called
Mr. Wells to tell him that the law-
suit had been delayed. Mr. West said
the department had a lot going on,
and that the lawsuit wouldnt be
filed that week or the following
week. Privately, some bank officials
wondered if the Justice Department
didnt want a lawsuit. Within days,
the two sides had returned to the
table.
The eventual settlement, and the
behind-the-scenes haggling that cre-
ated it, is being watched closely
throughout Washington and Wall
Street, where it could help set a
precedent for similar talks under
way with Bank of America Corp.
The negotiations are stoking
banks fears that the Justice Depart-
ment is getting increasingly heavy-
handed against the industry, while
investors are worried that bank pen-
alties will be decided not by a for-
mula but by the subjective measures
of the government. The deal also
could be seen as a key test for Citi-
group CEO Michael Corbat, who was
given the top job in 2012 with a
mandate to improve the banks rela-
tionship with the government.
Meanwhile, Mr. Holder has faced
constant criticism from Congress
and elsewhere that his Justice De-
partment has been too soft on fi-
nancial institutions.
Citigroup will pay the U.S. gov-
ernment a civil penalty of about $4
billiontwice that paid by J.P. Mor-
gan Chase & Co. But unlike J.P.
Morgan, Citigroups penalty also
covers its liability for collateralized
debt obligations, not just mortgage
securities. The rest of the settle-
ment goes to consumer relief, the
Federal Deposit Insurance Corp.
and the states of California, Dela-
ware, Illinois, Massachusetts and
New York, according to people fa-
miliar with the matter.
For months, Citigroup lawyers
had argued that the bank should pay
far less than J.P. Morgan, noting
Citigroups market share in the resi-
dential mortgage-backed securities
market in the run-up to the crisis:
one-fifth that of J.P. Morgan. Most
of J.P. Morgans mortgage securities
had been issued by Bear Stearns and
Washington Mutual, which J.P. Mor-
gan didnt buy until 2008.
Justice Department attorneys
contended that Citigroups market
share was far less relevant than the
sheer number of mortgage-bond
deals it put together with loans it
knew were defective.
When negotiations began in ear-
nest in early May, Citigroup offered
to pay $363 million in cash to settle
with the Justice Department only,
and to set aside an unspecified
amount of money to help customers
in financial trouble.
Government lawyers thought
Citigroups offer was laughably low
and told them to return with some-
thing better, these people said.
The bank doubled its proposed
penalty to $700 million. The banks
lawyers pointed out how Citigroup
already had settled claims with the
Federal Housing Finance Agency and
the National Credit Union Adminis-
tration, which had been two pieces
of J.P. Morgans total figure. Citi-
group also noted how it had settled
those claims for far less than its ri-
val had.
The Justice Department came
back in late May with a much higher
number: $12 billion, according to
people familiar with the matter.
Privately, Citigroup officers won-
dered if the Justice Department at-
torneys now viewed the record $13
billion fine against J.P. Morgan as
too small, and were making a politi-
cal example out of the second big
bank to settle.
At one point, Geoffrey Graber, an
aide to the Justice Departments Mr.
West, told Citigroups lawyers that
if they planned to come to the next
meeting and make an argument
about their clients small market
share, they shouldnt bother show-
ing up.
The Citigroup lawyers asked if
they could meet with Mr. Holder
though they were careful not to ask
for a personal meeting between Mr.
Holder and the CEO, Mr. Corbat,
afraid that request would backfire.
The Justice Department said no.
By early June, the two sides
were bargaining but still far apart.
Citigroup had raised its offer to $3
billiona $1 billion penalty and $2
billion in consumer relief. The Jus-
tice Department was still demand-
ing more than $10 billion.
On the night of Monday, June 9,
negotiators got on a conference call
close to midnighta time picked to
accommodate Mr. West, who dialed
in from Alaska where he was meet-
ing with Native American groups.
The Justice Department lawyers
said that if they werent satisfied
with Citigroups offer by that Friday,
they would sue. Mr. Wells, who was
leading the negotiations for Citi-
group, asked for more time. Mr.
West said no.
On Friday, June 13, news reports
circulated that talks had broken
down and the Justice Department
planned to file a lawsuit. That eve-
ning, Mr. Wells called Mr. West and
the two sides agreed to keep talk-
ingif Citigroup agreed to raise its
offer.
It was hard for Citigroup lawyers
to tell if the government was pos-
turing. The Justice Department had,
after all, thrown a $20 billion de-
mand at J.P. Morgan as an attempt
to get the banks attention, accord-
ing to people familiar with those
talks.
That weekend, Fathers Day, Citi-
group decided it would offer about
$7 billion, including payments to the
FDIC and the states. The bank also
reiterated that it wouldnt sign any
deal that didnt release it from po-
tential liability for collateralized
debt obligations.
Citigroup was adamant that it
wouldnt raise its offer again, and it
prepared for the possibility of a
lawsuit. Then the bank received an
unexpected reprieve from Mr.
Khatallah.
The two sides met in Washington
days later. In the following weeks,
they hammered out what the con-
sumer-relief portion would look like,
where the bank would get credit for
modifying mortgages for some
homeowners, and similar actions.
Deals with the state attorneys gen-
erals were completed. The Justice
Department reduced the amount al-
located to five states and the Fed-
eral Deposit Insurance Corporation
by $400 million, and shifted that
amount to the departments cash
penalty. The move kept the headline
number the same, but meant that
Citigroup could no longer write off
that $400 million against its taxes.
Monday, the Justice Department
is expected to announce a final deal.
By AndrewGrossman,
Christina Rexrode
and Dan Fitzpatrick
Citigroup and the U.S. Justice Department, led by Eric Holder, above, are expected to unveil a settlement Monday.
A
s
s
o
c
i
a
t
e
d
P
r
e
s
s
OPINION
Washington, D.C.
He was a career bureaucrat who
fought to protect American taxpay-
ers, battled to reform potentially
disastrous policies, and champi-
oned fiscal responsibility. Edward
DeMarco was the loneliest man in
government.
As the acting director of the
Federal Housing Finance Agency
from 2009 until January of this
year, Mr. DeMarco might have as-
sumed that his task at the FHFA
was to help reform housing policy
so it could never again play a cen-
tral role in a financial meltdown,
as it had in the 2008 crisis. He be-
gan working to rein in the federal
mortgage-insurance giants Fannie
Mae and Freddie Mac, which had
been bailed out with $188 billion
in taxpayer dollars, and he worked
to stabilize and reform the housing
market.
I made up my mind from the
beginning that because there was
this tremendous uncertainty about
how long it would actually be, that
I would treat every day like I
wasnt there just as a caretaker,
that I had a job to do and I was
just going to do it, Mr. DeMarco
says, as we meet at the Journals
Washington bureau.
Anyone outside of Washington
might think he deserved a medal,
but thats not what happened. In-
stead, Mr. DeMarco was pilloried
by members of Congress and exco-
riated by President Obamas liberal
allies. Former White House adviser
Van Jones told the Huffington Post
in 2012 that you could have the
biggest stimulus program in Amer-
ica by getting rid of one person
Mr. DeMarco.
The White House didnt press
him to degrade lending standards,
he says, but plenty of pressure did
come from the administrations
proxies, including Realtors, home
builders, the Mortgage Bankers
Association, insured depositories
and credit unions. Protesters orga-
nized by progressive groups
showed up more than once outside
Mr. DeMarcos house in Silver
Spring, Md., demanding his ouster.
A demonstration in April last year
brought out 500 picketers with
Dump DeMarco signs and 15-foot
puppets fashioned to look like him.
My first reaction was of course
one of safety, Mr. DeMarco says of
the April protest. When I first
saw them, I was standing a few
feet from the window of a ground-
level family room and theyre less
than 10 feet way through this pane
of glass, and it was a crowd of peo-
ple so big I couldnt tell how many
people were out there. And then all
the chanting and yelling started.
His wife had gone to pick up
their youngest daughter, one of
their four children, at a friends
house, so I had to get on the
phone and tell her, Dont come.
Then he called the police, who
eventually cleared the scene. It
was unsettling, he says. I think it
was meant to be unsettling.
What did the protesters want,
other than his resignation? They
wanted me to start forgiving debt
on mortgages. Ah, yes, the goal of
housing advocates in and out of
government ever since the fiscal
crisis spurred by too many people
borrowing too much money to buy
houses they couldnt afford: the
multibillion-dollar do-over. Mr.
DeMarcos resistance made him
unpopular in an administration
that was anxious to refire the
housing market.
The 54-year-old chooses his
words carefully as he recalls his
FHFA tenure, but his frustration is
evident, particularly in light of re-
cent events. His replacement at the
agency, Mel Watt, announced in
May that government will remain
firmly in control of the mortgage
market. Which means that Fannie
and Freddie will be unleashed to
embark on another affordable-
housing push. Or, as Mr. Watt put
it, they will maintain the govern-
ments housing footprint.
Mr. DeMarco says he first saw
how dangerous Fannie and Freddie
could be in late 1989 when he was
a low man on the totem pole at
the General Accounting Office
(now the Government Accountabil-
ity Office). Fresh from receiving an
economics doctorate at the Univer-
sity of Maryland, he was sent to
study the two government-spon-
sored enterprises. Lawmakers had
bailed out thrifts in the savings-
and-loan crisis of the 1980s, he
says, and they wanted to know,
Are there other rocks we should
be looking under?
Short answer: yes. Mr. DeMarco
says he found the same problems
at Fannie and Freddie that would
become painfully apparent almost
two decades laterthe mortgage
giants enjoyed implicit support
from taxpayers to insure mort-
gages, but there wasnt much over-
sight.
His warnings got some traction,
and in 1992 Congress established
the Office of Federal Housing En-
terprise Oversight to ensure Fan-
nie and Freddies safety and
soundness. But the new bureau-
cracy, rather than reining them in
as Mr. DeMarco had hoped, kind
of became the Fannie and Freddie
Growth Act, because it told the
market, Hey, we really care about
these guys, and were concerned
about them because theyre really
important.
After stints at the Treasury and
Social Security Administration, Mr.
DeMarco found himself working at
the very oversight office that his
reports to Congress had helped
create. It was 2006, when Fannie
and Freddies growth had been
turbocharged by the governments
mortgages-for-all mania. Mr.
DeMarco recalls that during his
first couple of weeks at the
agency, he attended a conference
for supervision staffers organized
to tell them about great, new
mortgage instrumentssubprime
loans, he says, with a sardonic
chuckle.
Treasury Secretary Timothy
Geithner asked Mr. DeMarco to run
the Federal Housing Finance
Agency, the new entity that Con-
gress mandated to run Fannie and
Freddie until the politicians could
decide what to do with the toxic
twins. It was a natural transition,
given that Mr. DeMarco had
worked closely with the agencys
departing director, James Lock-
hart. He took over as acting direc-
tor in August 2009.
Mr. DeMarco started by scram-
bling to retain senior managers,
who were fleeing Fannie and Fred-
die in droves. He gave them big
salary hikes on Christmas Eve, cre-
ating a tremendous amount of
congressional outrage about com-
pensation, he says, with a wry
smile. Even Texas Republican Jeb
Hensarling, a reform advocate,
dubbed the move unconsciona-
ble. Mr. DeMarco stuck to his
guns.
In 2012, he rolled out an exten-
sive strategic plan for the two
companies, mischievously subtitled
The Next Chapter in a Story that
Needs an Ending, that promised
to gradually shift risk from tax-
payers to private insurers. FHFA
announced plans to raise the fed-
eral insurers guarantee fees,
shrink their mortgage portfolios,
and reduce their loan limits so pri-
vate insurance competitors could
re-enter the market.
I wasnt trying to price Fannie
and Freddie out of the market so
much as get the price closer so
that the taxpayer capital is getting
an appropriate rate of return and
that, more important, we start
selling off this risk, he says. In
2011 Congress mandated that both
firms increase their fees, and the
Financial Stability Oversight Coun-
cil, another government overseer,
has explicitly supported higher
fees too. He notes that the presi-
dent also said were going to re-
duce conforming loan limits and he
[wanted] to accelerate the FHFA
taking steps to reduce the tax-
payers exposure.
Mr. DeMarcos efforts started to
show results. Housing prices re-
covered, both companies began to
make moneylots of itand pri-
vate insurers eyed getting back
into the market. Then in August
2012 the Obama administration de-
cided to sweep Fannie and Fred-
dies profits, now and in the future,
into the governments coffers. The
move left the companies unable to
build up capital reserves, and
shareholders sued.
If we have another recession,
if theres some foreign crisis that
creates issues that affect our econ-
omy, it doesnt matter whatever
the instigating event is, the point
is that if we have another round of
house price declines like weve
had, were going to erode most of
that remaining capital support,
Mr. DeMarco says. He declines to
comment on the pending lawsuit.
What really earned the enmity
of Democrats was his refusal to
write down principal for under-
water borrowers whose homes
were worth less than their mort-
gages, and his opposition to a
housing slush fund (a housing
trust fund, he says, teasingly cor-
recting me). Some 80% of those
underwater homeowners were still
making regular, monthly payments.
To create an incentive for them to
declare a hardship to get that prin-
cipal written down was a huge risk
to the taxpayer, he says. And the
longer-term implication of doing
this is that it would have raised
some serious questions about what
a future investor could expect
about how a mortgage contract
was going to work.
Mr. DeMarco isnt against gov-
ernment support for housingif
done properly. Is providing lever-
age or loosening the underwriting
standards to provide credit to
households with little down pay-
ments and poor track records of
managing credit really helping that
family, he says, or is it setting
that family up for increased risk of
failure? Thats not a question that
wins friends in Washington.
The drumbeat for Mr. De-
Marcos ouster culminated in the
Senate confirmation of Mr. Watt, a
North Carolina congressmen whom
Senate Majority Leader Harry Reid
pushed through after killing the
filibuster. (Mr. DeMarco hasnt
taken a job since leaving the FHFA:
Im going to take a little time
away to recover and to gain some
fresh perspective.)
Housing advocates cheered.
One of Mr. Watts first acts was to
announce that he would delay a
series of planned loan guarantee-
fee increases. In May he said hed
leave the loan limits for Fannie and
Freddie guarantees at $625,500,
which allow the twins to put tax-
payer money behind McMansions.
Mr. Watts FHFA has also tasked
Fannie and Freddie with finding
underserved, creditworthy bor-
rowersin other words, govern-
ment will again be recruiting bor-
rowers for mortgages they may
not be able to afford.
Mr. DeMarco is skeptical of
such an approach, though hes po-
lite when he speaks about his suc-
cessor. Assuming that only govern-
ment can foster homeownership
among people below median in-
come, he says, suggests a trou-
bling view of markets themselves.
He notes that homeownership
rates in the U.S. today are the
same as they were 50 years ago,
despite all the government efforts
to promote affordable housing.
Lets say it was a failed effort, he
says. To me, if you go through a
50-year period, and you do all
these things to promote housing,
and the homeownership rate is
still bouncing around a two-per-
centage-point band, I think the
markets telling you were at an
equilibrium.
Yet here we go again. At some
point, were going to have another
serious problem, he says. I never
would have thought that the last
problem wasnt serious enough to
drive lawmakers to say weve got
to fix this once and for all, no mat-
ter how hard it is.
Ms. Kissel is a member of the
Journals editorial board.
[ Journal Interview ]
with Edward DeMarco
BY MARY KISSEL
The Man Who Took on Fannie Mae
Z
i
n
a
S
a
u
n
d
e
r
s
How a career bureaucrat
became the target of the
housing lobby and the
White House for trying
to avoid a repeat of 2008.
Thorold Barker, Editor,
Europe, Middle East & Africa
Bruce Orwall, Senior Editor, Europe
Gren Manuel, Executive Editor, Europe
Terence Roth, Managing Editor, Europe
Lauren Berkemeyer, Marketing
Kate Dobbin, Communications
Florence LeFevre, Institutional Sales Europe
Jonathan Wright, Circulation Sales
Kelly Leach, Publisher
Published since 1889 by
Dow Jones & Company
2014 Dow Jones & Company. All Rights Reserved
Monday, July 14, 2014
Pound/Euro 0.7949 0.06% Yen/$ 101.33 0.06% Global Dow 2598.85 0.13% Gold 1337.00 g 0.13% Oil 100.83 g 2.04% 3-month Libor 0.23360 10-year Treasury 3/32 yield 2.520%
THE WALL STREET JOURNAL. europe.WSJ.com
GMChief to Return to Capitol Hill
For More Questions on Recalls
BUSINESS &FINANCE 17
Box Buys Time for Its IPO
But Needs to Make Its Case
HEARDONTHE STREET 27
Aircraft
Duopoly
Looms Over
Air Show
LONDONPart arms bazaar, part
industrial petting zoo, the Farnbor-
ough air show, which kicks off Mon-
day at an airfield in rural England,
represents the aerospace commu-
nitys annual opportunity to take the
pulse of the business of flying.
And with the headwinds of the
global economic crisis mostly be-
hind the industry, business is boom-
ing again.
Jetliner output at rivals Boeing
Co. and Airbus Group NV is at re-
cord highs. The two together are de-
livering 100 passenger planes of all
sizes to the worlds airlines each
month. They are also expanding
their manufacturing footprints, both
in the industrialized and industrial-
izing world, as Airbus adds plants in
Tianjin, China, and Mobile, Ala.,
while Boeing expands in South Caro-
lina.
But underscoring the changing
nature of the global economy and
the maturity of the aviation indus-
try, incrementalism is the unofficial
theme of the show.
Neither of the big manufacturers
is rolling out revolutionary new air-
craft. Instead, Boeings showcase
model this year is its stretched
Dreamliner, a lengthened version of
the composite airplane that was cer-
tified last month. Airbus, mean-
while, may be making the highest-
profile debut of the show, though
not with an all-new product. In-
stead, the Toulouse, France, plane
maker is set to unveil an engine up-
grade for its 20-year-old A330 using
new turbines from Rolls-Royce
Holdings PLC.
The improved A330 promises
14% greater efficiency than the cur-
rent version. It will still guzzle more
fuel than more modern jets, such as
the Boeing Dreamliner. But Airbus is
betting its lower capital and mainte-
nance costs will draw airline orders.
On Sunday, the sniping between
the two rivals was already in full
swing. Boeing marketing head
Randy Tinseth said the fuel savings
Airbus was touting for its A330
were extraordinarily optimistic.
Farnborough alternates every
year with Paris as host to the indus-
trys biggest show. Many watchers
had pegged this year in England as
the event that would mark the end
of the Boeing and Airbus duopoly.
New entrants from Canada, Japan
and China were all aiming to have
made splashes that would have put
them at least nipping at the heels of
the jetliner giants.
But they have all faced technical
and production delays on their new
products. The Bombardier Inc.
CSeries, long-viewed as the most
BY JON OSTROWER
AND ROBERT WALL
In Spain, Bank Data Isnt Plain
MADRIDSpanish banks say a
modest decline in bad loans in re-
cent months marks a post-crisis
turning point. But analysts warn
that a more-comprehensive measure
of the banks health points to a lon-
ger road to recovery for lenders.
After a vicious real-estate bust
and a deep recession, Spanish
banks nonperforming loanscases
in which borrowers have fallen be-
hind or defaulted on payments
have edged down to 13.4% of total
loans as of April from a record-high
13.6% in December, according to
Spains central bank.
But some analysts say investors
should be looking at the banks non-
performing assets, a broader metric
that includes repossessed real-es-
tate assets and some restructured
loans, including those transferred to
Spains bad bank entity.
At the end of the first quarter,
those nonperforming assets totaled
372 billion ($506 billion), mean-
ing bad debts are around 22% of
lenders total loans, according to Ex-
ane BNP Paribas analyst Santiago
Lpez Daz.
It seems we are close to (or
even past) the peak of officially re-
ported nonperforming loan figures,
but not everything that glitters is
gold, Mr. Lpez Daz wrote re-
cently. Reported nonperforming
loans clearly understate the order of
magnitude of the credit-quality di-
saster.
Nonperforming assets are a bet-
ter measure of banks health, some
analysts say, because the metric
shows the full extent of bad debts
the lenders have to work through
and provides a more realistic pic-
ture of the continued drag on earn-
ings that banks face. It captures
foreclosed homes a bank will have
to try to sell and repeatedly refi-
nanced loans to property developers
or other businesses that are unlikely
to be paid.
Fears about the health of South-
ern European banks have largely
eased over the past year. But they
rushed back into the spotlight last
week when worries about Banco Es-
prito Santo, one of Portugals big-
gest lenders, sparked a market sell-
off across the continent.
Spanish banks have been among
the biggest beneficiaries of the re-
turning market confidence. Shares
of the four largest Spanish banks
whose main business is in the coun-
try have risen an average of 17.8%
since the beginning of the year,
compared to a 2.5% decline in the
STOXX European banks index, as in-
vestors cheer Spains recovery.
But the debate over whether
Spanish banks are providing inves-
tors with a helpful snapshot of their
health is a sign of the lingering
fears about what lurks on European
bank balance sheets.
Spanish banks routinely disclose
their nonperforming loans, but they
dont provide detailed quarterly fig-
BY JEANNETTE NEUMANN
Spanish Banks: The Big Picture
Bad loans have stopped
climbing...
Sources: Bank of Spain (ratio of nonperforming
loans to total loans); Bank of America Merrill
Lynch (banks rst-quarter and quarterly change
in nonperforming assets and loans)
14
10
11
12
13
%
2013 14
April: 13.4%
...but a more comprehensive measure of banks' health, nonperforming assets*,
has seen a milder decrease.
2.5%
5.3%
0.3%
0.8%
0.8%
1.6%
0.9%
no change
0.8%
1.3%
3.1%
4.1% 18.22
22.91
Bankia
15.79
23.91 Banco
Sabadell
20.02
30.55
Santander
21.00
35.48
BBVA
21.06
35.52 Banco
Popular
Nonperforming loans: 24.01 billion
Nonperforming assets: 38.72 billion
Caixabank
Change from
fourth-quarter 2013
First-quarter 2014 nonperforming assets and loans
for the six largest Spanish banks**
The ratio of nonperforming loans
to total loans
**By market capitalization
*Includes repossessed real-estate assets and some restructured loans
SHENZHEN, ChinaStar Wang
was surprised last summer to hear
that Intel Corp., the worlds biggest
chip maker by revenue, wanted to
talk business.
Mr. Wang runs a small factory in
this southern Chinese city, making
tablet computers and printed circuit
boards for local electronics brands
in China and South America. His
company, Shenzhen Hampoo Science
& Technology Co., isnt well known,
but it is exactly the kind of cus-
tomer that the Silicon Valley giant
is seeking.
Intel, the longtime king of pro-
cessors for personal computers, has
been largely frozen out of tablets
and smartphones in favor of rivals
using chip technology from ARM
Holdings PLC. It has little hope of
swaying market leaders Apple Inc.
and Samsung Electronics Co.,
which design their own ARM-based
chips.
So the chip maker is trying new
techniques to woo entrepreneurs
like Mr. Wang, small suppliers that
lately have had an outsize impact on
the evolution of the tablet market.
Were trying to think differently
and trying to be pragmatic, said
Rene James, Intels president.
Like, what would we do if we were
a startup?
That means coming to Shenzhen,
a onetime fishing village situated
near Hong Kong in the Pearl River
Delta. Known for cheap factories
and fake iPhones, the city is increas-
ingly home to fanciful skyscrapers
and a legion of local electronics
manufacturers such as Shenzhen
Ramos Digital Technology Co.,
Teclast Electronics Co. and Wanlida
Group Co.
One impact is on pricing. Where
Apples least-expensive tablet starts
at $299, the Chinese companies sell
tablets for as little as 299 yuan, or
$48. They sometimes sell the hard-
ware under their own names, but
also increasingly ship small batches
of tablets to companies in emerging
countries that apply their own
brands.
Some vendors, such as E FUN
Inc., have cracked U.S. sales chan-
nels like Wal-Mart Stores Inc., sell-
ing tablets for as little as $70. Such
models often lack some features of
tablets from well-known vendors,
but are reaching a broad audience.
Research firm IDC estimates that
44% of the 245 million tablets to be
shipped this year will be manufac-
tured in Shenzhen, a figure that in-
cludes some products sold under the
brands of big companies like Len-
ovo Group Ltd. and Hewlett-Pack-
ard Co. Sales under brands of com-
panies smaller than the top five
tablet providers accounted for about
34% of the market in the first quar-
ter, said Tom Mainelli, an IDC vice
president. The firm counts nearly
200 tablet sellers in all.
The small companies, sometimes
called white box vendors because
they sell products without a brand
to resellers who can add their own,
appear to be avoiding some satura-
tion blamed for a slowdown in sales
BY EVA DOU AND DON CLARK
Frozen out of the tablet market by Apple and Samsung, Intel is trying to woo
small factories in China that making white box or unbranded tablets.
A
s
s
o
c
i
a
t
e
d
P
r
e
s
s
OPINION
Washington, D.C.
He was a career bureaucrat who
fought to protect American taxpay-
ers, battled to reform potentially
disastrous policies, and champi-
oned fiscal responsibility. Edward
DeMarco was the loneliest man in
government.
As the acting director of the
Federal Housing Finance Agency
from 2009 until January of this
year, Mr. DeMarco might have as-
sumed that his task at the FHFA
was to help reform housing policy
so it could never again play a cen-
tral role in a financial meltdown,
as it had in the 2008 crisis. He be-
gan working to rein in the federal
mortgage-insurance giants Fannie
Mae and Freddie Mac, which had
been bailed out with $188 billion
in taxpayer dollars, and he worked
to stabilize and reform the housing
market.
I made up my mind from the
beginning that because there was
this tremendous uncertainty about
how long it would actually be, that
I would treat every day like I
wasnt there just as a caretaker,
that I had a job to do and I was
just going to do it, Mr. DeMarco
says, as we meet at the Journals
Washington bureau.
Anyone outside of Washington
might think he deserved a medal,
but thats not what happened. In-
stead, Mr. DeMarco was pilloried
by members of Congress and exco-
riated by President Obamas liberal
allies. Former White House adviser
Van Jones told the Huffington Post
in 2012 that you could have the
biggest stimulus program in Amer-
ica by getting rid of one person
Mr. DeMarco.
The White House didnt press
him to degrade lending standards,
he says, but plenty of pressure did
come from the administrations
proxies, including Realtors, home
builders, the Mortgage Bankers
Association, insured depositories
and credit unions. Protesters orga-
nized by progressive groups
showed up more than once outside
Mr. DeMarcos house in Silver
Spring, Md., demanding his ouster.
A demonstration in April last year
brought out 500 picketers with
Dump DeMarco signs and 15-foot
puppets fashioned to look like him.
My first reaction was of course
one of safety, Mr. DeMarco says of
the April protest. When I first
saw them, I was standing a few
feet from the window of a ground-
level family room and theyre less
than 10 feet way through this pane
of glass, and it was a crowd of peo-
ple so big I couldnt tell how many
people were out there. And then all
the chanting and yelling started.
His wife had gone to pick up
their youngest daughter, one of
their four children, at a friends
house, so I had to get on the
phone and tell her, Dont come.
Then he called the police, who
eventually cleared the scene. It
was unsettling, he says. I think it
was meant to be unsettling.
What did the protesters want,
other than his resignation? They
wanted me to start forgiving debt
on mortgages. Ah, yes, the goal of
housing advocates in and out of
government ever since the fiscal
crisis spurred by too many people
borrowing too much money to buy
houses they couldnt afford: the
multibillion-dollar do-over. Mr.
DeMarcos resistance made him
unpopular in an administration
that was anxious to refire the
housing market.
The 54-year-old chooses his
words carefully as he recalls his
FHFA tenure, but his frustration is
evident, particularly in light of re-
cent events. His replacement at the
agency, Mel Watt, announced in
May that government will remain
firmly in control of the mortgage
market. Which means that Fannie
and Freddie will be unleashed to
embark on another affordable-
housing push. Or, as Mr. Watt put
it, they will maintain the govern-
ments housing footprint.
Mr. DeMarco says he first saw
how dangerous Fannie and Freddie
could be in late 1989 when he was
a low man on the totem pole at
the General Accounting Office
(now the Government Accountabil-
ity Office). Fresh from receiving an
economics doctorate at the Univer-
sity of Maryland, he was sent to
study the two government-spon-
sored enterprises. Lawmakers had
bailed out thrifts in the savings-
and-loan crisis of the 1980s, he
says, and they wanted to know,
Are there other rocks we should
be looking under?
Short answer: yes. Mr. DeMarco
says he found the same problems
at Fannie and Freddie that would
become painfully apparent almost
two decades laterthe mortgage
giants enjoyed implicit support
from taxpayers to insure mort-
gages, but there wasnt much over-
sight.
His warnings got some traction,
and in 1992 Congress established
the Office of Federal Housing En-
terprise Oversight to ensure Fan-
nie and Freddies safety and
soundness. But the new bureau-
cracy, rather than reining them in
as Mr. DeMarco had hoped, kind
of became the Fannie and Freddie
Growth Act, because it told the
market, Hey, we really care about
these guys, and were concerned
about them because theyre really
important.
After stints at the Treasury and
Social Security Administration, Mr.
DeMarco found himself working at
the very oversight office that his
reports to Congress had helped
create. It was 2006, when Fannie
and Freddies growth had been
turbocharged by the governments
mortgages-for-all mania. Mr.
DeMarco recalls that during his
first couple of weeks at the
agency, he attended a conference
for supervision staffers organized
to tell them about great, new
mortgage instrumentssubprime
loans, he says, with a sardonic
chuckle.
Treasury Secretary Timothy
Geithner asked Mr. DeMarco to run
the Federal Housing Finance
Agency, the new entity that Con-
gress mandated to run Fannie and
Freddie until the politicians could
decide what to do with the toxic
twins. It was a natural transition,
given that Mr. DeMarco had
worked closely with the agencys
departing director, James Lock-
hart. He took over as acting direc-
tor in August 2009.
Mr. DeMarco started by scram-
bling to retain senior managers,
who were fleeing Fannie and Fred-
die in droves. He gave them big
salary hikes on Christmas Eve, cre-
ating a tremendous amount of
congressional outrage about com-
pensation, he says, with a wry
smile. Even Texas Republican Jeb
Hensarling, a reform advocate,
dubbed the move unconsciona-
ble. Mr. DeMarco stuck to his
guns.
In 2012, he rolled out an exten-
sive strategic plan for the two
companies, mischievously subtitled
The Next Chapter in a Story that
Needs an Ending, that promised
to gradually shift risk from tax-
payers to private insurers. FHFA
announced plans to raise the fed-
eral insurers guarantee fees,
shrink their mortgage portfolios,
and reduce their loan limits so pri-
vate insurance competitors could
re-enter the market.
I wasnt trying to price Fannie
and Freddie out of the market so
much as get the price closer so
that the taxpayer capital is getting
an appropriate rate of return and
that, more important, we start
selling off this risk, he says. In
2011 Congress mandated that both
firms increase their fees, and the
Financial Stability Oversight Coun-
cil, another government overseer,
has explicitly supported higher
fees too. He notes that the presi-
dent also said were going to re-
duce conforming loan limits and he
[wanted] to accelerate the FHFA
taking steps to reduce the tax-
payers exposure.
Mr. DeMarcos efforts started to
show results. Housing prices re-
covered, both companies began to
make moneylots of itand pri-
vate insurers eyed getting back
into the market. Then in August
2012 the Obama administration de-
cided to sweep Fannie and Fred-
dies profits, now and in the future,
into the governments coffers. The
move left the companies unable to
build up capital reserves, and
shareholders sued.
If we have another recession,
if theres some foreign crisis that
creates issues that affect our econ-
omy, it doesnt matter whatever
the instigating event is, the point
is that if we have another round of
house price declines like weve
had, were going to erode most of
that remaining capital support,
Mr. DeMarco says. He declines to
comment on the pending lawsuit.
What really earned the enmity
of Democrats was his refusal to
write down principal for under-
water borrowers whose homes
were worth less than their mort-
gages, and his opposition to a
housing slush fund (a housing
trust fund, he says, teasingly cor-
recting me). Some 80% of those
underwater homeowners were still
making regular, monthly payments.
To create an incentive for them to
declare a hardship to get that prin-
cipal written down was a huge risk
to the taxpayer, he says. And the
longer-term implication of doing
this is that it would have raised
some serious questions about what
a future investor could expect
about how a mortgage contract
was going to work.
Mr. DeMarco isnt against gov-
ernment support for housingif
done properly. Is providing lever-
age or loosening the underwriting
standards to provide credit to
households with little down pay-
ments and poor track records of
managing credit really helping that
family, he says, or is it setting
that family up for increased risk of
failure? Thats not a question that
wins friends in Washington.
The drumbeat for Mr. De-
Marcos ouster culminated in the
Senate confirmation of Mr. Watt, a
North Carolina congressmen whom
Senate Majority Leader Harry Reid
pushed through after killing the
filibuster. (Mr. DeMarco hasnt
taken a job since leaving the FHFA:
Im going to take a little time
away to recover and to gain some
fresh perspective.)
Housing advocates cheered.
One of Mr. Watts first acts was to
announce that he would delay a
series of planned loan guarantee-
fee increases. In May he said hed
leave the loan limits for Fannie and
Freddie guarantees at $625,500,
which allow the twins to put tax-
payer money behind McMansions.
Mr. Watts FHFA has also tasked
Fannie and Freddie with finding
underserved, creditworthy bor-
rowersin other words, govern-
ment will again be recruiting bor-
rowers for mortgages they may
not be able to afford.
Mr. DeMarco is skeptical of
such an approach, though hes po-
lite when he speaks about his suc-
cessor. Assuming that only govern-
ment can foster homeownership
among people below median in-
come, he says, suggests a trou-
bling view of markets themselves.
He notes that homeownership
rates in the U.S. today are the
same as they were 50 years ago,
despite all the government efforts
to promote affordable housing.
Lets say it was a failed effort, he
says. To me, if you go through a
50-year period, and you do all
these things to promote housing,
and the homeownership rate is
still bouncing around a two-per-
centage-point band, I think the
markets telling you were at an
equilibrium.
Yet here we go again. At some
point, were going to have another
serious problem, he says. I never
would have thought that the last
problem wasnt serious enough to
drive lawmakers to say weve got
to fix this once and for all, no mat-
ter how hard it is.
Ms. Kissel is a member of the
Journals editorial board.
[ Journal Interview ]
with Edward DeMarco
BY MARY KISSEL
The Man Who Took on Fannie Mae
Z
i
n
a
S
a
u
n
d
e
r
s
How a career bureaucrat
became the target of the
housing lobby and the
White House for trying
to avoid a repeat of 2008.
Thorold Barker, Editor,
Europe, Middle East & Africa
Bruce Orwall, Senior Editor, Europe
Gren Manuel, Executive Editor, Europe
Terence Roth, Managing Editor, Europe
Lauren Berkemeyer, Marketing
Kate Dobbin, Communications
Florence LeFevre, Institutional Sales Europe
Jonathan Wright, Circulation Sales
Kelly Leach, Publisher
Published since 1889 by
Dow Jones & Company
2014 Dow Jones & Company. All Rights Reserved
Monday, July 14, 2014
Pound/Euro 0.7949 0.06% Yen/$ 101.33 0.06% Global Dow 2598.85 0.13% Gold 1337.00 g 0.13% Oil 100.83 g 2.04% 3-month Libor 0.23360 10-year Treasury 3/32 yield 2.520%
THE WALL STREET JOURNAL. europe.WSJ.com
GMChief to Return to Capitol Hill
For More Questions on Recalls
BUSINESS &FINANCE 17
Box Buys Time for Its IPO
But Needs to Make Its Case
HEARDONTHE STREET 27
Aircraft
Duopoly
Looms Over
Air Show
LONDONPart arms bazaar, part
industrial petting zoo, the Farnbor-
ough air show, which kicks off Mon-
day at an airfield in rural England,
represents the aerospace commu-
nitys annual opportunity to take the
pulse of the business of flying.
And with the headwinds of the
global economic crisis mostly be-
hind the industry, business is boom-
ing again.
Jetliner output at rivals Boeing
Co. and Airbus Group NV is at re-
cord highs. The two together are de-
livering 100 passenger planes of all
sizes to the worlds airlines each
month. They are also expanding
their manufacturing footprints, both
in the industrialized and industrial-
izing world, as Airbus adds plants in
Tianjin, China, and Mobile, Ala.,
while Boeing expands in South Caro-
lina.
But underscoring the changing
nature of the global economy and
the maturity of the aviation indus-
try, incrementalism is the unofficial
theme of the show.
Neither of the big manufacturers
is rolling out revolutionary new air-
craft. Instead, Boeings showcase
model this year is its stretched
Dreamliner, a lengthened version of
the composite airplane that was cer-
tified last month. Airbus, mean-
while, may be making the highest-
profile debut of the show, though
not with an all-new product. In-
stead, the Toulouse, France, plane
maker is set to unveil an engine up-
grade for its 20-year-old A330 using
new turbines from Rolls-Royce
Holdings PLC.
The improved A330 promises
14% greater efficiency than the cur-
rent version. It will still guzzle more
fuel than more modern jets, such as
the Boeing Dreamliner. But Airbus is
betting its lower capital and mainte-
nance costs will draw airline orders.
On Sunday, the sniping between
the two rivals was already in full
swing. Boeing marketing head
Randy Tinseth said the fuel savings
Airbus was touting for its A330
were extraordinarily optimistic.
Farnborough alternates every
year with Paris as host to the indus-
trys biggest show. Many watchers
had pegged this year in England as
the event that would mark the end
of the Boeing and Airbus duopoly.
New entrants from Canada, Japan
and China were all aiming to have
made splashes that would have put
them at least nipping at the heels of
the jetliner giants.
But they have all faced technical
and production delays on their new
products. The Bombardier Inc.
CSeries, long-viewed as the most
BY JON OSTROWER
AND ROBERT WALL
In Spain, Bank Data Isnt Plain
MADRIDSpanish banks say a
modest decline in bad loans in re-
cent months marks a post-crisis
turning point. But analysts warn
that a more-comprehensive measure
of the banks health points to a lon-
ger road to recovery for lenders.
After a vicious real-estate bust
and a deep recession, Spanish
banks nonperforming loanscases
in which borrowers have fallen be-
hind or defaulted on payments
have edged down to 13.4% of total
loans as of April from a record-high
13.6% in December, according to
Spains central bank.
But some analysts say investors
should be looking at the banks non-
performing assets, a broader metric
that includes repossessed real-es-
tate assets and some restructured
loans, including those transferred to
Spains bad bank entity.
At the end of the first quarter,
those nonperforming assets totaled
372 billion ($506 billion), mean-
ing bad debts are around 22% of
lenders total loans, according to Ex-
ane BNP Paribas analyst Santiago
Lpez Daz.
It seems we are close to (or
even past) the peak of officially re-
ported nonperforming loan figures,
but not everything that glitters is
gold, Mr. Lpez Daz wrote re-
cently. Reported nonperforming
loans clearly understate the order of
magnitude of the credit-quality di-
saster.
Nonperforming assets are a bet-
ter measure of banks health, some
analysts say, because the metric
shows the full extent of bad debts
the lenders have to work through
and provides a more realistic pic-
ture of the continued drag on earn-
ings that banks face. It captures
foreclosed homes a bank will have
to try to sell and repeatedly refi-
nanced loans to property developers
or other businesses that are unlikely
to be paid.
Fears about the health of South-
ern European banks have largely
eased over the past year. But they
rushed back into the spotlight last
week when worries about Banco Es-
prito Santo, one of Portugals big-
gest lenders, sparked a market sell-
off across the continent.
Spanish banks have been among
the biggest beneficiaries of the re-
turning market confidence. Shares
of the four largest Spanish banks
whose main business is in the coun-
try have risen an average of 17.8%
since the beginning of the year,
compared to a 2.5% decline in the
STOXX European banks index, as in-
vestors cheer Spains recovery.
But the debate over whether
Spanish banks are providing inves-
tors with a helpful snapshot of their
health is a sign of the lingering
fears about what lurks on European
bank balance sheets.
Spanish banks routinely disclose
their nonperforming loans, but they
dont provide detailed quarterly fig-
BY JEANNETTE NEUMANN
Spanish Banks: The Big Picture
Bad loans have stopped
climbing...
Sources: Bank of Spain (ratio of nonperforming
loans to total loans); Bank of America Merrill
Lynch (banks rst-quarter and quarterly change
in nonperforming assets and loans)
14
10
11
12
13
%
2013 14
April: 13.4%
...but a more comprehensive measure of banks' health, nonperforming assets*,
has seen a milder decrease.
2.5%
5.3%
0.3%
0.8%
0.8%
1.6%
0.9%
no change
0.8%
1.3%
3.1%
4.1% 18.22
22.91
Bankia
15.79
23.91 Banco
Sabadell
20.02
30.55
Santander
21.00
35.48
BBVA
21.06
35.52 Banco
Popular
Nonperforming loans: 24.01 billion
Nonperforming assets: 38.72 billion
Caixabank
Change from
fourth-quarter 2013
First-quarter 2014 nonperforming assets and loans
for the six largest Spanish banks**
The ratio of nonperforming loans
to total loans
**By market capitalization
*Includes repossessed real-estate assets and some restructured loans
SHENZHEN, ChinaStar Wang
was surprised last summer to hear
that Intel Corp., the worlds biggest
chip maker by revenue, wanted to
talk business.
Mr. Wang runs a small factory in
this southern Chinese city, making
tablet computers and printed circuit
boards for local electronics brands
in China and South America. His
company, Shenzhen Hampoo Science
& Technology Co., isnt well known,
but it is exactly the kind of cus-
tomer that the Silicon Valley giant
is seeking.
Intel, the longtime king of pro-
cessors for personal computers, has
been largely frozen out of tablets
and smartphones in favor of rivals
using chip technology from ARM
Holdings PLC. It has little hope of
swaying market leaders Apple Inc.
and Samsung Electronics Co.,
which design their own ARM-based
chips.
So the chip maker is trying new
techniques to woo entrepreneurs
like Mr. Wang, small suppliers that
lately have had an outsize impact on
the evolution of the tablet market.
Were trying to think differently
and trying to be pragmatic, said
Rene James, Intels president.
Like, what would we do if we were
a startup?
That means coming to Shenzhen,
a onetime fishing village situated
near Hong Kong in the Pearl River
Delta. Known for cheap factories
and fake iPhones, the city is increas-
ingly home to fanciful skyscrapers
and a legion of local electronics
manufacturers such as Shenzhen
Ramos Digital Technology Co.,
Teclast Electronics Co. and Wanlida
Group Co.
One impact is on pricing. Where
Apples least-expensive tablet starts
at $299, the Chinese companies sell
tablets for as little as 299 yuan, or
$48. They sometimes sell the hard-
ware under their own names, but
also increasingly ship small batches
of tablets to companies in emerging
countries that apply their own
brands.
Some vendors, such as E FUN
Inc., have cracked U.S. sales chan-
nels like Wal-Mart Stores Inc., sell-
ing tablets for as little as $70. Such
models often lack some features of
tablets from well-known vendors,
but are reaching a broad audience.
Research firm IDC estimates that
44% of the 245 million tablets to be
shipped this year will be manufac-
tured in Shenzhen, a figure that in-
cludes some products sold under the
brands of big companies like Len-
ovo Group Ltd. and Hewlett-Pack-
ard Co. Sales under brands of com-
panies smaller than the top five
tablet providers accounted for about
34% of the market in the first quar-
ter, said Tom Mainelli, an IDC vice
president. The firm counts nearly
200 tablet sellers in all.
The small companies, sometimes
called white box vendors because
they sell products without a brand
to resellers who can add their own,
appear to be avoiding some satura-
tion blamed for a slowdown in sales
BY EVA DOU AND DON CLARK
Frozen out of the tablet market by Apple and Samsung, Intel is trying to woo
small factories in China that making white box or unbranded tablets.
A
s
s
o
c
i
a
t
e
d
P
r
e
s
s
OPINION
sion announced on Monday that
preliminary results showed Ashraf
Ghani a million votes ahead of Ab-
dullah Abdullah. Both camps im-
mediately claimed victory.
Mr. Abdullahs supporters have
taken to the streets, and he has
threatened to form a parallel gov-
ernment if the result is not over-
turned. The White House has said
that the formation of an extra-con-
stitutional body will mean the ter-
mination of U.S. aid to Afghani-
stan, and rightly so. This election
must be decided according to Af-
ghan law by the established elec-
toral bodies and without more mo-
bilization of street pressures. Any
other outcome will hurt all of the
Afghan people and seriously dam-
age U.S. and international interests
in South Asia.
This crisis is only superficially
complex. There was clearly a lot of
fraud, as there always is in Afghan
elections. President Hamid Karzais
political machine largely backed
Mr. Ghani, which means that there
was no doubt plenty of cheating
on his behalf. Mr. Abdullah also
surely benefited from ballot-box
manipulation, as he did in his
2009 effort to unseat Mr. Karzai.
The Afghan electoral system, sup-
ported by the international com-
munity, must investigate the vote
and ultimately certify a result that
is as clean as possible in
accordance with the Afghan con-
stitutional system.
It wont be surprising if it turns
out that Mr. Ghani won, even when
the fraud on both sides is sub-
tracted. The electoral coalitions
were built in typical Afghan style.
Mr. Ghani, a Pashtun, appealed to
that ethnic group, which is a plu-
rality of Afghan voters. His selec-
tion of Abdul Rashid Dostum, an
Uzbek warlord, as his running
mate no doubt secured him some
Uzbek support that ate into Mr.
Abdullahs base.
Mr. Abdullah, a member of the
Tajik minority, tried to run as a
candidate of all Afghans but was
seen as a Northern Alliance power-
broker, narrowing his appeal to
Pashtuns. Afghanistans demo-
graphics make it hard for a North-
ern Alliance candidate to win an
election fought along ethnic lines,
as this one was. Mr. Ghani also
campaigned for the runoff election
much more vigorously than did Mr.
Abdullah.
None of that matters now.
There are a limited number of sce-
narios for resolving the crisis: (1)
The result stands and Mr. Ghani
wins, with Mr. Abdullah ultimately
acquiescing; (2) the result is over-
turned and the victory given to Mr.
Abdullah, with Mr. Ghani submit-
ting; or (3) the whole process
breaks down and is discredited,
with Mr. Karzai continuing to rule
through emergency powers and ev-
eryone else trying to figure out
how to start over or, worse, aban-
doning the democratic and consti-
tutional process entirely.
sion was right to announce the
preliminary results on July 7 while
continuing its fraud investigations.
Departures from the constitution-
ally mandated process and time-
line risk tipping Afghanistan into
the abyss: If an impatient Mr.
Abdullah and his supporters
launch a parallel government, it
would fracture the country and
provoke civil war almost immedi-
ately.
Prolonging the electoral-review
process past its legally mandated
periodthe final results are due
on July 22allowing Mr. Karzais
continued rule, would alienate
most Afghans and all of Afghani-
stans international supporters.
Fears that Mr. Karzai might extend
his rule indefinitely would rise.
The consequences would be
dire. Aid would likely be sus-
pended or canceled. Mr. Karzai
would continue to refuse to sign
the status of forces agreement
allowing U.S. troops to stay in Af-
ghanistan after the end of this
year. President Obama would likely
order plans drawn up to withdraw
all U.S. troops by the end of 2014
and might even set that process in
motion.
Other troop-contributing na-
tions would do the same. Deprived
of military and humanitarian aid,
Afghanistan would be on track to
implode spectacularly.
The Taliban are no doubt
watching the crisis closely, heart-
ened by signs of dysfunction and
ready to step up pressure on an
Afghan National Security Force al-
ready frayed by the ethnic tensions
surrounding the election. If inter-
national forces begin to move out
faster than the current drawdown
calls for, significant battlefield fail-
ures are likely, heightening the im-
pression that the country is on the
verge of collapse. In response to
Taliban successes, the Northern
Alliance would likely mobilize, fur-
ther weakening the Afghan
National Security Force, because
former alliance commanders form
much of the militarys leadership.
Pakistan would reinforce the
Taliban and the Haqqani network.
India would be tempted to rein-
force the Northern Alliance. Rus-
sia, joined by Iran, might support
the alliance as well. The prospects
for an all-out civil war are high if
the electoral crisis is allowed to
fester.
Mr. Abdullah and his partisans,
in taking their defiant stands,
seem to have forgotten the risks of
the course they are pursuing. For
all his flaws, Mr. Ghani is not Mr.
Karzai. He is not a Pashtun su-
premacist and would not pose a
threat to Afghanistans northern
minorities. He has already an-
nounced his intention to form an
inclusive government, and his past
behavior provides ample reason to
believe him.
The U.S. and the international
community should bring as much
pressure to bear as possible on Mr.
Abdullahand on Mr. Ghani if it
becomes necessaryto let the con-
stitutional process play out. Other-
wise there may be no future for
Afghanistan.
Mr. Kagan is director of the Criti-
cal Threats Project at the Ameri-
can Enterprise Institute.
The late, great
economist Mancur
Olson taught us
that getting rid of
encrusted, inter-
est-group-sup-
ported bureaucracies like the U.S.
Export-Import Bank is nearly im-
possible, so we should seize on
any opportunity that the political
moment offers us, even if were
embarrassed by some of our al-
lies.
And, no, we are not referring
to the hands off my Medicare
small-government activists of the
tea party. These people dont de-
serve to be mocked. For genera-
tions Americans have been taught
to view Social Security and Medi-
care benefits as earned wealth,
paid for by hard work and payroll
taxes. A gross failure of Demo-
crats and Republicans alike has
been turning the payroll tax from
perceived wealth into a disincen-
tive to work by undermining the
long-term credibility of the gov-
ernments promises to retirees.
But lets not kid ourselves. Ex-
Im bashing for GOP leaders is a
freebie. It costs them nothing:
GE, Boeing and the Chamber of
Commerce may be irritated, but
they have many fish to fry in
Washington. They wont be hold-
ing grudgesor refusing to hold
fundraisersfor GOPers if the
bank goes down. And is there
anything more eye-rolling than
the sudden loathing for Ex-Im ex-
hibited by pundits and think-
tankers who previously failed to
notice its existence?
On any list of Washington out-
rages, Ex-Im Bank is among the
most execrableexcept all the
others. Farm programs not only
dish out billions to relatively
wealthy Americans who own
farms. Sugar quotas and dairy-
price supports directly inflate the
cost of food.
Or how about the $250 bil-
lion-a-year tax benefit for em-
ployer-provided health insur-
ance? This subsidy to corporate
Americas employment costs not
only disproportionately benefits
workers in the highest tax
bracket. It prices many less-
skilled workers out of the job
market altogether and is the
proximate reason take-home pay
for middle-class Americans has
stagnated for a genera-
tion.
Medicare, the most be-
loved of programs? For a
considerable number of
beneficiaries for a consid-
erable part of the time,
Medicare has become a gi-
ant subsidy to doctors
and hospitals to overtreat
seniors to the detriment
of their well-being.
Even to find the sub-
sidy in Ex-Im lending, in
contrast, you have to en-
gage in abstruse fair
value accounting, since
most years the program
returns a modest profit to
the Treasury.
The Ex-Im fight is ob-
viously a lot more about
politics than policy. The
fight comes two months
after the death of Marxist
historian Gabriel Kolko,
whose book Railroads
and Regulation graced
many a freshman night-
stand and earned him the
enduring admiration (which he
didnt reciprocate) of libertarians.
His shrewdest critics, though,
accused Kolko of a slight exag-
geration: Yes, the rise of railroad
regulation in the 19th century
was indeed shaped by railroad
lobbyists who sought to curb
competition and ensure the in-
dustrys profits. But the political
impetus still came from politi-
cians flogging up a populist re-
jection of the evils of big busi-
ness.
Please sue everyone from
your kindergarten teacher on up
if you are so poorly prepared for
life in our democracy as to be-
lieve the Ex-Im struggle
signals the beginning of a
crusade to purify our po-
litical life of influence
peddling. On the contrary,
populist revolt breeds cro-
nyism: The post-2008
mood gave us Dodd-Frank,
which sanctified too big
to fail; it gave us Obama-
Care, which requires all
Americans, under penalty
of law, to buy the insur-
ance industrys products
and makes insurers di-
rectly dependent on con-
gressional appropriations
for their profits.
Its no coincidence that
such exercises occur in
moments of populist fer-
ment when the reasonable
aspirations of Americans
are being thwarted by an
absence of growth. Growth
is the antithesis of the
Obama non-recovery weve
come to know, an era of
self-perpetuating stagna-
tion, grievance and intrin-
sically corrupting expansions of
government.
By all means, lets get rid of
Ex-Im. But if all voters can hope
for from Republicans over the
next two years is attempts to
outbid Democrats in reviling big
business and crony capitalism,
God help us.
[ Business World ]
BY HOLMAN W. JENKINS, JR.
Abdullah Abdullahs supporters protest in Kabul, July 11.
R
e
u
t
e
r
s
How to Avert Afghanistans Implosion
Our Sins Are Many, Ex-Im Is the Least
BY FREDERICK W. KAGAN
A
F
P
/
G
e
t
t
y
I
m
a
g
e
s
Populist revolts have the
peculiar result of breeding
new generations of cronyism.
Election-fraud charges must
be resolved by July 22.
The U.S. should do all it
can to make that happen.
Comments? The Journal
welcomes readers responses to
all articles and editorials. It is
important to include your full
name, address and telephone
number. Please send letters to
the editor to: Letters@WSJ.com
The U.S. Export-Import Bank in Washington.
INDEX TO BUSINESSES
Airbus Group.................15
Altria Group..................18
Amazon.com................. 27
Apple........................10,15
Arab Banking B.S.C......10
ARM Holdings...............15
AstraZeneca..................17
Banco Comercial
Portugues.................... 4
Banco Espirito Santo..... 1
Barclays.........................20
Beaufort Securities......20
Boeing........................... 15
Bombardier ................... 15
Box................................ 27
British American Tobacco
18
British Broadcasting
Corp............................17
Chocoladefabriken Lindt
& Spruengli................17
Citigroup.................... 1,16
CME Group...............18,20
Cynk Technology...........19
Delphi Automotive....... 17
Deutsche Bank....18,20,27
Development Bank of
Mongolia....................20
EMC...............................27
Federal Deposit
Insurance................... 16
Fiat................................20
General Motors.............17
Goldman Sachs Group....1
Google...................... 18,27
Harbinger Capital
Management..............11
Harbinger Group...........11
Hewlett-Packard...........15
Imperial Tobacco...........18
Intel...............................15
Intercontinental
Exchange....................20
Jefferies Group...............1
J.P. Morgan Chase..........1
KeyCorp.........................27
Knight Capital Group....10
Lenovo Group................15
Libyan Investment
Authority................... 10
Lockheed Martin...........17
Lorillard.........................18
Microsoft..................18,27
Mizuho International ..... 1
Morgan Stanley..............1
Morgan Stanley Wealth
Management..............20
Neuberger Berman
Group..........................20
New York Mercantile
Exchange....................18
Northrop Grumman......17
Nymex...........................18
OTC Markets Group......19
Pfizer.............................17
Portugal Telecom..........27
Pratt & Whitney...........17
Reynolds American...... 18
Rolls-Royce Holdings... 15
Royal Bank of
Scotland................18,20
Russell Stover.............. 17
Samsung Electronics....15
Sanchez Medical
Services..................... 19
Sierra Pacific
Securities...................18
Socit Gnrale.......... 10
Sound Point Capital
Management..............18
Southwest Airlines...... 23
Telekom Slovenije d.d. ... 4
Texas Instruments....... 18
Thomson Reuters.........20
Tiger Oak Media...........19
Tradition Financial
Services....................... 1
TRW Automotive
Holdings.....................16
UBS................................. 1
U.S. Steel......................16
Viel & Cie......................10
Vodafone.......................20
Wal-Mart Stores.......... 15
Wells Fargo...................27
ZF Friedrichshafen....... 16
Zions Bancorp...............27
Businesses
This index of businesses
mentioned in todays
issue of The Wall Street
Journal is intended to
include all significant
reference to companies.
First reference to the
companies appears in
bold face type in all
articles except those
on page one and the
editorial pages.
Corrections Amplifications
U.S. Steel Corp. said its plan to idle plants indefinitely in August
in McKeesport, Pa., and Bellville, Texas, is due in part to unfairly
priced foreign steel tubes. A Business & Finance article in the Fri-
day-Sunday edition incorrectly said the idling of the plants was
contingent upon the outcome of a tubular steel antidumping case.
ZF Friedrichshafen AG is a German auto-parts maker. The head-
line on a Business & Finance article in the Friday-Sunday edition
about ZFs offer for U.S.-based TRW Automotive Holdings Corp.
incorrectly called ZF an auto maker.
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BUSINESS & FINANCE
Citi Mortgage Deal: Behind the Scenes
A $7 billion deal between Citi-
group Inc. and the U.S. Justice De-
partment, expected to be unveiled
Monday, nearly fell apart one day
last month.
Government officials, frustrated
by months of back-and-forth hag-
gling, warned the bank that a law-
suit would be filed the next day. But
hours before the deadline expired,
the Justice Department put its plans
on hold.
News had leaked that afternoon,
June 17, that the U.S. had captured
Ahmed Abu Khatallah, a key suspect
in the attacks on the American con-
sulate in Benghazi in 2012. Justice
Department officials didnt want the
announcement of the suit against
Citigroupand its accompanying lit-
any of alleged misdeeds related to
mortgage-backed securitiesto be
overshadowed by questions about
the Benghazi suspect and U.S. policy
on detainees. Citigroup, which
didnt want to raise its offer again
and had been preparing to be sued,
never again heard the threat of a
suit.
Instead, the two sides returned
to the table. Were it not for that un-
connected event, Citigroup and the
Justice Department might not have
the deal they are expected to an-
nounce this week.
This reconstruction of the events
leading up to the deal is based on
interviews with people close to the
talks.
The two sides had been negotiat-
ing for months. They had started
with numbers that were orders of
magnitude apart: Citigroup opened
negotiations with an offer of $363
million in cash to settle Justice De-
partment claims, plus more for con-
sumer relief. The Justice Depart-
ment had opened by demanding a
number that was roughly $12 bil-
lion, which would include consumer
relief.
A pivotal point came on June 17,
when Tony West, a lieutenant of At-
torney General Eric Holder, met
with his boss and presented him
with a choice: return to the negoti-
ating table, or move ahead with a
lawsuit the next day. Mr. Holder
chose the lawsuit. Mr. West called
Ted Wells, a top outside lawyer for
Citigroup, and told him the news.
The Justice Department began to
plan for an announcement. Colorado
U.S. Attorney John Walsh, whose of-
fice was working on the case along
with its counterpart in Brooklyn,
boarded a flight from Denver to
Washington for a news conference.
Citigroup by then had raised its of-
fer several times and told the Jus-
tice Department that it wasnt will-
ing to do so again. At the time, it
was offering $7 billion.
Then, the news of Mr. Khatallahs
capture broke. Justice Department
officials thought attention would be
focused on his interrogation and
prosecution, distracting from the
announcement of the lawsuit.
So that evening, Mr. West called
Mr. Wells to tell him that the law-
suit had been delayed. Mr. West said
the department had a lot going on,
and that the lawsuit wouldnt be
filed that week or the following
week. Privately, some bank officials
wondered if the Justice Department
didnt want a lawsuit. Within days,
the two sides had returned to the
table.
The eventual settlement, and the
behind-the-scenes haggling that cre-
ated it, is being watched closely
throughout Washington and Wall
Street, where it could help set a
precedent for similar talks under
way with Bank of America Corp.
The negotiations are stoking
banks fears that the Justice Depart-
ment is getting increasingly heavy-
handed against the industry, while
investors are worried that bank pen-
alties will be decided not by a for-
mula but by the subjective measures
of the government. The deal also
could be seen as a key test for Citi-
group CEO Michael Corbat, who was
given the top job in 2012 with a
mandate to improve the banks rela-
tionship with the government.
Meanwhile, Mr. Holder has faced
constant criticism from Congress
and elsewhere that his Justice De-
partment has been too soft on fi-
nancial institutions.
Citigroup will pay the U.S. gov-
ernment a civil penalty of about $4
billiontwice that paid by J.P. Mor-
gan Chase & Co. But unlike J.P.
Morgan, Citigroups penalty also
covers its liability for collateralized
debt obligations, not just mortgage
securities. The rest of the settle-
ment goes to consumer relief, the
Federal Deposit Insurance Corp.
and the states of California, Dela-
ware, Illinois, Massachusetts and
New York, according to people fa-
miliar with the matter.
For months, Citigroup lawyers
had argued that the bank should pay
far less than J.P. Morgan, noting
Citigroups market share in the resi-
dential mortgage-backed securities
market in the run-up to the crisis:
one-fifth that of J.P. Morgan. Most
of J.P. Morgans mortgage securities
had been issued by Bear Stearns and
Washington Mutual, which J.P. Mor-
gan didnt buy until 2008.
Justice Department attorneys
contended that Citigroups market
share was far less relevant than the
sheer number of mortgage-bond
deals it put together with loans it
knew were defective.
When negotiations began in ear-
nest in early May, Citigroup offered
to pay $363 million in cash to settle
with the Justice Department only,
and to set aside an unspecified
amount of money to help customers
in financial trouble.
Government lawyers thought
Citigroups offer was laughably low
and told them to return with some-
thing better, these people said.
The bank doubled its proposed
penalty to $700 million. The banks
lawyers pointed out how Citigroup
already had settled claims with the
Federal Housing Finance Agency and
the National Credit Union Adminis-
tration, which had been two pieces
of J.P. Morgans total figure. Citi-
group also noted how it had settled
those claims for far less than its ri-
val had.
The Justice Department came
back in late May with a much higher
number: $12 billion, according to
people familiar with the matter.
Privately, Citigroup officers won-
dered if the Justice Department at-
torneys now viewed the record $13
billion fine against J.P. Morgan as
too small, and were making a politi-
cal example out of the second big
bank to settle.
At one point, Geoffrey Graber, an
aide to the Justice Departments Mr.
West, told Citigroups lawyers that
if they planned to come to the next
meeting and make an argument
about their clients small market
share, they shouldnt bother show-
ing up.
The Citigroup lawyers asked if
they could meet with Mr. Holder
though they were careful not to ask
for a personal meeting between Mr.
Holder and the CEO, Mr. Corbat,
afraid that request would backfire.
The Justice Department said no.
By early June, the two sides
were bargaining but still far apart.
Citigroup had raised its offer to $3
billiona $1 billion penalty and $2
billion in consumer relief. The Jus-
tice Department was still demand-
ing more than $10 billion.
On the night of Monday, June 9,
negotiators got on a conference call
close to midnighta time picked to
accommodate Mr. West, who dialed
in from Alaska where he was meet-
ing with Native American groups.
The Justice Department lawyers
said that if they werent satisfied
with Citigroups offer by that Friday,
they would sue. Mr. Wells, who was
leading the negotiations for Citi-
group, asked for more time. Mr.
West said no.
On Friday, June 13, news reports
circulated that talks had broken
down and the Justice Department
planned to file a lawsuit. That eve-
ning, Mr. Wells called Mr. West and
the two sides agreed to keep talk-
ingif Citigroup agreed to raise its
offer.
It was hard for Citigroup lawyers
to tell if the government was pos-
turing. The Justice Department had,
after all, thrown a $20 billion de-
mand at J.P. Morgan as an attempt
to get the banks attention, accord-
ing to people familiar with those
talks.
That weekend, Fathers Day, Citi-
group decided it would offer about
$7 billion, including payments to the
FDIC and the states. The bank also
reiterated that it wouldnt sign any
deal that didnt release it from po-
tential liability for collateralized
debt obligations.
Citigroup was adamant that it
wouldnt raise its offer again, and it
prepared for the possibility of a
lawsuit. Then the bank received an
unexpected reprieve from Mr.
Khatallah.
The two sides met in Washington
days later. In the following weeks,
they hammered out what the con-
sumer-relief portion would look like,
where the bank would get credit for
modifying mortgages for some
homeowners, and similar actions.
Deals with the state attorneys gen-
erals were completed. The Justice
Department reduced the amount al-
located to five states and the Fed-
eral Deposit Insurance Corporation
by $400 million, and shifted that
amount to the departments cash
penalty. The move kept the headline
number the same, but meant that
Citigroup could no longer write off
that $400 million against its taxes.
Monday, the Justice Department
is expected to announce a final deal.
By AndrewGrossman,
Christina Rexrode
and Dan Fitzpatrick
Citigroup and the U.S. Justice Department, led by Eric Holder, above, are expected to unveil a settlement Monday.
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OPINION: REVIEW & OUTLOOK
E
very July 12, after lighting hun-
dreds of bonfires across the re-
gion, thousands of Northern Ire-
land unionists pass through the streets
of Belfast and other towns and cities
to commemorate the 1690 victory of
King William III over his Catholic ri-
val, King James, in the
Battle of the Boyne. The
centuries-old sectarian
tensions and the trium-
phalist tone of the
marches have in previ-
ous years triggered bru-
tal violence and mass
rioting.
So its a relief that this years
march passed peacefully. Only six peo-
ple were arrested with public-order of-
fenses, down from more than 600 last
year. Yet in Northern Ireland, peaceful
is always a relative term. Three men
were stabbed in separate incidents,
and a letter bomb was found in a
postal sorting center in Mallusk. Army
technicians successfully defused the
device.
The most potentially explosive inci-
dent occurred in Antrim, where an ef-
figy of Gerry Adams was hung from a
unionist bonfire. The Sinn Fein leader
called the incident a disturbing esca-
lation of sectarian and
hate crime. That it was,
though its worth noting
that Mr. Adams himself
too often misses oppor-
tunities to disavow his
own association with the
terrorist Irish Republi-
can Army.
The bill for policing Northern Ire-
lands sectarian fault lines over the
past 18 months reached 55 million,
and some 3,500 police officers were
mobilized across the region for the
Twelfth of July march, according to
the Irish Independent.
Northern Ireland has come a long
away from the days of the Troubles
the three-decade
sectarian civil
war that scarred
the region begin-
ning in the 1970s
until the 1998
Good Friday
A g r e e m e n t
brought it to a
close.
A sign of the
regions maturity
came when
unionist march-
ers, prevented
from walking
through certain
republican neigh-
borhoods, re-
solved to register
a political pro-
test rather than
resort to rioting.
Todays Europe is one of resurgent
extremes. With slow growth and high
rates of jobless-
ness across much
of the Continent,
far-right and na-
tionalist parties
are on the rise.
While its econ-
omy is witness-
ing a modest re-
covery, Britain
isnt immune
from such pres-
sures.
Leaders in
London and Bel-
fast would thus
be amiss to as-
sume that the
status quo will
last in perpetuity
without contin-
ued efforts at
r econc i l i at i on
and engagementand backed by vigi-
lant policing.
C
ongress has been working for more
than a year to get to the bottom of
the IRS political targeting scandal,
and the Obama Administration has re-
sisted across the board. So hurrah to the
judicial branch, which this week stepped
into the fray with orders that could force
the IRS to start coughing up some an-
swers.
U.S. District Judge Emmet G. Sullivan
on Thursday ordered the IRS to provide
for him, within a month, a sworn declara-
tion explaining how the agency came to
lose two years worth of email belonging
to former Director of Exempt Organiza-
tions Lois Lerner. Judge Sullivan also as-
signed a federal magistrate, John Facciola,
to conduct his own query into whether
Ms. Lerners emails might be obtained by
other means. The order
suggested that Judge Sulli-
van was far from satisfied
with the IRSs cursory ex-
planations of crashed hard
drives and irretrievable in-
formation.
On Friday a second federal judge, Reg-
gie B. Walton, issued another order, de-
manding the IRS provide under oath an
affidavit outlining what happened to Ms.
Lerners hard drive, the qualifications of
anybody who attempted to retrieve her
lost email, and the status of the IRS In-
spector Generals investigation into these
issues. Judge Walton gave
the IRS one week to re-
spond.
Now were getting
somewhere. The IRS has
slow-rolled document pro-
duction for Congress and
then it waited two months to tell its legis-
lative overseers that Ms. Lerners emails
had vanished. The Justice Department
and FBI, meanwhile, have leaked to the
press that their probes have found noth-
ing wrong.
Both of these judicial orders are the re-
sult of litigation filed by outside groups
Judge Sullivans in response to the watch-
dog group Judicial Watch and Judge
Waltons to True the Vote, one of the con-
servative groups that the IRS mistreated.
Judges take due process and discovery
claims seriously, especially when they in-
volve concerns over the infringement of
the right to free political speech. And they
rightly dont take kindly to evasion or fail-
ure to produce evidence. We look forward
to the IRSs answers.
W
hen President Obama an-
nounced in May that he would
withdraw all remaining U.S.
forces from Afghanistan by the end of
2016, he insisted that the future of Af-
ghanistan must be decided by Afghans.
True enough, though they could still use
some help in that department too.
Afghanistans election commission
declared Monday that former Finance
Minister Ashraf Ghani leads Abdullah
Abdullah, his rival in the countrys run-
off presidential vote, 56.4% to 43.6% in
a preliminary vote count. Mr. Abdullah
immediately denounced the result as
fraudulent and suggested he might set
up a parallel administration even if Mr.
Ghani is declared the winner.
On the question of the vote counts
validity, Mr. Abdullah may have a strong
case. The former foreign minister was
the victim of widespread vote fraud
when he ran against current President
Hamid Karzai in 2009. This time around
he led Mr. Ghani 45% to 31% in the first
round of voting in April and was
promptly endorsed by third-place fin-
isher Zalmai Rassoul, who had 11%.
Mr. Abdullah claims that Mr. Ghanis
unexpected gains are the result of some
two million stuffed ballots. In Wardak
province, near Kabul, Mr. Ghanis vote
share rose tenfold to 170,000 between
the first and second votes, while turn-
out in rural areas vastly exceeded turn-
out in towns and cities. The head of the
European Unions Election Assessment
Team, Thijs Berman, has criticized the
limited investigation un-
dertaken by Afghan elec-
tion officials. The num-
ber of problematic polling
stations could well exceed
6,000 out of a total of
22,828, Mr. Berman told
Deutsche Welle.
These findings make it
essential to have a comprehensive re-
count and Mr. Ghani deserves credit for
publicly endorsing the most extensive
and intensive audit possible. Both sides
agreed on Saturday to a full audit of the
election results, rather than an earlier
U.N. proposal that would have examined
only around 44% of ballots cast.
Messrs. Ghani and Abdullah also
promised on Saturday to form a na-
tional-unity government whatever the
outcome of the audit. How long that
pledge will last is another question,
however. Mr. Abdullah helped neither
his candidacy nor his country with his
categorical declarations of victory last
week, and whipped his supporters into
a frenzy of indignation. Some of Mr. Ab-
dullahs supporters called openly for
civil war if Mr. Ghani wins.
Thats never an idle threat in Af-
ghanistan, and it only plays into the
hands of the Taliban,
which has already been
emboldened by Mr.
Obamas departure dead-
line to step up its at-
tacks. Secretary of State
John Kerry brokered the
weekends audit deal,
though here too Mr.
Obamas premature promise of retreat
leaves his top diplomat with dramati-
cally less leverage than he might have
had even a year ago when it comes to
enforcing the pledge of a unity govern-
ment.
If the weekends deal doesnt stick,
one solution would be to hold a new
election. Short of that, the U.S. might
offer to broker a face-saving compro-
mise. One idea: Split the five-year presi-
dential term in half and alternate in of-
fice. Thats what Israels Shimon Peres
did with his rival Yitzhak Shamir in
1984, after a close vote prevented either
man from forming a government. Mr.
Peres took the premiership for the first
two years of the term, while Mr. Shamir
served as deputy prime minister and
foreign minister. They switched places
in 1986 and went to the polls again in
1988, an election Mr. Shamir won.
Such a formula seems especially use-
ful for Afghanistan, where the differ-
ences over the election are only sharp-
ened by the underlying ethnic rivalries
between the Pashtun Mr. Ghani and the
partly Tajik Mr. Abdullah. A 30-month
term for either man may not be a recipe
for the most effective government. But
it is a check on bad government and po-
litical cronyism.
Abiding by their unity-government
pledge or adopting some other compro-
mise if it comes to that would demon-
strate that both candidates are above
all interested in serving the Afghan peo-
ple as a whole, and not only their re-
spective camps. Afghanistan has an ur-
gent need for political consensus to
prepare for the Western drawdown and
to resist the Taliban. If the dueling can-
didates want to demonstrate their fit-
ness for the job to which they aspire,
they can start by putting their egos
aside.
A Fragile Ireland Peace
Judging the IRS
Afghan Standoff Solution
A pair of court orders
seek answers about
the vanishing emails.
A power-sharing deal
could avoid a
damaging political
breakdown.
Policing sectarian
fault lines over the
past 18 months cost
55 million.
Sinn Fein leader Gerry Adams.
G
e
t
t
y
I
m
a
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e
s
BUSINESS & FINANCE
General Motors Co. Chief
Executive Mary Barra returns to
Capitol Hill this week for what
may be her last and toughest
hearings with U.S. lawmakers over
the auto makers botched response
to a faulty ignition-switch that has
landed GM in hot water with
federal regulators and the Justice
Department.
On Thursday, Ms. Barra will
face Sen. Richard Blumenthal (D.,
Conn.), one of her harshest critics,
and Sen. Claire McCaskill (D.,
Mo.), who remains skeptical of
GMs response to the issue and its
internal probe that cleared the
auto makers executive team and
pinned the lack of response on
lower-level engineers, lawyers and
a dysfunctional company culture.
It took the auto maker nearly 11
years to issue a recall for the 2.6
million Chevrolet Cobalt, Saturn
Ion and other older model vehicles
equipped with the faulty switch.
Ms. Barra needs a smooth
hearing process as she looks to
move the focus from the Detroit-
based auto makers recall woes
and back to the companys strong
sales and financial performance.
The auto maker is set to release
its second-quarter earnings later
this month. This will be Ms.
Barras second appearance before
a Senate subcommittee.
Most of the attention for the
past five months has been on the
ignition-switch issue. The
defective switch can slip from the
run to accessory position if
the key is jarred or bumped. As a
result, power can be cut to the
vehicle disabling the electronic
steering and air bag deployment.
GM has attributed 13 deaths to
accidents involving the faulty
ignition-switch although plaintiff
attorneys say the number is much
higher. The company has
dismissed 15 employees,
disciplined five others and recalled
millions of cars.
Compensation expert Kenneth
Feinberg, hired by GM to handle
payouts to victims, will also testify
and is expected to be asked for
more information on how many
people he estimates have been
hurt or killed. Mr. Feinberg has
declined to provide a figure until
he reviews claims. The claim
process runs from Aug. 1 through
the end of the year.
Chicago attorney Anton
Valukas, who handled GMs
internal probe, has also been
called to testify.
Rounding out the witness list
are Michael Millikin, GMs general
counsel, and Delphi Automotive
PLC CEO Rodney ONeal. As the
auto makers top lawyer, Mr.
Millikin is expected to face
questions about why he didnt
know about the ignition-switch
problem sooner since lower-level
lawyers were settling Cobalt crash
claims out of court.
Mr. ONeal will be asked how
his company interacted with GM in
the design and manufacturing of
the switch. Delphi contends it was
following GMs direction including
a move by former GM engineer
Raymond DeGiorgio, who modified
the switch in 2006 but approved
keeping the part identification
number unchanged. That move,
according to GMs internal report,
kept the switch issue hidden while
sidelining the auto makers ability
to detect the problem sooner.
The Week Ahead looks at coming
corporate events
More Questions for GM
[ The Week Ahead ]
BY JEFF BENNETT
GM chief Mary Barra will return to Washington, D.C., Thursday to address concerns about the firms ignition-switch recall.
B
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Britain to Tighten
Its Takeover Rules
LONDONThe U.K. government
said it would stiffen laws governing
foreign takeovers of British compa-
nies, potentially raising new hurdles
for overseas acquirers amid height-
ened interest in British companies
as takeover targets.
The new measureswhich the
government hasnt detailed, but an-
nounced in general terms Sunday
come after U.S. drugs company
Pfizer Inc. failed to seal a nearly
$120 billion deal to buy rival Astra-
Zeneca PLC. The U.K. government
wasnt hostile to that bid but said it
would scrutinize it closely as con-
cerns emerged over potential job
cuts in Britain.
Vince Cable, business secretary
in the Conservative-Liberal Demo-
crat government of Prime Minister
David Cameron, said that he intends
to increase protection for British
companies during takeover negotia-
tions when the national interest is
at stake.
Mr. Cable, speaking during an in-
terview with the British Broadcast-
ing Corp., said there should be no
wiggle room for foreign companies
to renege on commitmentssuch as
maintaining jobsmade during ne-
gotiations.
The new tack comes amid a
frenzy of trans-Atlantic deal talks
and agreements. Part of that is be-
ing driven by U.S. companies seek-
ing partners that will allow them to
relocate out of the U.S. into a more
favorable tax regime. Targets for
these so-called inversions have in-
cluded a number of British compa-
nies, which enjoy a generally lower
tax rate than those in the U.S.
Mr. Cable said he wanted to pass
the laws as soon as possiblewith-
out saying precisely whenbecause
he expected the string of takeover
bids by foreign firms for U.K. com-
panies to continue.
Many other targets have been in
Ireland.
Mr. Cable told the BBC he had
discussed with the U.K. Takeover
Panel, an agency that sets rules for
takeovers and mergers involving
British companies, the possibility of
fining companies that dont live up
to promises made during negotia-
tions, in an attempt to make any
such commitments legally binding.
Mr. Cable added that he had
been influenced by the recent nego-
tiations between Pfizer and Astra-
Zeneca. That takeover ultimately
failed, but not before executives
from both companies were called
before parliamentary committees to
give commitments on the shape of a
combined company.
While the U.K. has sought such
assurances in past deals, it has
never had the legal backing to en-
force those assurances.
There will be cases, and this
was one, where there will be vital
national interestsin this case
large-scale [research and develop-
ment], and the question is how you
protect it, he said.
BY PETER EVANS
Aircraft Duopoly Looms Over Air Show
serious challenger to the pair, suf-
fered an engine failure during
ground testing in May and hasnt
flown since. Engine maker Pratt &
Whitney, a unit of United Technol-
ogies Corp., said Sunday it is now
testing a modification that will al-
low the jet to return to flying
within weeks.
Tens of thousands of people are
expected to flock to the show during
the four-day fair. For a lucky few at-
tendees who scored nearby bed-and-
breakfast roomswhich go for
about $515 a nightthe show is a
pleasant walk away. For the rest of
the industry, Monday will start off
in packed commuter trains from
central London or as part of a slow
caravan of hired cars snaking into
the airfield grounds.
Over the years, the event has
morphed along with the industry.
Meetings arent just about wooing
potential customers any more. As
Continued from page 15 the industry has become more inter-
connected, with suppliers spanning
the globe, the get-together serves as
much as caffeine-fueled staff and
contractor meetings. Amid the
screech of jets taking off and land-
ing, manufacturers are just as often
huddling with program partners as
they are trying to sell planes.
But the show is still one big
trade fair. Mom-and-pop aerospace
outfits vie for the attention of those
companies with sprawling custom-
built private pavilions.
Government officials from
around the world mingle with dark-
suited executives and uniformed
military brass, engaging in a speed-
dating-like pace of meetings and
cocktail parties that continue into
the night at rented-out London land-
marks such as the citys museums.
Western militaries continue to be
squeezed by budget austerity that
has hampered substantial arms pur-
chasing, dampening the military
side of the Farnborough and Paris
shows in recent years. But this year,
the show will serve to kick off the
Pentagons race to commission a
new bomber for the U.S., a program
that will help shape the future of
the U.S. defense industrial base.
Northrop Grumman Corp. and
Boeing have a lot riding on the con-
test, with the loser at risk of being
shut out of the U.S. militarys future
manned combat plane business as a
prime contractor. Lockheed Martin
Corp., maker of the F-35, is teamed
with Boeing.
For many, the highlight of the
military side of the show was ex-
pected to be the Lockheed Martin
F-35. The fighters excursion here
was intended to shore up overseas
support. Lockheed Martin needs or-
ders beyond the U.S. to meet cost-
reduction targets.
But the fighter is, for now, a no-
show, grounded after an engine fire
in Florida three weeks ago.
Lindt in Talks to Buy
Russell Stover Chocolates
Swiss candy maker Chocolade-
fabriken Lindt & Spruengli AG is in
talks to acquire Russell Stover, the
U.S. boxed-chocolate seller, accord-
ing to people familiar with the mat-
ter.
The price couldnt immediately
be learned, though first-round bids
earlier this year from other inter-
ested suitors valued Russell Stover
at more than $1 billion, The Wall
Street Journal reported in May.
Discussions with Lindt were re-
ported by the Financial Times.
Russell Stover, known for its
boxed chocolates, has annual sales
of about $600 million and around
$60 million in earnings before inter-
est, tax, depreciation and amortiza-
tion, a measure of cash flow, the
Journal reported earlier.
The Ward family, which bought
Russell Stover from its founders in
1960, put the company up for sale
earlier this year and hired Goldman
Sachs Group Inc. to run the process.
Russell Stover was founded in
1923 in the Denver home of Clara
and Russell Stover. Its brands in-
clude its namesake boxed choco-
lates, as well as Whitmans and
Pangburns of Texas. The company
has about 4,500 employees.
In going after Russell Stover, a
mass-market brand sold in pharma-
cies around the U.S., Lindt appears
to be challenging the prevailing
trend in the chocolate industry,
which has been to push upmarket.
Chocolate producers had to weather
a surge in cocoa-bean prices last
year that cut into profitability. To
counter the rising expense, many
chocolate companies have intro-
duced new premium products to jus-
tify higher prices.
American chocolate palates also
are getting more sophisticated and
darker chocolates are becoming in-
creasingly popular, in part because
of a health halo due to the antioxi-
dants found in cacao.
For example, Nestl SA, one of
the worlds largest chocolate mak-
ers, has rolled out fancier versions
of its Cailler chocolates. The food gi-
ant, based in Switzerland, has also
looked at Italys Ferrero SpA, the
maker of Ferrero Rocher chocolates.
Many chocolate companies, in-
cluding Lindt, are also pursuing
sales in emerging markets, particu-
larly in Asia, to diversify their sales.
Analysts said an acquisition of
Russell Stover would be an unusual
move for Lindt, which already has a
strong presence in the U.S., through
its ownership of the Ghirardelli
Chocolate Co. Lindts North America
region, which includes the U.S., gen-
erated $943.2 million in sales last
year, roughly a third of the com-
panys total revenue.
Jon Cox, a senior equity analyst
at Kepler Cheuvreux, said he had ex-
pected Lindt to consider purchases
in Brazil and Russia, big markets
where the company currently
doesnt have a significant presence.
Acquiring in the U.S. also is at odds
with Lindts strategy of pursuing or-
ganic growth in North America, he
said, referring to growth that
doesnt involve acquisitions.
John Letzing, John Revill
and Neil MacLucas
BY LIZ HOFFMAN
AND DANA MATTIOLI
IN DEPTH
Zewam, other officials of Arab Banking
Corp. and the Libyan Investment Authority
and bank traders, according to people who
attended and to electronic-chat and email
transcripts obtained by U.S. and British in-
vestigators.
The transcripts, reviewed by The Wall
Street Journal, show crude banter between
Tradition brokers and Arab Banking Corp.
officials, interspersed with snippets about
trades and financial news. Mr. Bailey
dubbed the group Team Morocco.
In an April 2009 email to Mr. Bailey, ac-
cording to the transcripts, Mr. Zewam re-
ferred to a coming Marrakesh trip as a
week [of] joy in the NSL zone. That stood
for no sperm left, according to people fa-
miliar with the expression. A message from
a Tradition employee referred to procuring
organic viagra.
Mr. Baileys team also entertained Mr.
Zewam and his colleagues in London, at
tamer events. For one, Mr. Bailey invited
Mr. Zewam to a private Fashion Week linge-
rie-modeling party in February 2010.
In September 2008 Mr. Zewam asked
Mr. Bailey about whether he could help him
get a Cartier watch with a sapphire-
crowned winding mechanism, specifying
that he preferred the gold version with no
diamonds, according to an electronic-chat
transcript. British investigators interpreted
that as a request for Mr. Bailey to buy him
the watch. It isnt clear whether Mr. Bailey
did so. The spokesman for Tradition said it
has no knowledge of such a watch being
purchased.
Tradition appears to have paid for much
of Mr. Zewams travel to Marrakesh, as well
as his airfare and hotel stays in London and
Dubai, based on a spreadsheet of expenses
compiled by British regulators and re-
viewed by the Journal.
On some of the London and Dubai trips,
Sakher Koussa accompanied Mr. Zewam, ac-
cording to the spreadsheet. It identified
more than 72,000 (roughly $108,000) of
expenses from late 2007 through April
2010, although it noted that Mr. Zewam or
Arab Banking Corp. covered several thou-
sand pounds of them.
Mr. Zewam, now Arab Banking Corp.s
head of asset management, declined to
comment. A spokesman for the firm didnt
respond to requests for comment.
Tradition charged it commissions that
were sometimes three timesand up to 20
timeswhat Tradition would often get from
other clients, according to former employ-
ees and others familiar with the relation-
ship. The U.K. financial regulator estimated
Tradition collected 8.9 million ($15 million
at the time) in Libyan commissions in 2008
and 2009, said a person familiar with the
matter.
The Tradition spokesman disputed the
estimate but didnt provide another figure.
He said the firm charged a variety of rates
dependent upon the circumstances of each
trade.
Tradition also set up Libyan officials
with hedge-fund managers and bank trad-
ers. Two London-based traders at Bank of
America Corp. were introduced to Libyans
at Marrakesh parties. Bank of America later
fired them. Reached by phone, they de-
clined to comment.
U.S. investigators have also looked into
the Libyan activities of a hedge-fund man-
ager, Philip Falcone of Harbinger Capital
Management, according to people familiar
with the probe.
In early 2009 he was seeking to raise
money from sovereign-wealth funds. A Tra-
dition broker in New York asked Mr. Bailey
to set up a meeting for Mr. Falcone with
Libyan officials, according to electronic-
chat transcripts. The broker messaged Mr.
Bailey about Mr. Falcone, saying, I told his
trader to show u some love. Harbinger be-
gan using Traditions London office for
more trades around that time, according to
a former Tradition employee.
Mr. Falcone later met with Arab Bank-
ing Corp. and Libyan Investment Authority
officials about potential investments, but
none resulted, said people familiar with the
meetings. Mr. Falcone hasnt been accused
of any wrongdoing. It is unclear whether
authorities are still looking at his activities.
In a matter unrelated to Libya, Mr. Fal-
cones firm currently is fulfilling investor
redemption requests under the settlement
of a civil case in which the SEC accused him
of improperly borrowing from one of his
hedge funds to pay his taxes. He admitted
wrongdoing and agreed to a fine and five-
year ban from the securities industry. He
now is involved in acquisitions as chairman
of Harbinger Group. Tradition declined to
comment on the Harbinger relationship.
Traditions practices, including its enter-
tainment of Libyan officials, made some
employees uncomfortable. Employees on at
least two occasions expressed concerns to
the firms Mr. Leibowitz, said two ex-mem-
bers of Mr. Baileys team and a person fa-
miliar with the U.K. investigation. Later, in
April 2010, Mr. Bailey and some of his team
left Tradition, U.K. records show.
When questioned by British investiga-
tors, Mr. Bailey said what he did with re-
gard to Libyans was known to Mr. Leibow-
itz and other Tradition executives,
according to a person who was present. The
Tradition spokesman denied that Mr. Lei-
bowitz knew about Mr. Baileys tactics or
that any member of Mr. Baileys team com-
plained.
In recent weeks, British authorities have
summoned some former Tradition employ-
ees for additional questioning, according to
people familiar with those meetings.
Mr. Baileys wife, Maria, said her hus-
bands alleged actions were being blown out
of proportion.
Its just a big stink, she said, standing
outside their large white house, named
Greensleeves, in Londons northern exurbs.
Told that Tradition describes itself as a
victim of misdeeds by Mr. Bailey and other
employees, she shook her head and said:
Its the big guy pointing the finger at the
little guy.
Tradition Financial Services hired a brother of Mustafa Zarti, right, seen here in 2010 with Seif Gadhafi, a son of the late Libyan ruler. Mustafa Zarti was deputy chief of the Libyan Investment Authority.
Tradition gave fund manager Philip Falcone access to Libyan officials, though no deal resulted.
(
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BUSINESS & FINANCE
U.S. Tobacco Firms Near Deal
Combination of Reynolds American, Lorillard Could Create $50 Billion Behemoth
Reynolds American Inc. is nearing
a deal to acquire Lorillard Inc. that, if
successful, would transform the U.S.
tobacco industry and put additional
corporate muscle behind the already
hot electronic-cigarette market.
The companies on Friday con-
firmed talks about a deal that would
combine Reynolds Camel and Pall
Mall cigarettes with Lorillards popu-
lar Newport menthol brand to create
a more powerful No. 2 to U.S. industry
leader Altria Inc., maker of Marlboro.
Reynolds and Lorillard have a com-
bined stock-market capitalization of
more than $50 billion.
The potential tie-up faces signifi-
cant risks, including tough antitrust
scrutiny. The U.S. Food and Drug Ad-
ministration is also weighing a possi-
ble crackdown on menthol cigarettes,
which fuel more than 80% of Loril-
lards sales, after the agency banned
all other cigarette flavors in 2009.
The companies confirmed they are
in talks to sell certain brands to Impe-
rial Tobacco Group PLC, a move that
would likely ease regulatory concerns.
A deal would give Reynolds a jump
on Altria in electronic cigarettes, the
small but fast-growing alternative to
traditional smokes. Both companies
had been slow to enter that market,
only beginning to roll out their brands
nationally this summer. As part of a
merger, Reynolds would get Lorillards
Blu e-cigarette brand, which has more
than a 40% market share in U.S. con-
venience stores.
The potential combination comes
as tobacco majors try to increase scale
and cut costs amid a yearslong decline
in U.S. cigarette consumption, includ-
ing an estimated 4% contraction last
year, even as profits remain robust.
Two rare pockets of growth in the
$100 billion U.S. tobacco market are e-
cigarettes and menthol cigarettes.
Lorillard is the market leader in both.
The companies face many hurdles
to closing a deal. For starters, the ac-
quisition would result in much greater
consolidation in the U.S. tobacco in-
dustry. Altria has roughly 50% of the
U.S. cigarette market. Reynolds and
Lorillard have roughly 25% and 15%
U.S. market shares, respectively. With-
out divestments, 90% of the U.S. mar-
ket would be in the hands of two com-
panies.
In almost every industry, three-
to-two mergers are a bright line, said
John Briggs, an antitrust lawyer with
Axinn, Veltrop & Harkrider LLP, refer-
ring to industry dominance by two
companies versus three.
Altria declined to comment.
Any tie-upand its potential to
lead to higher pricescould bring out
different views from various corners
of the federal government.
Public-health officials have urged
people to quit smoking, and studies
have shown that higher prices lower
consumption. Yet competition author-
ities focus on protecting customers
from deals that raise prices or limit
choices. The Justice Department and
Federal Trade Commission declined to
comment.
Adding another layer of complex-
ity are the number of players in-
volved. British American Tobacco
PLC and Imperial Tobacco, two U.K.
cigarette giants, are participating in
the talks.
British American, or BAT, which
owns a 42% stake in Reynolds, said
Friday it expects to support the acqui-
sition of Lorillard if it proceeds. BAT,
the second-largest international ciga-
rette company, with brands including
Kent and Dunhill, said it would invest
to keep its stake in Reynolds at 42%.
Imperial Tobacco, which has
around a 3% share of U.S. cigarette
sales, largely behind its USA Gold dis-
count brand, is being enlisted to allay
antitrust concerns and help finance
the deal. It said Friday it is in talks to
buy assets from Reynolds and Loril-
lard. Those would likely be smaller
brands like Reynolds Kool and Salem
or Lorillards Maverick.
An agreement could be announced
as early as Monday, according to a
person familiar with the discussions,
but the companies cautioned there
was no assurance a deal would come
together. Shares of Lorillard rose 4.7%
to $66.01 on Friday while Reynolds fell
0.8% to $61.75.
A deal would also thrust men-
tholabout a third of U.S. cigarette
salesfurther into the regulatory
spotlight.
Lorillards crown jewel is Newport,
whose share of the U.S. cigarette mar-
ket rose from 9.7% in 2008 to 12.2%
last year, trailing only Marlboro, ac-
cording to Euromonitor. The leading
menthol brand also skews younger
than most brands, giving Lorillard a
22.5% share of consumers aged 18 to
25, RBC Capital Markets recently esti-
mated.
The FDA, which began regulating
tobacco products in 2009, said last
year that the mint-flavored smokes
likely make it easier for teenagers to
start smoking and harder for smokers
to quit.
That has set the stage for potential
restrictions on their sale, including
the possibility of a ban. Any proposed
FDA curbs are still likely months if not
years away, and companies could chal-
lenge a menthol ban in court.
The FDA is also considering curbs
on e-cigarettes, the battery-powered
devices that turn nicotine-laced liquid
into vapor. Such regulations, though,
could be years away as authorities try
to determine if e-cigarettes help wean
smokers off more-harmful combusti-
ble cigarettes or act as a gateway to
more smoking.
E-cigarette sales more than dou-
bled last year and are expected to top
$2 billion in 2014. Reynolds and Altria
are scrambling to catch up after Loril-
lard jumped to an early lead by ac-
quiring Blu in 2012 and quickly ramp-
ing up distribution across tens of
thousands of U.S. stores. Reynolds
only began rolling out its Vuse e-ciga-
rette brand nationally last month. Al-
tria is also starting a national rollout
of its MarkTen brand this summer.
BAT and Imperial Tobacco have
signaled their appetite for more expo-
sure to the U.S. market. Sales in Eu-
rope and some emerging markets are
shrinking or slowing, as authorities
crack down on smoking.
Cigarette volumes in the European
Union fell an estimated 7.5% last year,
nearly twice the rate of the U.S. de-
cline, according to Citi Research.
While smoking has been under siege
in the U.S. for decades, the business is
still very profitable despite a lingering
threat of expensive U.S. lawsuits for
tobacco companies.
Liz Hoffman
and Shayndi Raice
BY MIKE ESTERL
AND PETER EVANS
The Wall Street Journal Source: Euromonitor International
40
30
20
10
0
10%
1999 02 05 07 09 11 13
Global
9.7% gain
since 1999
5.7 trillion
cigarettes
sold in 2013
Up in Smoke
Change in cigarette
consumption
U.S.
34.5% drop
since 1999
285 billion
cigarettes
sold in 2013
Trading
Slump Frays
Nerves on
Wall Street
crisis, regulators have limited their
ability to take risks with their own
money, and have made the process
costlier, prompting many to dial
back or push in different directions.
At the same time, global markets
have fallen into an unusually placid
pattern that has damped clients de-
sire to make trades.
Its been absolutely dead, said
Jarrod Dean, a municipal-bond
trader at Sierra Pacific Securities
in Las Vegas. Municipal-bond trad-
ing volumes are down about 30%
since last August, he said, while
profits are down more than 70%.
The malaise has prompted an ex-
odus of traders from big firms to
smaller ones that are less subject to
government oversight.
Late last year, Sound Point Capi-
tal Management LP, a New York
money manager, scooped up five
credit traders and analysts from UBS.
The rowdy atmosphere once cel-
ebrated on Wall Street already was
on the wane when the crisis hit, as
electronic-trading platforms began
ushering in a quieter era. But the
downturn and the new rules that
followed have emptied desks and
left fewer people to make sales calls
and trade securities.
Down the road from UBS in Stam-
ford, the U.K.s Royal Bank of Scot-
land Group PLC has faced similar
struggles. In 2005, RBS accepted
$100 million of tax breaks in ex-
change for spending $345 million on
a gleaming new headquarters in
Stamford, creating 1,150 new jobs and
retaining 700 employees in the state.
Two months ago, the bank,
which is now majority-owned by the
British government after a crisis-era
bailout, said it planned to cut 400
jobs, in part to refocus the banks
attention on the U.K. market.
A spokeswoman for RBS con-
firmed the intention to reduce staff
and said it met the requirements
under its agreement with the state
of Connecticut, but otherwise de-
clined to comment.
As a sign of the anxiety being
felt on trading floors, a scuffle
erupted in the trading pits of the
New York Mercantile Exchange
floor on June 24, according to wit-
nesses. One combatants shirt was
torn, a trader said.
Witnesses said the skirmish began
when two traders argued over where
they could stand in the pits. A spokes-
man for CME Group, which owns the
Nymex, declined to comment.
Tempers can be short on the
Nymex floor. That is especially so
when markets are slow and, as one
trader said, nobodys making
money.
Morgan Stanley has beaten the
hastiest retreat from FICC of any
U.S. firm. In 2010, the New York
firm began shifting toward steadier
businesses like wealth management.
Today Morgan Stanleys FICC opera-
tion, once considered a great fron-
tier for expansion, employs just
1,600 people, down about 20% since
2010, according to people familiar
with the matter.
Some firms, like Goldman Sachs
Group Inc. and Deutsche Bank AG,
have argued their decisions to stay
the course will pay dividends later
when more clients return to the
markets to trade and find fewer
banks willing to trade with them.
of brand-name tablets in industrial-
ized countries. Where IDC says
overall global shipments of tablets
rose 3% in the first quarter, ship-
ments from the smaller companies
rose 13%.
One reason for low tablet prices
has been competition among makers
of ARM-based chips, which include
Taiwans MediaTek Corp. and
Chinas Fuzhou Rockchip Electronics
Co. So Intel recently cut a deal with
Rockchip to develop and sell chips
based on Intel technology.
Intel, whose CEO has vowed to
put its technology in 40 million tab-
lets this year, also has moved to re-
duce the cost penalty for shifting
away from ARM.
Under a plan the company de-
scribes as contra revenues, Intel
offers discounts on chips as well as
financial help for one-time engi-
neering work associated with de-
signing Intel-based tablets.
But new customers like Ham-
poos chief executive, Mr. Wang,
whose company had previously been
using ARM-based chips from Texas
Instruments Inc., cite other bene-
Continued from page 15
fits. Despite his initial incredulity,
he quickly realized that Intel was of-
fering unheard-of service for such a
big company.
We had some technical issues,
and Intel sent an engineer to stay
with us for a month and a half,
working late until 10:30 p.m. or
even midnight, to solve the prob-
lems, he said. When we had a
component shortage, Intel went to
talk with suppliers to ensure we
would get the components we
needed.
Mr. Wang, who makes tablets
used by a number of Chinese tablet
brands, said he has shifted all chip
purchases to Intel this year.
Similar stories are told at Ra-
mos, one of Chinas up-and-coming
local brands. Sitting at his office in
one of Shenzhens sleek high-tech
industrial parks, Chief Executive
Wan Qiuyang said Intel helped him
find new overseas customers, and
provided domestic promotional sup-
port for Ramos, whose Chinese
name Lan Mo means Blue Magic.
Mr. Wan said Intel managers en-
couraged his company by saying Ra-
mos could be as big as Lenovo. We
take it jokingly, because we are so
small, but it is true that a lot of In-
tels partners have become success-
ful brands, Mr. Wan said.
Mr. Wan said more than 70% of
the roughly 1.2 million tablets he
will sell this year will have Intel
chips inside, with the rest coming
from MediaTek.
Among other tactics, Intel has
taken a cue from Chinese chip mak-
ers and last year began offering
reference designs"essentially
ready-made tablet designs that al-
low manufacturers to create a prod-
uct in as little as one month, said
Stephanie Hallford, director of busi-
ness development for Intels China
mobile team. Intel has also sped up
its chip development time to match
the rapid product cycles in China,
she said.
It isnt just Intel with its eye on
Shenzhen. Microsoft Corp., eager to
break into a field dominated by
Google Inc.s Android software, has
also been visiting since last year to
discuss partnerships, Mr. Wan said.
34.2%
Others
32.5%
Apple
22.3%
Samsung
5.0%
Asus
4.1%
Lenovo
1.9%
Amazon
Smaller tablet makers
are gaining global market
share*
1Q 2014
50.4
MILLION
SHIPMENTS
Keeping Tabs
Source: IDC
Preliminary
*By shipments
Broker Faces Probe on Libya Deals
charges, according to people familiar with
the matter. The U.S. Securities and Ex-
change Commission and the Justice Depart-
ment are examining whether the firm or its
employees were part of what authorities
believe was a broad pattern in which West-
ern companies used improper means to
curry favor with officials in the Gadhafi re-
gime, said people familiar with the investi-
gations.
A spokesman for Tradition, which hasnt
been accused of wrongdoing, said it is co-
operating with British investigators and
isnt aware of U.S. investigations. The
spokesman said former employees, not the
firm itself, are the subject of the U.K. inves-
tigation, and described the firm as a victim
of employees who submitted fraudulent ex-
pense claims for inappropriate entertain-
ment, most of it unrelated to clients.
Tradition is just one of a number of
banks, brokerage houses and investment
firms under scrutiny for their efforts to
woo Libyans. Others include Goldman Sachs
Group Inc., French bank Socit Gnrale
SA, hedge-fund firm Och-Ziff Capital Man-
agement Group LLC and private-equity firm
Blackstone Group LP, according to those fa-
miliar with the probes. The firms declined
to comment.
The U.S. investigations are based on the
Foreign Corrupt Practices Act, which pro-
hibits giving or offering bribes to foreign
officials to gain a business advantage.
Businesses are allowed to provide some
hospitality and pay some expenses for for-
eign officials, the Justice Department and
SEC said in a guide to the law published
two years ago. But gifts or payments can be
considered bribes, the agencies said, if they
appear to be given with corrupt intent,
which could be demonstrated by a pattern
Continued from first page of gifts that are extravagant or payment for
travel that is primarily for enjoyment
rather than business. Likewise, the hiring of
relatives of foreign officials is permissible if
not done for the purpose of winning busi-
ness.
At Tradition, we do not believe that any
misconduct amounted to corruption, the
firms spokesman said. Hospitality offered
in accordance with Tradition policy was ap-
propriate.
Gadhafis death in October 2011 sparked
investigations within Libya as well, as the
new authorities audited its main sovereign-
wealth fund and launched a legal cam-
paignstill in progressto recover losses
suffered in the Gadhafi era. Earlier this
year, the Libyan wealth fund sued Goldman
and Socit Gnrale in Londons High
Court over deals that went sour. The banks
have denied wrongdoing in the lawsuits.
Tradition, based in Lausanne, Switzer-
land, has operations in 28 countries. It spe-
cializes in matching buyers and sellers of fi-
nancial products such as derivatives and
large blocks of stock outside of public ex-
changes. The firm is majority-owned by
Viel & Cie, a French investment company.
Former employees describe a rambunc-
tious culture at Tradition. One said if he
walked away for a few minutes, colleagues
would sometimes send raunchy messages
from his computer to colleagues or clients.
The firm had an eat what you kill mental-
ity in which brokers pay was determined
by revenue they brought in.
A decade ago, Tradition launched an eq-
uity-brokerage department and to run it re-
cruited Robert Bailey, an American who had
worked at Knight Capital Group. Mr. Bai-
ley, 45 years old, has since been questioned
by British investigators, and the U.S. SEC
has also sought to interview him, said peo-
ple familiar with the inquiries. Mr. Bailey,
whom authorities havent accused of any
wrongdoing, didnt respond to emails,
phone calls and a letter seeking comment.
A period of rapid expansion got under
way at Tradition around the time of Mr.
Baileys arrival. From 2005 to 2009, its rev-
enue nearly doubled and its profit more
than doubled.
Some of that success stemmed from
Libya, former employees say.
The Gadhafi governments first sover-
eign-wealth fund, known as the Libyan Arab
Foreign Investment Co., or Lafico, dated
back to 1981. The fund later assigned re-
sponsibility for part of its securities trading
to a government-controlled firm called
Arab Banking Corp.
The lifting of international sanctions
against Libya in 2003 and 2004, after Gad-
hafi agreed to forswear weapons of mass
destruction, ignited a gold rush among
Western financial institutions.
By 2005, an Arab Banking Corp. portfo-
lio manager, Mahmoud Zewam, had handed
Tradition responsibility for handling trades
in a Lafico stock portfolio.
Libya formed a new sovereign-wealth
fund, the Libyan Investment Authority, in
2007, placing the older Lafico fund under
its auspices. The new fund soon became a
heavyweight global investor. Estimates of
its assets topped $60 billion. Arab Banking
Corp. was responsible for managing large
portions of the fortune.
The Libyan funds holdings included a
modern, rose-colored building in London
that housed Traditions offices, according to
U.K. records.
Mr. Baileys mission was to protect and
expand this business relationship in the
face of competition. His ambitious Libyan
growth strategy stirred excitement among
Tradition executives, who viewed Mr. Bailey
as an excellent broker.
In 2008, according to past and current
Tradition employees, Mr. Baileys initiatives
included hiring Sakher Koussa, who was a
son of Gadhafis longtime spy chief, Moussa
Koussa, and was a veteran of Arab Banking
Corp.
The next year Mr. Bailey hired Haitem
Zarti, whose older brother Mustafa was the
deputy chief of the Libyan Investment Au-
thority and a college friend of one of Gad-
hafis sons, Seif al-Islam Gadhafi. Haitem
Zarti had previously worked as a paid in-
tern at Goldman.
Mr. Baileys team in London began a
campaign to impress important Libyans, ac-
cording to former employees. Mr. Bailey
gave Seif Gadhafi a gift of a $1,900 Apple
laptop in New York in November 2008, Mr.
Bailey later told British investigators, said
people familiar with the inquiry.
Seif Gadhafi, now jailed in Libya,
couldnt be reached for comment. Sakher
Koussa and Haitem Zarti also couldnt be
reached. Records in Bahrain list those two
as owners of a consulting firm there; a law-
yer for that firm didnt respond to requests
for comment.
A particular focus for Tradition was
Arab Banking Corp.s Mr. Zewam, who had
joined the board of the Libyan Investment
Authority. He regularly visited Traditions
London office, where Mr. Bailey escorted
him to meetings with Traditions top Euro-
pean executive, Michael Leibowitz, accord-
ing to a person familiar with the visits. Mr.
Zewam came across as a family man, often
talking about his wife and children, said
past and present Tradition employees.
Tradition organized luxury vacations in
Marrakesh in 2009 and 2010. Mr. Baileys
team rented a large villa and invited Mr.
The London offices of Tradition Financial Services, a building owned by the Libyan Investment Authority. Tradition for years handled investments for the countrys oil-rich sovereign-wealth funds.
D
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IN DEPTH
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Feri Institutional Advisors, www.feri.de
ARIXComposite Gross USD OT OT GBR 06/30.00 USD1631.22 1.8 6.1 6.9
nCGPortfolioFundLtd
NAV OT OT CYM 06/07.00 GBP25839.68 5.3 10.9 9.8
Penny Stock Defies Gravity, Stirs SEC
The Securities and Exchange
Commission is investigating how
Cynk Technology Corp., a social
network that reports zero assets, no
revenue and one employee, soared
to a $6 billion valuation, according
to people close to the probe.
The SEC on Friday halted trading
in Cynkwhose price had shot up
more than 100-fold since mid-
Junebecause of concerns about
potentially manipulative transac-
tions in the stock, the regulator
said.
The sole employee Cynk has
listed couldnt be reached for com-
ment.
The SECs move comes as prose-
cutors and regulators ramp up ef-
forts to tackle possible fraud in the
penny-stock markets, where thou-
sands of tiny companies trade with
little, if any, formal scrutiny of their
financial health or operations.
As part of this effort, the SEC
has suspended trading in more than
1,300 companies in the past two
years. The government also is in-
creasing its use of sting operations
to catch alleged fraudsters.
In the case of Cynk, SEC officials
think they shut down trading before
large numbers of investors were
harmed, according to people close
to the investigation of the meteoric
stock rise.
Cynk shares, after not trading for
about a month, on June 17 suddenly
jumped to $2.25 from 6 cents.
That day, various stock promot-
ers on Twitter raved about the
stock, saying it keeps surging
higher!! and this could be EPIC!!!
The stock climbed over the next
several weeks before nearly tripling
to $14.71 on Wednesday.
Volumes, though up sharply,
were still relatively low, with
386,000 shares traded Thursday.
The SEC believes it stopped trading
before any attempt could be made
to offload the inflated shares to re-
tail investors via possible spam
emails or press releases, said the
people close to the probe.
The regulators acted in part be-
cause of a plethora of red flags, the
people added.
Cromwell Coulson, president and
chief executive of OTC Markets
Group Inc., which owns the plat-
form on which Cynk traded along-
side thousands of other companies,
said the information was there for
any investor to know they should
avoid Cynk.
He added that the limited supply
of Cynk shares, along with brokerage
firms restrictions on large sellers of
the stock may have helped any manip-
ulators drive the price up.
Cynk, a Nevada-based company
with a business address in Belize City,
Belize, is based on the premise that
people will pay for introductions that
are meaningful, its federal filings say.
As of its quarterly report in Novem-
ber, it had yet to generate any reve-
nue. The address in its regulatory fil-
ing is inaccurate and the business
plan vague. The company itself said in
its annual report in May 2013 that it
lacked effective internal controls.
Cynk has had four chief executives
since 2008. The latestthe sole em-
ployeeis Javier Romero, whose ad-
dress is listed as in Belize. Mr.
Romero bought 210 million shares in
February, giving his stake a notional
value of more than $3.5 billion when
the stock price peaked Thursday. He
couldnt be reached for comment.
According to Cynks regulatory fil-
ings, the company was founded in Las
Vegas by John Kueber in 2008 in Las
Vegas with the name Introbuzz and
six million shares outstanding. Mr.
Kueber, who is chief operating officer
of Tiger Oak Media in Seattle, said in
an interview Friday he no longer has
a connection with the company. I
read about it on the news, he said.
The company in its filings said it
planned to launch a website called In-
trobizz.com in the second quarter of
2012. That site doesnt appear to have
ever launched, but Cynk operates a
site called Introbiz.com with the ban-
ner headline The Social Marketplace.
The site says it allows users to re-
ceive contact information of celebri-
ties such as Leonardo DiCaprio for
$50 or to connect with professionals
in various areas of business for a
larger fee. It isnt clear when Intro-
biz.com launched.
Over six years, the companys
shares have been transferred three
separate times. The four people in-
volved all served as the lone em-
ployee and chief executive.
Kenneth Carter became the com-
panys sole employee and CEO in Oc-
tober 2011 after buying six million
shares for $600, according to a filing,
which said he bought them from Mr.
Kueber. Mr. Carter said in an inter-
view Wednesday that he had the ini-
tial idea for the social network and re-
ceived support fromoutside investors,
whom he declined to specify. He said
the investors took the company in a
different direction from what he had
in mind, so he quit and sold all his
shares. My lawyer said, You better
get out now, he said.
Mr. Carter resigned in March 2013
and his shares were canceled, Cynk
said in a filing. A month later, Marlon
Luis Sanchez was granted 2.8 million
shares, a 72% stake, and took over as
CEO.
According to the filings, Mr. San-
chez is a partner in Sanchez Medical
Services providing medical services
to the Southern California market. He
is also listed there as the primary
spokesperson for the Medical Tour-
ism Industry council in Tijuana, Mex-
ico.
Reached by phone on Thursday,
Mr. Sanchez said he left the company
several months ago. I worked my
magic for a year, my friend, and now
you can see the results, he said, add-
ing that he couldnt speak further at
this time.
Mr. Sanchez sold 210 million
shares to Mr. Romero, the current
CEO, according to a letter sent by a
lawyer in Las Vegas to OTC Markets
Group.
The June 11 lettersent by Harold
P. Gewerter six days before Cynks
stock began taking off stated that
he had been hired by Cynk to review
all of the companys corporate re-
cords, such as disclosure statements,
financial reports and bylaws, and that
such records were adequate under
SEC rules.
Mr. Gewerter wrote that he per-
sonally met with Mr. Romero and con-
firmed his address as one being in a
business center in Belize City.
That address, which also appears
in Cynks quarterly reports from 2013
when Mr. Sanchez was CEO, isnt
valid, according to the manager of
that building in Belize.
The building manager asked Cynk
by email why it listed that address.
The company apologized and said it
was a mistake.
Mr. Gewerter said in an email that
he no longer represents the company.
Michael Calia and Scott Austin
BY JEAN EAGLESHAM
AND JEFF ELDER
MARKETS
Source: FactSet The Wall Street Journal
Cynk Up
Market regulators suspended trading in
Cynk Technology shares, following a
sharp spike in recent weeks.
$20
0
5
10
15
June July
CYNK CLOSING SHARE PRICE
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Antanta Combined Fund EE EQ AND 06/27 USD 204.85 -2.4 -11.4 -14.1
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Prosperity Return Fund A JP BD LUX 12/06 JPY 8577.68 -9.3 -8.4 0.3
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nHERMITAGECAPITAL MANAGEMENTLTD.
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The Hermitage Fund GL EQ JEY 03/12 USD 963.12 4.5 105.6 -23.2
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The SEC halted trading in Cynk, whose valuation had soared to $6 billion.
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Iraqs Political Impasse Is Prolonged
BAGHDADIraqs parliament
failed to agree on a new speaker
during its second session on Sunday,
prolonging a political impasse that
has dashed hopes of reaching a res-
olution to the worst security crisis
since the U.S.-led invasion in 2003.
U.S. diplomats and others have
urged Iraqi politicians to reach a
quick agreement over the three key
government positionsthe parlia-
ment speaker, president and prime
ministerwho are traditionally di-
vided up between Sunni Arabs,
Kurds and Shiite Arabs, respec-
tively.
Parliamentarians met briefly but
adjourned almost immediately after
Mehdi Hafez, the legislatures interim
speaker, announced that deputies
hadnt yet reached an agreement on
a new speaker.
The next session will be held on
Tuesday, he said.
But the abiding political dead-
lock has raised concerns among
Iraqi politicians and international
observers that Iraqs political class
is busy bickering even as its country
is riven by a powerful Sunni Islamist
insurgency.
Failing to move forward on
electing a new speaker, a new presi-
dent and a new government risks
plunging the country into chaos,
the United Nations special repre-
sentative for Iraq, Nickolay Mlade-
nov, said Saturday. If serious solu-
tions to the current problems are
not found, then all political leaders
will have to share their responsibil-
ity for failing to act with the neces-
sary sense of duty at a time of cri-
sis.
The primary barrier to forming a
new government is the widespread
opposition to Prime Minister Nouri
al-Maliki, who is seeking his third
four-year term. Mr. Malikis coali-
tion won a plurality of votes in the
April polls and he has refused to
step down.
An Islamist group calling itself the
Islamic State took over Iraqs second-
largest city of Mosul on June 10,
pushing Iraqs U.S.-trained military
into a frenzied retreat. In the next
two days, the group previously known
as the Islamic State of Iraq and al-
Sham, quickly advanced to within
reach of Iraqs capital of Baghdad.
The first session of parliament,
which was elected in April, ended in
a shouting match between represen-
tatives of the countrys Kurdish mi-
nority and Arab Shiites.
After a short break, most of the
bodys Sunni Arab and Kurdish rep-
resentatives walked out.
Sundays session was quieter, but
the lawmakers still elicited frustra-
tion from their fellow parliamentari-
ans.
This is a big risk for Iraq, said
Mr. Mehdi as he chided the repre-
sentatives before adjourning the
session. We cant continue on in
this way.
The countrys constitution
obliges parliament members to se-
lect a speaker during its first seat-
ing. But the body continued to meet
without a new speaker in violation
of the charter.
Deputies have been meeting in
their blocs for hours a day, often
into the early hours of the morning,
for weeks.
A bloc of Sunni parliamentarians
have reportedly agreed to nominate
Salim al-Jabouri, a Sunni lawmaker
and the chairman of the parliamen-
tary committee on human rights, as
speaker. Osama al-Nujaifi, the previ-
ous parliament speaker, announced
on Sunday that they were ready to
nominate Mr. Jabouri.
But the Sunni bloc is unlikely to
move ahead on a vote for speaker
before the body has reached agree-
ments on the president and prime
minister.
BY MATT BRADLEY
Iraqi Prime Minister Nouri al-Maliki has defied growing pressure to step aside.
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WORLD NEWS
ChineseRing
Accused In
NewHacking
Investigation
WASHINGTONThe Justice De-
partment has charged the owner of
a Chinese aviation technology com-
pany with stealing reams of infor-
mation from U.S. defense contrac-
tors about key American
technologythe latest in an effort
to criminally prosecute what Ameri-
can officials allege is rampant Chi-
nese industrial espionage.
The charges against Su Bin, a
Chinese citizen living in Canada,
shed new light on an alleged hack-
ing ecosystem that officials have
long said poses a threat to many
U.S. companies.
Tensions between the U.S. and
China over cyberespionage remain
high. Secretary of State John Kerry,
visiting China this week, raised the
chilling effect hacking has on U.S.
firms. The Chinese, in turn, see
themselves as victims of cyberespio-
nage. On Friday, state broadcaster
China Central Television called a lo-
cation-tracking function offered by
Apple Inc.s iPhone a national secu-
rity concern.
Prosecutors in Los Angeles un-
sealed a 50-page complaint accusing
Mr. Su of working with two co-con-
spirators in China between 2009
and 2013 to break into computers at
Boeing Co. and other defense con-
tractors, steal technology and pass
it to entities in China.
The trio allegedly stole sensitive
information about Boeings C-17 mil-
itary transport plane and two of the
Pentagons most advanced fighter
jets, the F-22 and F-35, built by
Lockheed Martin Corp., among
other projects.
Unlike five Chinese military of-
ficers who were charged in May
with hacking into U.S. companies,
Mr. Su appears to have been work-
ing for himself, according to the
complaint. After a request from the
U.S., Mr. Su was arrested June 28 in
Canada, a spokeswoman for the Ca-
nadian Department of Justice said.
He faces extradition proceedings. A
lawyer for Mr. Su didnt respond to
a request for comment.
The F-35 has been a long-stand-
ing target of suspected overseas
hackers. The Wall Street Journal re-
ported in 2009 that hackers, possi-
bly Chinese, had penetrated Penta-
gon computers containing
information about the program.
The complaint helped to answer
one question about Chinas sprawl-
ing hacking-industrial complex. The
countrys cyberwarriors, some of
whom work for the military and
others on their own, hit so many
targets and vacuum up so much in-
formation, that it can at times it can
be hard to tell who is directing
them, a former U.S. official said.
Many hackers work as freelanc-
ers, sometimes during off hours,
then try to sell stolen information
to state-owned firms.
In the Boeing case, the effort ap-
peared to be directed not by Chinas
central government but by Mr. Su,
owner of a firm named Beijing Lode
Technology Co. Ltd. The firm de-
scribes itself as an aerospace tech-
nology company on its website. The
complaint said the company is in
contact with military and commer-
cial entities involved in aerospace
technology in China.
BY ANDREWGROSSMAN
AND DANNY YADRON
Gazans Flee After Israel Warning
More than ten thousand Palestin-
ians in the northern Gaza Strip fled
their homes for United Nations shel-
ters after the Israeli military warned
them with leaflets and phone calls
to evacuate ahead of an intensified
offensive.
Columns of cars, donkey carts
and scooters loaded with luggage
packed escape routes from the farm-
ing village of Beit Lahiya. Ignoring
calls from the territorys Hamas rul-
ers to stay, residents said that after
hearing a fierce gunbattle in the
early morning between militants
and Israeli commandos, they de-
cided to take the warning seriously.
The warnings followed a navy
commando raid on Saturday night
that Israel said killed three militants
and destroyed rocket launchers. It
was the first time in this round of
hostilities that Israel dispatched
commandos instead of launching
airstrikes.
An Israeli military spokeswoman
said the offensive in Beit Lahiya
would involve a significant number
of targets but would be from the
air and wont include a ground in-
cursion. A senior Air Force officer
said the military would spend sev-
eral hours to determine whether the
neighborhoods had been evacuated.
Israeli Prime Minister Benjamin
Netanyahu has said all options are
open, including a ground invasion,
to stop rocket barrages from Gaza
on Israel.
Israeli forces are massed on the
border between southern Israel and
Gaza, poised for a possible ground
operation. Israel had called up
36,000 reservists as of Sunday.
Kerry spoke by phone to Mr. Netan-
yahu on Sunday and reiterated U.S.
readiness to facilitate a cease-fire,
according to a senior State Depart-
ment official.
The secretary condemned the
rocket attacks from Gaza into Israel,
and stressed Israels right to defend
itself, the official said.
Mr. Netanyahu defended the of-
fensive in U.S. television interviews
on Sunday, saying Hamas was to
blame for civilian deaths in Gaza.
Were using missile defense to
protect our civilians, and theyre us-
ing civilians to protect their mis-
siles, he said on Fox News Sunday.
Moussa Abu Marzook, a senior
Hamas figure, said in an online mes-
sage that even if a cease-fire is
reached, it would mark only a tem-
porary pause.
The Palestinian death toll for
nearly a week of fighting reached
165 with more than 1,000 injured,
according to the Gaza Health Minis-
try. The U.N. said 70% of the fatali-
ties were noncombatants. No Israe-
lis have been killed.
Israels leaflets addressed to the
residents of Beit Lahiya warned of a
short and temporary campaign
against militants, adding that those
who ignored the warning would en-
danger the lives of their family. Is-
rael has also argued that warnings
such as calls and leafleting are re-
ducing civilian casualties from its
strikes on Gaza.
The U.N.s refugee agency,
UNRWA, said about 10,000 people
had reached the shelters, and called
on both sides to respect the invio-
lability of the shelters. Not all
those who fled took refuge at the
shelters, however, with some going
to join families elsewhere.
Displaced Gazans crammed into
U.N. schoolhouses, laying out blan-
kets as children played soccer out-
side.
Ahmed Al Attar, a 61-year-old
farmer, said his extended family of
30 set off on foot at 3 a.m. under
the full moon and walked about 7
miles to two schools out of the tar-
get zones. He said he feared a new
bombardment would destroy about
$7,000 of investments he had made
to his farm where he grows cucum-
bers and which was leveled in the
last Israel-Hamas conflict in 2012.
Each couple of years, another
war, he said. I would prefer to
leave this country.
At another U.N. school, Sabreen
Shunnar, 35 years old, sat with her
elderly mother and a number of her
children. They too had been hit by
fighting before in 2009, which lev-
eled their home. As the children
played, the mother, Hoson Jarbuo,
flipped through pictures of their
house.
Im expecting to go back and
find rubble, she said.
Ms. Shunnar said that despite
Hamass calls for people to stay put,
that her decision to leave didnt
mean she didnt still support the
militants in their fight against Is-
rael, only that she wanted to remain
safe.
I blame the Israeli occupation
for this situation, she said.
An Israeli airstrike on Saturday
evening on the home of Gazas po-
lice chief killed 18 people as they
were leaving after prayers at a
nearby mosque, officials said. The
police chief survived. The senior Air
Force officer said the attack was be-
ing reviewed.
Mohammed Arafah Abu Haloob,
an 80-year-old man who owns an
orange grove a short walk from the
northern border, said he received
six phone calls from Israelis telling
him to leave his home. But he stayed
put, saying there were too many
valuables in his home.
He left only when his son and
daughterwho had already fled
came to his house and refused to
leave if he didnt do the same. He is
still considering returning, he said.
By Nicholas Casey
in Gaza City and
Joshua Mitnick in Tel Aviv
Palestinian mourners in a van carrying bodies to a funeral on Sunday.
Z
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EURHighYieldBond
Funds that invest in higher yielding securities denominated/hedged in European
currencies 40% of assets in securities with a credit quality equivalent to BB, or lower.
Rankedon%total return(dividendsreinvested) inEurosfor oneyear endingJuly11, 2014
Leading 10Performers
FUND FUND LEGAL %Return in $US **
RATING* NAME FUNDMGM'T CO. CURR. BASE YTD 1-YR 2-YR 5-YR
3 Anima Fix Anima Sgr S.p.A EURITA 6.19 15.33 13.70 12.48
High Yield A
NS Anima Anima Sgr S.p.A EURITA 5.92 15.23 9.34 4.39
Obbligazionario High Yield A
4 Aberdeen Aberdeen Global GBPLUX 5.93 14.72 13.70 19.53
Global Sel High Yield Bd D1 Services S.A.
NS Henderson Henderson EURLUX 5.59 14.53 NS NS
Horizon Euro Hi Yld Bd A1 EUR Management S.A.
2 Objectif Lazard Frres EURFRA 5.76 14.05 13.88 11.53
Alpha Haut Rendement Acc Gestion
NS Danske Danske Invest EURLUX 5.22 13.68 NS NS
Invest SICAVEuro HYBond A Management Company S.A.
5 Fidelity Fidelity (FIL Inv EURLUX 6.15 13.61 15.13 NS
Inst Euro High Yield I-Acc-EUR Mgmt (Lux) S.A.)
NS Danske Danske Invest DKKDNK 5.77 13.16 15.71 NS
Invest Euro HYObl Akk KL DKKh
4 Schelcher Schelcher Prince EURFRA 4.75 13.13 19.88 13.91
Prince Haut Rendement I Gestion
4 CNP-Assur-HY CCRAsset EURFRA 5.20 12.93 13.20 13.64
A/I Management
NOTE: Changes in currency rates will affect performance and rankings. Source: Morningstar, Ltd
KEY: ** 2YRand 5YRperformance is annualized 1 Olivers Yard, 55-71 City Road
NA-not available due to incomplete data; London EC1Y 1HQUnited Kingdom
NS-fund not in existence for entire period www.morningstar.co.uk; Email: mediaservice@morningstar.com
Phone: +44 (0)203 107 0038; Fax: +44 (0)203 107 0001
MARKETS
Fund Scorecard
Analysts Question
Spanish Bank Data
ures for nonperforming assets.
The information that banks re-
port each quarter is often insuffi-
cient to determine the total volume
of bad assets, says Alberto Postigo,
a Moodys Investors Service analyst
in Madrid.
Nonperforming loans at the six
largest Spanish banks fell or were
flat in the first quarter of this year
compared with the fourth quarter of
2013. But nonperforming assets at
four of those banksCaixabank SA,
Banco de Sabadell SA, Bankia SA
and Banco Bilbao Vizcaya Argen-
taria SAdeclined less quickly, and
actually increased at Banco Popular
Espaol SA, according to Sergio
Gamez, a Bank of America Merrill
Lynch analyst.
Mr. Gamez estimates that Span-
ish banks total nonperforming as-
sets are equivalent to 433 billion,
or 40% of the Spanish economy.
Caixabank, for instance, recorded
a 5.3% fall in nonperforming-loan
volume from the fourth quarter of
2013 to the first quarter of this year,
but only a 2.5% drop in nonperform-
ing assets, according to Mr. Gamez.
Banco Santander SA was the ex-
ception. The lender reported no
change in its nonperforming loans
quarter over quarter and a 0.9% de-
crease in nonperforming assets in
its Spanish unit, according to Mr.
Gamez.
Representatives for Caixabank,
Sabadell, Bankia and Santander de-
clined to comment. A BBVA spokes-
woman says nonperforming loans
are a better way to measure trends
in asset quality because they are a
leading indicator of loan defaults.
A Banco Popular spokesman says
he disagrees with the Bank of
America analysis. The banks non-
performing loans and assets both
fell, he says.
One potential explanation for the
discrepancy between nonperforming
loans and assets: Banks could be ac-
celerating foreclosures, analysts
suggest. Foreclosing on a home
would move an overdue mortgage
loan from the nonperforming-loans
Continued from page 15 bucket into the one for nonperform-
ing assets.
Indeed, an analysis by Mr. Gamez
shows that the six largest Spanish
banks increased the number of fore-
closures by an average 2.2% from
the fourth quarter of 2013 to the
first quarter of this year.
Banks are likely to have to step
up what they disclose, and how of-
ten, when the European Central
Bank takes over in November as the
regulator for the euro zones largest
banks, says Robert Tornabell, a pro-
fessor of banking at ESADE Business
School in Barcelona.
An ECB spokeswoman says that
every quarter, banks will have to
disclose their nonperforming ex-
posures, which includes loans and
other credit risks, although that
change wont take effect in Novem-
ber. The majority of banks will have
to disclose foreclosures and repos-
sessions regularly, she added.
For now, Spanish banks continue
to highlight their nonperforming
loans.
Banco Popular Chairman ngel
Ron touted the first-quarter im-
provement in the banks nonper-
forming-loan volume during a June
conference in the northern Spanish
city of Santander, titled Europe
Leaves the Crisis Behind.
Based on the internal numbers
that we have at the bank, we would
anticipate that we are going to see
an improvement in bad loans in up-
coming quarters as well, Mr. Ron
said. This is very good news.
But Banco Populars nonperform-
ing assets actually grew 0.3% from
the fourth quarter to the first quar-
ter, according to Mr. Gamez. The
Banco Popular spokesman disagrees.
He says the banks nonperforming
assets fell 0.9%.
Bank-Driven Drop Seen as Blip
3.98% on Thursday.
Nonetheless, assets of every
stripe, from the safest to the riskiest,
have rallied so much in recent
months that some arent so quick to
shrug off last week as a passing blip.
People remember the European
crisis, and they get very much
afraid, said Andrew Wilmont, lead
portfolio manager for European
high-yield investments at Neu-
berger Berman Group LLC, which
manages $30 billion in high-yield
bonds. High-yield bonds were some
of the hardest hit last week.
Some investors have also cited
lofty valuations as a source of con-
cern and an indication that a correc-
tion could be imminent. The Dow
Jones Index smashed through 17000
for the first time early in July. Since
this time last year, the index has
gained more than 9%. The compa-
nies in the S&P 500 index are trad-
ing at a price-to-earnings ratio of
19.4, based on the past 12 months
earnings, up from 18.4 a year ago.
But even in the throes of last
weeks shakeout in bonds, investors
demonstrated that they are willing
to buy. Italy, a country that is usu-
ally the first affected by contagion
when financial jitters arise in Spain,
Portugal or Greece, sold its maxi-
mum targeted 7.5 billion ($10.2 bil-
lion) of debt of varying maturities
on Friday.
Elsewhere, Fiat SpA sold an
850 million eight-year bond in It-
aly on Thursday, even though simi-
lar bond deals were postponed as
far afield as Mongolia, where vola-
tility prompted the Trade and De-
velopment Bank of Mongolia to de-
lay a dollar bond on Friday.
Of course we have to take it se-
riouslywhen there is a strong and
sudden reaction like this, there is al-
ways a reason for it. But we are also
quite happy buying into the weak-
ness, as we dont think that the re-
covery is over yet, said Mike Frank-
lin, chief investment strategist at
Beaufort Securities in London. His
investment focus is U.K. stocks, but
he said that he is still buying equi-
ties with exposure to Southern Eu-
ropea, such as Vodafone PLC, which
has mobile-phone networks in Spain
and Italy.
In corporate- and bank-debt mar-
kets, Alberto Gallo, a strategist at
Royal Bank of Scotland, argues for
the lasting appeal of credit in Spain,
Portugal and Italy.
We shouldnt doubt Europes re-
covery or the health of Europes
banks, and this is not a turn in the
peripherys fortunes, he said. Eu-
rope still stands out he said, com-
pared with the U.S. and U.K. where,
in contrast to the euro zone, central
banks appear to be preparing to
bump up interest rates.
Even though Portugals stock in-
dex declined around 4% on Thurs-
day, it rose 0.9% on Friday and has
recorded a 30% gain over the last
two years, mirroring movements in
other asset classes in Europe and
beyond.
The pan-European Stoxx Europe
600 Index fell 3.2% for the week af-
ter a 1% drop on Thursday, but
inched up Friday and is up 6.1%
from its closing low this year, set on
Feb. 4.
Dan Skelly, equity strategist at
Morgan Stanley Wealth Manage-
ment, which oversees $1.9 trillion in
client assets, remains bullish on Eu-
ropean stocks and describes what
has happened in Portugal as an iso-
lated event.
He notes that the European econ-
omy is in far better shape than it was
during the height of the sovereign-
debt crisis, when financial markets
around the world swung wildly on al-
most every twist and turn.
Im worried about things like
potential U.S. wage inflation. Im
worried about premature Fed tight-
ening. Im worried about a slow-
down in the emerging markets.
What I am explicitly not worried
about is Banco Esprito Santo, said
Krishna Memani, chief investment
officer at OppenheimerFunds.
While the bank may not be pris-
tine, regulators certainly have the
means to control the situation at
this particular institution. If we
learned anything in 2008-09 in the
U.S. and 2011-12 in Europe, its that
regulators have a range of ways to
contain damage at the bank and
banking-system level, if they want
to.
Economists at Barclays PLC,
meanwhile, wrote in a note that
while what happened in Portugal
may raise reputational problems for
some of the institutions involved, it
is not a threat to the general bank-
ing system.
It wont help the already weak
sentiment to such names but it also
shouldnt escalate much beyond the
immediately impacted entities, said
Deutsche Bank strategist Jim Reid.
Tommy Stubbington,
Dan Strumpf and Matt Wirz
Source: WSJ Market Data Group The Wall Street Journal
Falling Out
A sharp selloff in Portugals stock market has barely dented a long-running rally
in European shares.
45
30
15
0
15
30
%
13 14 2012
Stoxx Europe 600
Portugals PSI-20 index
CME, Thomson to Make Over Silver Fix
The silver market is about to un-
dergo a historic makeover as a
switch is flicked on a new price-
benchmarking system that will allow,
at a price, an unprecedented glimpse
into the workings of the silver fix.
The London Bullion Market Asso-
ciation said Friday that the existing
daily fix, which is set over the phone
by a small group of banks, will be re-
placed Aug. 15 by a new system pro-
vided jointly by CME Group Inc. and
Thomson Reuters Corp.
The crowning of CME and Thom-
son Reuters as the new custodians
of the silver fix brings to a close a
117-year-old City of London institu-
tion that is used to price, for exam-
ple, mining sales contracts and ex-
change-traded funds, totaling
billions of dollars each year.
The new method offers an auc-
tion-based, auditable electronic sys-
tem that will match buying and sell-
ing orders to reach a benchmark for
the price of silver.
Dan Rees, head of strategy for
commodities at Thomson Reuters,
said that to facilitate a smooth tran-
sition, there will be no other major
alterations for a six-month period.
After this point, however, a fee to
access the data is likely to be in-
stated. Mr. Rees said this is likely to
be sensible, rather than excessive.
Any income from the fee will
likely be split between the LBMA in-
dustry group, CME Group and Thom-
son Reuters, but the level of the fee
hasnt been determined, according to
people familiar with the plans. Other
global financial benchmarks charge
for data packages. Euribor-EBF, for
example, offers annual licensing
packages for its interbank lending
rates priced in a range of 500 to
40,000, depending on the type of
institution buying the data and in
how many locations it will be used.
IntercontinentalExchange Inc.
charges for use of Libor data.
A CME Group spokeswoman de-
clined to comment on whether the
exchange would charge participants
a fee to take part in the auction pro-
cess that sets the fix. Under the ex-
isting system that will end Aug. 14,
the banks determining the price
benchmark get a small commission
on each transaction.
The old silver fix was effectively
killed off in April when Deutsche
Bank AG withdrew from the process
as part of a wider retrenchment of
its commodities business. This left
only two banks on the fixing panel
Bank of Nova Scotia and HSBC Hold-
ings PLCrendering the process un-
viable, according to people familiar
with the matter. The LBMA-led
search for an alternative came as
market regulators have scrutinized
benchmarks across the financial sec-
tor in the wake of a scandal involv-
ing rigging of interest rates.
CME Group and Thomson Reut-
ers shook off competition from a
range of exchanges and information
providers to host the new fix.
This is a big win for the CME,
said Courtney Lynn, treasurer of Co-
eur Mining Inc., the largest listed U.S.
primary-silver producer. Prior to the
LBMA seminar [in which each pro-
posal was pitched], many expected
that the LME would win this busi-
ness. The CME came in as the dark
horse and walked away with not only
the silver fix, but a strong likelihood
that they will also have the gold fix-
ing business eventually as well.
The future of the London gold
fix, which dates back to 1919, is
shrouded in uncertainty.
BY FRANCESCA FREEMAN
Two measures of credit
quality paint different
pictures about lenders.
Big Gaps With Iran
On Nuclear Deal Remain
VIENNASignificant gaps be-
tween Iran and world powers re-
main a week before the deadline for
a nuclear deal, European foreign
ministers said Sunday.
Iranian Foreign Minister Javad
Zarif met U.S. and European foreign
ministers in Vienna, seeking a
breakthrough.
After the talks, European foreign
ministers said while the discussions
had been useful, Tehran must now
choose whether it would take the
steps needed for a deal.
I think it has been good to have
these meetings at ministerial level
but there is no change in the state
of play in these negotiations as of
this moment, said U.K. Foreign Sec-
retary William Hague.
Mr. Hague said there is still a
huge gap in particular between
Irans demands for its future enrich-
ment program and the position of
Western governments that Tehran
must scale back its activities.
The lack of a breakthrough Sun-
day would seem to significantly
raise the odds that a final, compre-
hensive nuclear deal will not be
done by July 20. The U.S. has said
the talks would only be extended
beyond that point if there is real
progress to report.
German Foreign Minister Frank-
Walter Steinmeier said he could not
predict whether an accord would be
reached on time. He said now was
the moment for Iran to show that
they were ready to take steps to
reach a deal.
It is now up to Iran to decide
whether they follow the path to-
ward international cooperation or
whether they want to remain in iso-
lation, he said.
Mr. Zarif met late Sunday with
U.S. Secretary of State John Kerry,
who warned on arrival in the Aus-
trian capital of very significant
gaps between the sides.
Obviously, we have some very
significant gaps still. So we need to
see if we can make some progress
and I really look forward to a very
substantive and important set of
meetings and dialogues, Mr. Kerry
told reporters as he arrived.
It is vital to make certain that
Iran is not going to develop a nu-
clear weapon that their program is
peaceful.
After the meeting with Mr. Kerry,
Mr. Zarif said the talks had made
some important headway.
We tried to look into ways or
means of bridging the gaps, narrow-
ing the differences that we have
not necessarily by trying to meet
halfway but...by trying to look into
innovative ways of addressing the
problems.
Mr. Zarif said Iran should have a
serious nuclear program. but one
that removes any concern and doubt
about the peaceful nature.
Iran negotiates on its nuclear
program with the U.S., the U.K.,
France, Russia, China and Germany.
The Russian and Chinese foreign
ministers were unable to join the
talks on Sunday.
Iran and the six powers are seek-
ing to reach an agreement over the
next week that gradually lifts inter-
national sanctions on Tehran in ex-
change for clear guarantees that
Iran wont be able to quickly break
out and produce nuclear weapons.
Speaking Saturday evening in Vi-
enna, a senior U.S. official said any
final agreement would need to en-
sure that Irans future enrichment
activities would be very limited
for a number of years that can be
measured in double digits.
For some period of time, they
are going to have to have a very
limited, very constrained program
that will have inspections, verifica-
tion, monitoring and a lot of limita-
tions of what they can do, the offi-
cial said.
Iranian officials have been push-
ing for a nuclear deal that would
limit the countrys program for only
a few years. However they contin-
ued to say it was Western govern-
ments that were failing to show
flexibility. One diplomat accused the
U.S. of sticking to rigid stances.
Earlier in the week, Irans Su-
preme Leader Ayatollah Ali Khame-
nei said Iran will need a signifi-
cantly greater enrichment program
though he did not say when.
By enriching uranium, Iran can
produce enough nuclear fuel for an
atomic bomb. Iran says its nuclear
program is purely for peaceful pur-
poses.
BY LAURENCE NORMAN
U.S. Secretary of State John Kerry and German Foreign Minister Frank-Walter Steinmeier attend the nuclear talks.
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U.S., Germany AffirmTies
VIENNAThe U.S. and Germany
tried to play down tensions on Sun-
day as their top diplomats met for
the first time since a fresh furor
erupted over American espionage in
Berlin in recent weeks. But new
signs emerged that the prospect re-
mains for wide-ranging repercus-
sions.
Kerry and German Foreign Minister
Frank-Walter Steinmeier stood next
to each other on the sidelines of
Iran nuclear talks here and tried to
make clear they remained commit-
ted to their trans-Atlantic alliance.
We have enormous political co-
operation and we are great friends,
Mr. Kerry told reporters after the
meeting. We will continue to work
together in the kind of spirit that
we have exhibited today.
On Thursday, Germany took the
rare step of telling the Central Intel-
ligence Agencys Berlin Station Chief
to leave the country, frustrated that
the U.S. wasnt being forthright in
response to allegations that two
German government workers had
been spying for the U.S.
Austrian Foreign Minister Sebas-
tian Kurz on Sunday said his gov-
ernment was taking very, very seri-
ously allegations that one of the
alleged spies had been directed by
U.S. officials based in Austria.
BY NICOLE LUNDEEN
Militants Kill 3 Pakistani Troops in Attack
ISLAMABADMilitants based in
Afghanistan attacked Pakistani para-
military troops in the northwestern
Bajaur tribal region, Pakistani offi-
cials said, killing three soldiers and
prompting Islamabad to issue a pro-
test to Kabul.
At least 40 militants ambushed
the Frontier Corps vehicle, which
was on a routine patrol. The terror-
ists had come into Pakistan from Af-
ghanistan, heavily armed, and at-
tacked around 12:30 a.m. on
Saturday, a military official in the
area said. They escaped when
troops fought back.
Three soldiers, including an of-
ficer, were killed, and two others
were seriously wounded, officials
said. The ambush occurred at Ghaki
Pass, which connects Bajaur with
Afghanistans Kunar province.
Early last month, four Pakistani
soldiers were killed in Bajaur in a
similar cross-border attack.
The Pakistani Taliban, who are
allied with al Qaeda, claimed re-
sponsibility for Saturdays attack.
Pakistan launched an offensive to
clear out militants fromthe North Wa-
ziristan tribal region last month. Sev-
eral militant groups, including al
Qaeda, the Pakistani Taliban and the
Haqqani network, are based in North
Waziristan. The U.S. had been putting
pressure on Pakistan for years to clear
the region of militants. The Pakistani
Taliban and other militant groups have
vowed retaliation for the offensive.
This is our reaction to the oper-
ation in North Waziristan. We will
continue to attack security forces in
all the tribal areas, Pakistani Tali-
ban spokesman Shahidullah Shahid
said after the Bajaur attack.
The Pakistani government said it
lodged a strong protest with the
Afghan government over the attack.
BY QASIM NAUMAN
AND SAFDAR DAWAR
WORLD NEWS
ln re: u3LC lNC.,
Uebtor.
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Chapter 11
Case No. 14-10475 (C33)
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PLA5 1AK NU1lC 1RA1:
1. Cemmencement ef Chater 11 Case and Flllng ef Plan. 0n Maroh 5, 2014, the above-
referenoed debtor and debtor in possession (the Uebtor") oommenoed a voluntary oase
under Chapter 11 of 1itle 11 of the united 3tates Code (the Bankruptoy Code") in the united
3tates Bankruptoy Court for the Uistriot of Uelaware (the Bankruptoy Court"). 3imultaneously,
the Uebtor tled the Uisolosure 3tatement with Respeot to Plan of Reorganization of u3LC
lno. (as amended, the Uisolosure 3tatement") and the Plan of Reorganization of u3LC lno.
(as amended, the Plan"). 0n 1uly 7, 2014, the Bankruptoy Court approved the Uisolosure
L-mail: u3LCloganandoo.oom, 1elephone: (973) 509-3190. Capitalized terms not otherwise
detned herein shall have the meanings asoribed to themin the Plan.
2. 5eclal Bar bate fer Certaln 5ecurltles-Related Clalms. ln oonjunotion with approving
the Uisolosure 3tatement, the Bankruptoy Court set a speoial bar date applioable to ourrent and
former holders of publio seourities issued by the Uebtor, inoluding oonvertible senior notes (0ld
Notes) and oommon stook (u3LC Common 3took), who may wish to assert seourities-related
Claims against the Uebtor. As ordered by the Bankruptoy Court, any Claim (i) arising from
resoission of a purohase or sale of the 0ld Notes or the u3LC Common 3took, (ii) for damages
arising from the purohase or sale of suoh a seourity, or (iii) for reimbursement or oontribution
allowed under Bankruptoy Code 3eotion 502 on aooount of suoh a Claim(oolleotively, a 510(b)
Claim") must be asserted against the Uebtor in a Proof of Claim reoeived no later than 5:00
p.m. Lastern 1ime on August 11, 2014 (the 3peoial Bar Uate"), by Logan & Company, lno., the
Uebtor's oourt-approved olaims agent, at the following address: u3LC lno. Claims Uooketing
Uepartment, o/o Logan & Company, lno., 546 valley Road, upper Montolair, N1 07043. A Proof
of Claim form may be obtained from the olaims agent's website, www.loganandoo.oom, under
olient name u3LC lno. Any suoh Claim that is not asserted in a Proof of Claim reoeived by the
olaims agent before the 3peoial Bar Uate will be barred and will not be entitled to reoeive any
payment or distribution of property from the Uebtor or its suooessors or assigns with respeot to
suoh Claim. Any Proof of Claim reoeived by the olaims agent will be subjeot to objeotion by the
Uebtor, as the Uebtor does not believe there is any basis for the allowanoe of any suoh Claims.
A Proof of Claim need not be tled solely to assert a Claim for prinoipal and interest due on the
0ld Notes or to assert an ownership interest in the u3LC Common 3took, a Proof of Claim is
required only if you wish to assert a 510(b) Claimas desoribed above.
3. 1reatment ef Netehelder Clalms under the Plan. lf you are a ourrent holder of 0ld Notes,
your Claim for the prinoipal and interest due on the 0ld Notes will be treated under the Plan in
the manner provided for Noteholder Claims in Class 5. ou will separately reoeive a oopy of the
Uisolosure 3tatement and a ballot for voting on the Plan fromthe Uebtor's voting Agent.
4. 1reatment ef Cemmen 5teck lnterests,Clalms under the Plan. As set forth in the Plan,
Common 3took lnterests/Claims in Class 7 inolude (a) any lnterests in the Uebtor that are
based upon or arise from u3LC Common 3took and (b) any Claims against the Uebtor that
are subordinated pursuant to Bankruptoy Code 3eotion 510(b) arising from the resoission
of a purohase or sale of u3LC Common 3took, any Claim for damages arising from the
purohase or sale of u3LC Common 3took, or any Claim for reimbursement, oontribution, or
indemnitoation on aooount of any suoh Claim. under the Plan, and subjeot to oertain limitations
and olaritoations oontained therein, if Class 5 and Class 6 vote to aooept the Plan, the holders
of any Allowed Common 3took lnterests/Claims in Class 7 shall be entitled to reoeive a Pro Rata
share of 5 of the New Common 3took issued under the Plan (subjeot to dilution). lf, however,
Class 5 or Class 6 votes to rejeot the Plan, the holders of suoh Claims and lnterests in Class 7
shall not reoeive or retain any property on aooount of suoh Claims and lnterests.
5. Plan Cenrmatlen Rearlng. A hearing to oonsider oontrmation of the Plan will be
held on 3eptember 5, 2014 at 1:00 p.m. (Lastern 1ime) before the onorable Christopher 3.
3ontohi, 1udge of the Bankruptoy Court for the Uistriot of Uelaware, 824 North Market 3treet,
5th lloor, wilmington, Uelaware 19801. 1he hearing may be adjourned from time to time by
announoement in open oourt. 1he Plan may be modited, if neoessary, prior to, during, or as a
result of the oontrmation hearing, without further notioe.
6. beadllne fer Ubjectlng te Plan. But fer the revlslens ef the Plan, and subject
te accetance ef the Plan by Class 5 and Class 6, helders ef Cemmen 5teck lnterests,
Clalms weuld have ne legal entltlement te recelve er retaln any reerty frem the bebter.
1herefere, ln accerdance wlth Bankrutcy Cede 5ectlen 1126(g), helders ef Clalms and
lnterests ln such Classes are deemed te have rejected the Plan and are net entltled te vete
en the Plan. Rewever, such artles are entltled te ebject te cenrmatlen ef the Plan. Ne
later than August 22, 2014 at 4:00 .m. (astern 1lme), all ebjectlens te cenrmatlen ef
the Plan must be (a) led wlth the Clerk ef the Bankrutcy Ceurt vla the Bankrutcy Ceurt's
electrenlc llng recedures and (b) served en the netlce artles set ferth ln Paragrah 30 ef
the erder arevlng the blsclesure 5tatement [becket Ne. 318].
1elephone: 212-906-1200, laosimile: 212-751-4864, Co-Counsel for Uebtor
ln re: u3LC lNC.,
Uebtor.
)
)
Chapter 11
Case No. 14-10475 (C33)
N01lcE 0F REARlN010c0N6l0ERc0NFlRMA1l0N0F, AN00EA0LlNE F0R
0B1Ec1lN010, PLAN0F RE0R0ANl2A1l0N0F 06Ec lNc.
1U: ALL PAR1l5 lN lN1R51:
1. 0n Maroh 5, 2014, u3LC lno. (the Uebtor") oommenoed a voluntary oase under
Chapter 11 of 1itle 11 of the united 3tates Code (the Bankruptoy Code") in the united 3tates
Bankruptoy Court for the Uistriot of Uelaware (the Bankruptoy Court"). 3imultaneously, the
Uebtor tled the Uisolosure 3tatement with Respeot to Plan of Reorganization of u3LC lno.
(as amended, the Uisolosure 3tatement") and the Plan of Reorganization of u3LC lno. (as
amended, the Plan").
2. 0n 1uly 7, 2014, the Bankruptoy Court entered an order approving the Uisolosure
1elephone: (973) 509-3190.
3. A hearing to oonsider oontrmation of the Plan will be held on 3eptember 5, 2014 at
1:00 p.m. (Lastern 1ime) before the onorable Christopher 3. 3ontohi, 1udge of the Bankruptoy
Court for the Uistriot of Uelaware, 824 North Market 3treet, 5th lloor, wilmington, Uelaware
19801. 1he hearing may be adjourned from time to time by announoement in open oourt. No
later than August 22, 2014 at 4:00 p.m. (Lastern 1ime), all objeotions to oontrmation of the
Plan must be (a) tled with the Clerk of the Bankruptoy Court via the Bankruptoy Court's eleo-
tronio tling prooedures and (b) served on the notioe parties set forth in Paragraph 30 of the
order approving the Uisolosure 3tatement [Uooket No. 378].
4. 1he Plan may be further modited, if neoessary, pursuant to 11 u.3.C. 1127, prior to,
during, or as a result of the oontrmation hearing, without further notioe to parties in interest.
1elephone: 212-906-1200, laosimile: 212-751-4864
Co-Counsel for Uebtor
Legal Notices
ADVERTISEMENT
BANKRUPTCIES
Major stockmarket indexes Stock indexes fromaround the world, grouped by region. Showninlocal-currency terms.
EUROPE Stoxx Europe 600 336.91 0.54 0.16% 2.6% 13.7%
Stoxx Europe 50 2987.33 2.63 0.09 2.3 11.1
Euro Zone Euro Stoxx 318.29 0.60 0.19 1.3 17.2
Euro Stoxx 50 3157.05 6.46 0.21 1.5 18.0
Austria ATX 2379.29 12.93 0.55 -6.6 3.3
Belgium Bel-20 3089.07 -8.12 -0.26% 5.7 17.5
Czech Republic PX 960.54 17.14 1.82 -2.9 6.8
Denmark OMXCopenhagen 662.36 2.99 0.45 17.0 33.8
Finland OMXHelsinki 7478.82 -9.40 -0.13 1.9 20.1
France CAC-40 4316.50 15.24 0.35 0.5 12.0
Germany DAX 9666.34 7.21 0.07 1.2 17.7
Hungary BUX 17902.46 48.35 0.27 -3.6 -8.3
Ireland ISEQ 4657.14 10.48 0.23 2.6 14.9
Italy FTSE MIB 20614.86 126.11 0.62 8.7 33.6
Netherlands AEX 403.61 0.22 0.05 0.5 10.6
Norway All-Shares 680.87 2.12 0.31 13.0 27.1
Poland WIG 51085.89 611.53 1.21 -0.4 10.7
Portugal PSI 20 6142.87 37.63 0.62 -6.3 14.5
Russia RTSI 1383.18 -0.52 -0.04% -4.1 2.5
Spain IBEX35 10538.80 5.20 0.05% 6.3 34.3
Sweden OMXStockholm 444.86 0.77 0.17 5.0 16.9
Switzerland SMI 8468.52 -5.71 -0.07 3.2 6.1
Turkey BIST 100 79364.43 812.8 1.03 17.1 7.4
U.K. FTSE 100 6690.17 17.80 0.27 -0.9 2.2
ASIA-PACIFIC DJ Asia-Pacific TSM 1507.76 -6.04 -0.40 4.1 9.4
Australia SPX/ASX200 5486.80 22.40 0.41 2.5 10.3
China Shanghai Composite 2046.96 8.62 0.42 -3.3 0.4
Hong Kong Hang Seng 23233.45 -5.54 -0.02 -0.3 9.2
India S&P BSE Sensex 25024.35 -348.40 -1.37 18.2 25.4
Japan Nikkei Stock Average 15164.04 -52.43 -0.34 -6.9 4.5
Singapore Straits Times 3293.73 24.23 0.74 4.0 1.8
South Korea Kospi 1988.74 -14.10 -0.70 -1.1 6.4
AMERICAS DJ Americas 496.08 0.41 0.08 6.5 16.9
Brazil Bovespa 54785.93 193.18 0.35 6.4 20.3
Mexico IPC 43481.83 7.54 0.02 1.8 7.8
Note: Americas index data are as of 5:00p.m. ET. Sources: SIXFinancial Information; WSJ Market Data Group
Cross rates U.S.-dollar and euro foreign-exchange rates inglobal trading
USD GBP CHF SEK RUB NOK JPY ILS EUR DKK CDN AUD
Australia 1.0658 1.8232 1.1939 0.1568 0.0312 0.1724 0.0105 0.3109 1.4493 0.1944 0.9943 ...
Canada 1.0719 1.8336 1.2007 0.1577 0.0314 0.1734 0.0106 0.3127 1.4575 0.1955 ... 1.0057
Denmark 5.4833 9.3799 6.1420 0.8068 0.1604 0.8872 0.0541 1.5995 7.4559 ... 5.1154 5.1446
Euro 0.7354 1.2581 0.8238 0.1082 0.0215 0.1190 0.0073 0.2145 ... 0.1341 0.6861 0.6900
Israel 3.4280 5.8641 3.8398 0.5044 0.1003 0.5546 0.0338 ... 4.6612 0.6252 3.1981 3.2163
Japan 101.3295 173.3379 113.5024 14.9087 2.9644 16.3950 ... 29.5594 137.7827 18.4798 94.5325 95.0712
Norway 6.1805 10.5726 6.9230 0.9093 0.1808 ... 0.0610 1.8030 8.4040 1.1272 5.7659 5.7988
Russia 34.1821 58.4731 38.2885 5.0292 ... 5.5306 0.3373 9.9714 46.4791 6.2339 31.8892 32.0709
Sweden 6.7967 11.6267 7.6132 ... 0.1988 1.0997 0.0671 1.9827 9.2418 1.2395 6.3408 6.3769
Switzerland 0.8928 1.5272 ... 0.1314 0.0261 0.1444 0.0088 0.2604 1.2139 0.1628 0.8329 0.8376
U.K. 0.5846 ... 0.6548 0.0860 0.0171 0.0946 0.0058 0.1705 0.7949 0.1066 0.5454 0.5485
U.S. ... 1.7106 1.1201 0.1471 0.0293 0.1618 0.0099 0.2917 1.3598 0.1824 0.9329 0.9382
Source: ICAPPlc.
MSCI indexes
Developed and emerging-market regional and country indexes
fromMSCI as of July 11, 2014
Price-to- LOCAL-CURRENCY
Dividend earnings PERFORMANCE
yield ratio MSCI Index Last Daily YTD 52-wk.
2.50% 17 MSCI ACWI* 427.30 0.58% 4.6% 20.1%
2.40 18 World(DevelopedMarkets) 1,734.48 0.67 4.4 21.0
2.30 18 Worldex-EMU 212.84 0.51 5.1 20.3
2.30 18 Worldex-UK 1,750.78 0.65 4.6 21.0
3.00 16 EAFE 1,943.87 0.99 1.5 18.6
2.70 12 EmergingMarkets (EM) 1,062.37 -0.14 6.0 13.0
3.20 17 EUROPE 114.95 -1.04 2.5 17.7
3.10 19 EMU 197.50 1.80 -0.1 26.6
3.10 19 Europe ex-UK 122.82 -1.28 2.1 18.8
4.10 14 Europe Value 116.82 -1.14 2.9 21.6
2.30 22 Europe Growth 108.86 -0.94 2.1 13.7
2.30 18 Europe Small Cap 267.39 -1.22 2.6 26.0
3.60 8 EMEurope 274.80 -0.99 0.1 0.9
3.50 15 UK 1,969.12 -0.66 -1.2 7.2
3.30 16 Nordic Countries 207.95 -1.06 3.1 20.3
4.20 5 Russia 775.97 -1.11 -2.1 11.0
2.80 19 SouthAfrica 1,248.97 -1.05 9.8 27.1
3.00 13 ACASIAPACIFICEX-JAPAN 498.84 -0.25 6.6 15.4
1.90 15 Japan 772.04 -0.88 -4.1 9.8
3.40 9 China 62.06 0.33 -1.6 13.7
1.40 19 India 955.89 -0.06 17.0 26.4
1.10 10 Korea 579.39 0.22 -1.7 8.5
2.70 17 Taiwan 347.39 0.88 14.8 20.1
1.90 20 USBROADMARKET 2,228.93 0.46 5.8 22.7
1.40 32 USSmall Cap 3,310.63 0.79 2.5 21.8
3.40 17 EMLATINAMERICA 3,421.82 -0.50 6.9 7.4
*Twenty-four developed and 21 emerging markets Source: MSCI
S&PDowJones Indices
Price-to-
2.36%19.68 Global TSM 3384.24 0.00% 15.8%
2.80 19.91 Global DOW 1799.46 0.15% 13.3% 2598.85 0.13 18.1
2.90 15.20 Global Titans 50 240.29 0.01 9.4 244.05 0.00 13.9
3.14 21.72 DevEurope TSM 3449.04 0.15 19.6
2.31 20.61 DevelopedMarkets TSM 3398.49 0.01 16.1
2.79 14.05 S&PBMI EmgMarkets 220.23 -0.22 7.9 272.08 -0.24 12.4
3.30 21.46 S&PEurope 350 1382.21 0.16 14.3 1688.87 0.14 19.2
3.14 26.06 S&PEuro 1358.61 0.17 18.2 1682.32 0.15 23.2
3.74 26.76 Europe Dow 1406.37 0.07 15.0 2031.15 0.05 19.8
3.44 9.74 BRIC50 408.58 -0.19 12.0 529.72 -0.21 16.7
1.87 21.27 U.S. TSM 20554.98 0.10 17.0
Kuwait Titans 30 -c 209.55 0.74 5.4
Price-to-
TurkeyTitans 20 -c 818.85 1.09% 9.7%
5.05%17.08 Global Select Div 227.30 0.20% 16.4% 264.53 0.19 21.2
5.22 17.46 Asia/Pacific Select Div 311.47 0.14 5.9 362.49 0.13 10.3
U.S. Select Dividend -d 1323.31 -0.07 13.4 1344.02 -0.09 18.2
3.08 29.38 S&PGlbNat Resources 2127.95 -0.14 8.7 2875.11 -0.15 13.3
2.08 20.35 Islamic Market 2899.74 -0.02 17.1
2.38 18.13 Islamic Market 100 2741.07 -0.02 13.3 3190.06 -0.03 18.0
Islamic Turkey -c 4478.51 -0.08 1.9
3.24 23.42 Sustainability Europe 112.42 0.13 15.2 168.05 0.11 20.0
3.39 30.41 S&PGlbInfrastructure 1658.04 0.23 16.4 2546.90 0.21 21.3
2.05 16.88 Luxury 1764.26 0.08 3.6 2034.01 0.06 8.0
DJ Commodity 688.50 -0.91 -1.1
*Fundamentals are based on data in U.S. dollar. Footnotes: a-in USdollar. b-dividends reinvested. c-in local currency. Note:All data as of 2 p.m.ET. Source: S&PDowJones Indices
GLOBAL MARKETS LINEUP
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Commodities Prices of futures contracts withthe most openinterest
EXCHANGE LEGEND: CBOT: Chicago Board of Trade; CME: Chicago Mercantile Exchange; ICE-US: ICE Futures U.S.MDEX: Bursa Malaysia
Derivatives Berhad; LIFFE: London International Financial Futures Exchange; COMEX: Commodity Exchange; LME: London Metals Exchange;
NYMEX: NewYork Mercantile Exchange;ICE-EU: ICE Futures Europe *Data as of July 10, 2014
ONE-DAY CHANGE Year Year
Commodity Exchange Last price Net Percentage high low
Corn (cents/bu.) CBOT 383.50 -9.25 -2.36% 517.00 382.50
Soybeans (cents/bu.) CBOT 1075.75 -17.25 -1.58 1,279.25 1,064.50
Wheat (cents/bu.) CBOT 526.25 -22.25 -4.06 751.50 525.00
Live cattle (cents/lb.) CME 151.800 1.075 0.71% 158.000 130.900
Cocoa ($/ton) ICE-US 3,088 7 0.23 3,149 2,650
Coffee (cents/lb.) ICE-US 161.25 -1.75 -1.07 220.60 116.70
Sugar (cents/lb.) ICE-US 17.04 -0.25 -1.45 18.91 15.72
Cotton (cents/lb.) ICE-US 68.07 -0.48 -0.70 84.74 67.10
Rapeseed (euro/ton) LIFFE 332.25 -2.25 -0.67 386 327
Cocoa (pounds/ton) LIFFE 1,905 10 0.53 1,945 1,651
Robusta coffee ($/ton) LIFFE 1,997 -12 -0.60 2,216 1,568
Copper ($/lb.) COMEX 3.2695 0.0025 0.08 3.3855 2.8780
Gold ($/troy oz.) COMEX 1338.50 -0.70 -0.05 1,392.00 1,215.20
Silver ($/troy oz.) COMEX 21.495 -0.013 -0.06 22.160 18.650
Aluminum($/ton)* LME 1,910.50 -40.50 -2.08 1,951.00 1,686.50
Tin ($/ton)* LME 22,100.00 -130.00 -0.58 23,770.00 21,410.00
Copper ($/ton)* LME 7,090.50 -65.50 -0.92 7,422.00 6,430.00
Lead ($/ton)* LME 2,172.00 -47.00 -2.12 2,242.00 2,033.00
Zinc ($/ton)* LME 2,260.00 -42.50 -1.85 2,302.50 1,948.00
Nickel ($/ton)* LME 19,050 -575 -2.93 21,100 13,425
Crude oil ($/bbl.) NYMEX 100.10 -2.30 -2.25 106.64 88.93
Heating oil ($/gal.) NYMEX 2.8725 -0.0338 -1.16 3.0848 2.8427
RBOBgasoline ($/gal.) NYMEX 2.8796 -0.0495 -1.69 3.0732 2.6607
Natural gas ($/mmBtu) NYMEX 4.133 0.020 0.49 4.8850 3.9090
Brent crude ($/bbl.) ICE-EU 107.07 -1.94 -1.78 115.09 102.75
Gas oil ($/ton) ICE-EU 881.50 -6.00 -0.68 947.00 874.00
Sources: SIX Financial Information; WSJ Market Data Group
Currencies Londonclose onJuly 11
Per In
AMERICAS Per euro In euros U.S. dollar U.S. dollars
Argentina peso-a 11.0823 0.0902 8.1503 0.1227
Brazil real 3.0195 0.3312 2.2207 0.4503
Canada dollar 1.4575 0.6861 1.0719 0.9329
Chile peso 753.84 0.001327 554.40 0.001804
Colombia peso 2521.49 0.0003966 1854.37 0.0005393
Ecuador US dollar-f 1.3598 0.7354 1 1
Mexico peso-a 17.6543 0.0566 12.9835 0.0770
Peru sol 3.7819 0.2644 2.7814 0.3595
Uruguay peso-e 31.182 0.0321 22.932 0.0436
U.S. dollar 1.3598 0.7354 1 1
Venezuela bolivar 8.63 0.115816 6.35 0.157480
ASIA-PACIFIC
Australia dollar 1.4493 0.6900 1.0658 0.9382
1-mo. forward 1.4525 0.6885 1.0682 0.9362
3-mos. forward 1.4586 0.6856 1.0727 0.9322
6-mos. forward 1.4677 0.6813 1.0794 0.9265
China yuan 8.4356 0.1185 6.2038 0.1612
Hong Kong dollar 10.5382 0.0949 7.7501 0.1290
India rupee 81.6618 0.0122 60.0565 0.0167
Indonesia rupiah 15796 0.0000633 11617 0.0000861
Japan yen 137.78 0.007258 101.33 0.009869
1-mo. forward 137.76 0.007259 101.31 0.009871
3-mos. forward 137.70 0.007262 101.27 0.009875
6-mos. forward 137.58 0.007269 101.18 0.009884
Malaysia ringgit-c 4.3321 0.2308 3.1860 0.3139
NewZealand dollar 1.5447 0.6474 1.1360 0.8802
Pakistan rupee 134.201 0.0075 98.695 0.0101
Philippines peso 59.114 0.0169 43.475 0.0230
Singapore dollar 1.6876 0.5926 1.2411 0.8057
South Korea won 1386.33 0.0007213 1019.55 0.0009808
Taiwan dollar 40.827 0.02449 30.026 0.03331
Thailand baht 43.704 0.02288 32.142 0.03111
Per In
EUROPE Per euro In euros U.S. dollar U.S. dollars
Euro zone euro 1 1 0.7354 1.3598
1-mo. forward 0.9999 1.0001 0.7353 1.3599
3-mos. forward 0.9996 1.0004 0.7352 1.3603
6-mos. forward 0.9992 1.0008 0.7348 1.3609
Czech Rep. koruna-b 27.438 0.0364 20.179 0.0496
Denmark krone 7.4559 0.1341 5.4833 0.1824
Hungary forint 310.13 0.003225 228.08 0.004385
Norway krone 8.4040 0.1190 6.1805 0.1618
Poland zloty 4.1421 0.2414 3.0462 0.3283
Russia ruble-d 46.479 0.02152 34.182 0.02926
Sweden krona 9.2418 0.1082 6.7967 0.1471
Switzerland franc 1.2139 0.8238 0.8928 1.1201
1-mo. forward 1.2136 0.8240 0.8925 1.1204
3-mos. forward 1.2130 0.8244 0.8921 1.1210
6-mos. forward 1.2119 0.8252 0.8912 1.1220
Turkey lira 2.8817 0.3470 2.1193 0.4719
U.K. pound 0.7949 1.2581 0.5846 1.7106
1-mo. forward 0.7951 1.2578 0.5847 1.7102
3-mos. forward 0.7955 1.2571 0.5850 1.7093
6-mos. forward 0.7964 1.2557 0.5857 1.7074
MIDDLE EAST/AFRICA
Bahrain dinar 0.5125 1.9512 0.3769 2.6531
Egypt pound-a 9.7233 0.1028 7.1508 0.1398
Israel shekel 4.6612 0.2145 3.4280 0.2917
Jordan dinar 0.9636 1.0378 0.7087 1.4111
Kuwait dinar 0.3834 2.6079 0.2820 3.5461
Lebanon pound 2056.55 0.0004863 1512.45 0.0006612
Saudi Arabia riyal 5.0991 0.1961 3.7501 0.2667
South Africa rand 14.5749 0.0686 10.7188 0.0933
United Arab dirham 4.9944 0.2002 3.6730 0.2723
a-floating rate b-financial c-government rate c-commercial
rate d-Russian Central Bank rate.
Source: ICAPPlc.
Talk of Raising Rates Heats Up Within The Fed
A debate is intensifying among
the Federal Reserves regional bank
presidents about whether to push
interest rates up from near zero
sooner than planned because of re-
cent improvements in the U.S. job
market, potentially signaling a
broader discussion that could
change the rate outlook.
Most Fed officials at Junes policy
meeting didnt see rate increases un-
til 2015, according to projections
made before the Labor Department
reported that the jobless rate fell to
6.1% in June, down 1.4 percentage
points from a year ago.
We have made more progress
toward our unemployment goals
than we would have thought earlier
this year, John Williams, president
of the Federal Reserve Bank of San
Francisco, said in an interview with
The Wall Street Journal. He added
that this development suggests
that monetary policy can safely
start the process of normalization a
touch earlier than previously ex-
pected.
Fed Chairwoman Janet Yellen tes-
tifies this coming Tuesday and
Wednesday to Congress on the econ-
omy and monetary policy, and could
shed light on where she stands on
the critical issue of raising rates.
Mr. Williams, who ran the San
Francisco Feds research department
when Ms. Yellen was the banks pres-
ident, said the shift in his view was
not a game changer because he
still believes there is quite a bit of
slack in the economy holding infla-
tion down. If the Fed does start
moving rates up sooner, he noted, it
wouldnt be substantially sooner
than previously thought.
One particularly encouraging
sign that Mr. Williams noted is that
recent declines in unemployment
have been driven by people getting
jobs, as opposed to people leaving
the labor force.
Atlanta Fed President Dennis
Lockhart, a centrist among officials,
pointed to job improvements in a
speech in Jackson Hole, Wyo., on Fri-
day but said he was sticking to his
view that rates should stay near zero
until the second half of 2015. He was
still concerned about the presence of
a large contingent of part-time work-
ers who want full-time jobs, a devel-
opment he said weighs on inflation
and wages.
In the current situation, I feel
its advisable to accrue evidence and
gain perspective, he said. You
might call this a whites of their
eyes approach to pulling the trigger
on raising rates.
If the economy is much stronger
than what Im anticipating, and we
get closer to our objectives sooner,
than I would obviously reconsider
my position about the timing of
rate hikes, Mr. Lockhart told report-
ers after Fridays speech.
Meanwhile, Fed hawks are be-
coming more vocal about wanting
earlier interest-rate increases.
We need to adjust the language
in our statement to reflect that the
economy really is better that it was
and that the necessity of having
zero interest rates for a long time to
come seems to me to be perhaps a
risky or unnecessary step at this
point, Philadelphia Fed President
Charles Plosser said in an interview
with the Journal.
St. Louis Fed President James
Bullard has been warning that mar-
ket participants might not appreci-
ate how quickly the economy is con-
verging toward the Feds goals of
maximum employment and stable
prices.
A year ago, he noted, Fed offi-
cials thought the jobless rate would
be at 7% by now and the central
bank would be finished with a pro-
gram of mortgage and Treasury
bond purchases meant to spur hir-
ing and investment. Instead, the
jobless rate is almost a full percent-
age point lower than expected and
bond purchases havent ended.
Things have moved a little faster
than the [Fed policy making] com-
mittee was anticipating, but our pol-
icy hasnt reacted to that, he said in
an interview. Mr. Bullard thinks the
Fed should start moving rates up in
the first quarter of 2015 and said he
is leaning toward an earlier projec-
tion if he gains confidence the econ-
omy has firmly rebounded from the
first-quarter slump in gross domes-
tic product.
BY JON HILSENRATH
AND MICHAEL S. DERBY
U.S. NEWS
Source: New York State Education Department (prociency); analysis of New York State Education Department data by Jonah Rockoff, Columbia Graduate School of Business (scatterplots) The Wall Street Journal
Note: Numbers apply to academic years ending in the years shown.
But the students actual performance relative to their peers didnt change much more than it did in those
years when testing standards went untouched.
New York schools average English assessment scores compared with the previous year
Deciency of Prociency | Its the standards that are changing, not the students
The percentage of students considered procient in New York dropped in years when the
state toughened its standards.
Share of New York students in third through eighth grade scoring at levels considered
to be procient or higher on statewide assessments
100%
0
10
20
30
40
50
60
70
80
90
10 2009 11 12 13
2013
Test content and
standards change
with Common Core.
MATH: 29.6%
ENGLISH: 31.1%
2010
Observers decide tests are
too easy, and raise the bar for
procient.
MATH: 54.0%
ENGLISH: 53.2%
2009 ...
MATH: 81.8%
ENGLISH: 77.4%
630
640
650
660
670
680
690
700
630 640 650 660 670 680 690 700
240 2
0
1
2
S
T
A
T
E
A
S
S
E
S
S
M
E
N
T
260
280
300
320
340
360
630
2
0
1
3
C
O
M
M
O
N
C
O
R
E
640 650 660 670 680 690 700
2012 TO 2013:
TEST CHANGED
2011 TO 2012:
TEST UNCHANGED
When New York
and Kentucky
rolled out the first
tests aligned with
the Common Core
State Standards,
the results were dismal: Most
students failed the new
standardized tests, in stark
contrast to the old assessments,
which the vast majority passed.
The results alarmed parents,
but the scores on these new
testsjust like those on earlier
forms of assessmentreveal less
about what children know than
about the way the test makers
decide to measure that knowledge.
The National Governors
Association and Council of Chief
State School Officers unveiled the
Common Core standards in 2010,
saying they were intended to raise
academic standards, and the test
scores so far appear to reflect the
increased expectations.
When New York first
administered Common Core tests
in 2013, less than a third of
students demonstrated
proficiencyconsidered a pass
in math and English. Kentucky
recorded similar scores when it
launched its assessments in 2012.
And results are expected to be
comparable in other states as they
roll out new tests next year.
Experts warned, however,
against reading too much into the
proficiency labels or pass-fail
numbers in assessing how much
students were actually learning.
Its the same set of kids, said
Jonah Rockoff, an economist at
Columbia Business School who
studies school accountability. Its
the same set of teachers. Their
school didnt change dramatically
overnight.
In devising the grading scale
for the new tests, New York used
a bookmark method to identify
four levels of achievement from
well below proficient to
excels, according to Ken
Wagner, deputy commissioner for
assessment and curriculum at the
New York Department of
Education.
We brought together 95
teachers from across the state,
Mr. Wagner said. We gave them
the test the students took in order
of difficulty from easiest to most
difficult. You keep going until you
say, gosh, I dont think a student
at level one would get this
correct, but someone at level two
would.
At that point, each teacher
dropped a bookmark and
continued until the threshold for
each performance level was
identified. The panel, divided into
math and English groups,
repeated the process four times
before arriving at final cut scores.
Its a deep concept, Mr.
Rockoff said. How do you send a
message to kids about what is
good enough?
Setting cut scores can indeed
be somewhat arbitrary, and New
York provides another example of
how manipulating the scale
changes the perception of how
well children are performing.
In 2009, before the Common
Core was introduced, 86% of
students taking New Yorks
standardized tests scored
proficient or better in mathematics
and 77% in English. Those
impressive results led the state and
outside observers to conclude that
the tests were too easy.
To address the criticism, New
York simply raised the cutoffs, so
that passing required a higher
score. With the new scale, 61% of
students ranked proficient in
math and 53% in English.
We use words like proficient
that carry a lot of baggage, said
Daniel Koretz, a Harvard professor
who is an expert on educational
assessment and testing policy.
People believe they know what
these labels mean. It has nothing
to do with how well kids are
doing. It is a way of making a
judgment about how performance
is going to be labeled.
Various groups object to the
Common Core standards, which
were drafted with the aim of
better preparing students in all
states for college and career.
Some regard the uniform
approach as an intrusion on
states rights. Others object to the
frequent testing. Teachers dislike
being evaluated based on student
test scores.
But such debates over Common
Core have diverted attention from
legitimate questions about
whether U.S. schools adequately
educate children, and there is
compelling evidence to the
contrary.
The federal governments
National Center for Education
Statistics compared individual
states assessments with the
nations report cardan
assessment mandated by Congress
to provide data on student
achievementand found that, by
its standards, most students
werent proficient in reading or
math. A respected international
assessment of 65 countries shows
U.S. students scoring below
average in math and average in
reading and science. And a study
by the National Center for
Education Statistics found that
20% of college freshmen in the
U.S. need remedial classes.
We have 210,000 students, Mr.
Wagner said of New York. Only
35% graduate-college- and career-
ready. That means almost 140,000
students every year, year after
year, are leaving the fourth year of
high school not ready for whats
next. Thats a real stark reality.
Still, experts caution that
concerned parents who want to
understand more about their
childrens education should look
beyond testing labels.
The deeper question parents
ought to be asking themselves,
Mr. Rockoff said, is Did I know
what my kid was learning last
year, and if I compare it to the
new Common Core curriculum, am
I happy or sad?
Test Scores May Move, Learning Doesnt
[ The Numbers ]
BY JO CRAVEN MCGINTY
Fed hawks are becoming
more vocal about earlier
interest-rate increases.
Major players & benchmarks
Credit derivatives
Spreads oncredit derivatives are one way the market rates
creditworthiness. Regions that are treading inroughwaters
cansee spreads swing toward the maximumand vice versa.
Indexes beloware for five-year swaps.
Markit iTraxxIndexes SPREADRANGE, in pct. pts.
Mid-spread, since most recent roll
Index: series/version in pct. pts. Mid-price Coupon Maximum Minimum Average
Europe: 21/1 0.62 101.82% 0.01% 0.81 0.56 0.67
Eur. HighVolatility: 20/1 0.71 101.28 0.01 1.26 0.68 0.93
Europe Crossover: 21/1 2.50 111.18 0.05 3.11 2.19 2.63
Asia ex-JapanIG: 21/1 1.04 99.83 0.01 1.06 0.99 1.02
Japan: 21/1 0.64 101.76 0.01 0.68 0.63 0.66
Note: Data as of July 10
Spreads
Spreads on
ve-year swaps
for corporate
debt; based on
Markit iTraxx
indexes.
In percentage points
3.00
2.00
1.00
0
1
t
Australia
t
Japan
2014
Jan. Feb. Mar. April May June July
Index roll
BehindEurope's deals: Bank revenue rankings, France
Behind every IPO, bond offering, merger deal or syndicated loanis one or more investment banks. Here are
investment banks ranked by year-to-date revenues fromrecent deals.
PERCENTAGEOFTOTAL REVENUE
Revenue, Equity Debt Mergers &
in millions share capital markets capital markets acquisitions Loans
BNPParibas $188 9.2% 12% 50% 23% 16%
Credit Agricole CIB 173 8.4 12 49 18 20
GoldmanSachs 168 8.2 15 63 7 15
Deutsche Bank 164 8.0 21 54 11 14
JPMorgan 152 7.4 13 56 16 15
MorganStanley 130 6.4 31 39 21 9
SGCorporate Investment Banking 112 5.5 22 52 13 12
Natixis 103 5.0 23 55 6 17
Credit Suisse 102 5.0 11 57 20 11
Source: Dealogic
Tracking
credit
markets &
dealmakers
Dow Jones Industrial Average P/E: 17
LAST: 16943.81 s28.74, or 0.17%
YEAR TO DATE: s367.15, or 2.2%
OVER 52 WEEKS s1,479.51, or 9.6%
Note: Price-to-earnings ratios are for trailing 12 months
17150
16900
16650
16400
16150
15900
17 25 2 9 16 23 30
May
6 13 20 27
June
3 11
July
High
Close
Low
50day
moving average
t
StoxxEurope 50: Friday's best andworst...
Previous
close, in STOCKPERFORMANCE
Company Country Industry Volume local currency Previous session YTD 52-week
Schneider Electric SE France Electrical Components &Equipment 1,609,723 66.58 1.48% 5.0% 14.7%
BNP Paribas France Banks 5,746,121 48.36 1.40 -14.6 9.6
Royal Dutch Shell A United Kingdom Integrated Oil &Gas 2,808,786 2,390 0.93 10.5 8.5
Unilever United Kingdom Food Products 1,978,144 2,622 0.92 5.6 -5.9
Reckitt Benckiser Grp United Kingdom Nondurable Household Products 737,108 5,000 0.73 4.3 1.4
BGGrp United Kingdom Integrated Oil &Gas 4,743,598 1,187 -1.00% -8.5 1.2
Tesco United Kingdom Food Retailers &Wholesalers 13,379,369 278.10 -0.93 -16.8 -20.4
GlaxoSmithKline United Kingdom Pharmaceuticals 6,044,228 1,562 -0.64 -3.1 -10.4
Anheuser-Busch InBev Belgium Brewers 994,586 82.84 -0.61 7.2 16.1
Lloyds Banking Group PLC United Kingdom Banks 104,144,504 72.67 -0.60 -7.9 9.7
...Andthe rest of Europe's blue chips
Latest,
Unilever CVA 2,904,941 31.36 0.66% 7.1% -0.4%
Netherlands (Food Products)
AXA 5,771,476 17.62 0.66 -12.8 9.4
France (Full Line Insurance)
HSBC Hldgs 17,213,499 592.30 0.56 -10.6 -17.9
BHP Billiton 4,967,973 1,961 0.49 4.9 8.9
National Grid 3,976,951 851.00 0.47 8.0 11.8
United Kingdom(Multiutilities)
L'Air Liquide 760,962 98.85 0.41 -3.8 1.1
France (Commodity Chemicals)
ENI 9,610,077 19.38 0.36 10.8 21.6
Italy (Integrated Oil &Gas)
Total 3,265,588 50.77 0.36 14.0 31.9
France (Integrated Oil &Gas)
Bayer 1,405,953 101.15 0.35 -0.8 20.6
Germany (Specialty Chemicals)
Vodafone Group 44,927,392 189.45 0.26 -22.7 -4.4
United Kingdom(Mobile Telecommunications)
INGGroep 14,375,589 10.08 0.25 -0.2 36.8
Netherlands (Life Insurance)
British American Tobacco 2,690,695 3,528 0.20 9.0 0.9
United Kingdom(Tobacco)
Allianz SE 1,275,032 127.70 0.20 -2.0 10.1
Germany (Full Line Insurance)
AstraZeneca 965,145 4,354 0.20 21.8 34.0
United Kingdom(Pharmaceuticals)
Roche Holding Part. Cert. 669,332 262.70 0.19 5.4 8.3
Glencore PLC 16,573,529 343.30 0.18 9.8 28.9
SAP SE 1,866,777 57.06 0.16 -8.4 0.6
Germany (Software)
Sanofi SA 1,565,880 75.81 0.15 -1.7 -5.0
France (Pharmaceuticals)
Banco Santander S.A. 38,471,438 7.44 0.13 16.7 51.4
Spain (Banks)
Telefon L.M. Ericsson B 6,506,577 78.60 0.13 0.1 -1.6
Sweden (Telecommunications Equipment)
Latest,
UBS 9,701,982 16.26 0.06% -3.9% -2.6%
Switzerland (Banks)
Deutsche Telekom 6,637,537 12.08 0.04 -1.9 36.3
Germany (Mobile Telecommunications)
BP PLC 11,824,844 503.80 0.02 3.2 8.4
United Kingdom(Integrated Oil &Gas)
Moet Hennessy Louis Vuitt 428,508 139.35 ... 5.1 4.3
France (Clothing &Accessories)
Nestle 3,393,386 68.45 ... 4.8 7.0
Switzerland (Food Products)
Zurich Insurance Group 314,135 269.50 -0.04 4.3 5.7
Switzerland (Full Line Insurance)
Barclays 39,276,029 207.90 -0.05 -23.6 -31.4
Novartis AG 2,430,614 79.60 -0.06 11.8 14.5
BASF 2,001,402 83.35 -0.08 7.6 17.1
Germany (Commodity Chemicals)
Siemens 1,963,156 92.51 -0.15 -6.8 16.6
Germany (Diversified Industrials)
ABB 3,689,632 20.26 -0.20 -13.7 -4.5
Switzerland (Industrial Machinery)
Credit Suisse Group AG 5,573,192 25.07 -0.20 -8.1 -6.0
Switzerland (Banks)
Deutsche Bank 6,424,658 25.45 -0.22 -26.6 -23.8
Germany (Banks)
Standard Chartered 4,079,010 1,194 -0.29 -12.2 -21.3
Diageo 3,169,525 1,846 -0.30 -7.7 -8.6
United Kingdom(Distillers &Vintners)
Rio Tinto 3,178,084 3,204 -0.33 -6.0 13.1
Financiere Richemont 773,434 89.95 -0.39 1.3 1.2
Switzerland (Clothing &Accessories)
Banco Bilbao Vizcaya Argn 24,544,179 9.04 -0.42 2.0 43.1
Spain (Banks)
Telefonica S.A. 13,053,823 12.13 -0.53 2.5 19.6
Spain (Fixed Line Telecommunications)
Daimler 2,933,276 66.68 -0.55 6.0 35.2
Germany (Automobiles)
Sources: SIX Financial Information
DJIAcomponent stocks
Volume, CHANGE
Stock Symbol in millions Latest Points Percentage
AT&T T 11.5 $35.76 0.06 0.17%
AmExpress AXP 2.1 94.47 0.01 0.01
Boeing BA 3.2 128.09 1.30 1.03
Caterpillar CAT 2.0 109.96 0.60 0.55
Chevron CVX 5.2 128.47 1.78 1.37
CiscoSys CSCO 20.7 25.52 0.08 0.31
CocaCola KO 9.7 41.97 0.29 0.69
Disney DIS 5.0 86.89 0.03 0.03
DuPont DD 2.8 64.89 0.05 0.08
ExxonMobil XOM 7.6 101.74 0.83 0.81
GenElec GE 35.3 26.55 0.35 1.34
GoldmanSachs GS 2.3 164.80 1.38 0.84
HomeDpt HD 4.7 79.61 0.21 0.26
Intel INTC 20.0 31.25 0.01 0.03
IBM IBM 2.3 188.00 0.30 0.16
JPMorgChas JPM 10.2 55.80 0.24 0.43
JohnsJohns JNJ 5.4 105.10 0.70 0.66
McDonalds MCD 2.8 100.37 0.21 0.21
Merck MRK 6.1 58.44 0.14 0.24
Microsoft MSFT 23.9 42.09 0.41 0.97
Nike B NKE 2.8 77.29 0.21 0.27
Pfizer PFE 18.2 30.07 0.07 0.23
ProctGamb PG 7.5 81.16 0.45 0.55
3M MMM 1.9 144.31 0.42 0.29
TravelersCos TRV 1.1 94.68 0.38 0.40
UnitedTech UTX 3.7 114.13 0.62 0.55
UtdHlthGp UNH 2.7 82.87 0.79 0.96
Verizon VZ 17.6 50.32 0.68 1.37
VISAClA V 1.4 217.00 1.46 0.68
WalMart WMT 4.5 76.82 0.24 0.31
Source: WSJ Market Data Group
Credit-default swaps: European companies
At itsmost basic, thepricingof credit-default swapsmeasureshowmuchabuyer hastopaytopurchase-and
howmuch a seller demands to sell-protection fromdefault on an issuer's debt. The snapshot belowgives a
sense whichway the market was moving yesterday.
Showing the biggest improvement...
RaiffeisenZentralbank
Oesterreich
108 9 32 20
3i Gp 111 1 1 3
SIXCONTINENTS 51 ... ... 1
LandbkBadenWuertbg 57 ... ... 2
Henkel 25 ... ... 1
SwedishMatch 59 ... ... 3
NNGroup 53 ... ... 1
Adecco 55 ... ... 1
ABElectrolux 60 ... 1 1
Siemens 39 ... 1 ...
Andthe most deterioration
Dexia Cr Loc 205 22 27 48
HSBCHldgs 60 5 8 15
TVNFinCorpIII ABpubl 217 18 29 29
RaiffeisenBkIntl 143 11 25 35
RabobankNederland 53 4 8 11
BANKIA 149 11 22 34
BcoComercial Portugues 253 18 61 99
Finmeccanica 198 14 21 10
Portugal TelecomIntl Fin 273 18 44 58
HSBCBk 53 4 11 14
BLUE CHIPS & BONDS
WSJ.com
>>
Follow the markets throughout the day, with updated
stock quotes, news and commentary at WSJ.com.
Also, receive emails that summarize the days trading in
Europe and Asia. To sign up, go to WSJ.com/Email.
Below, a look at the Dow Jones Stoxx
50, the biggest and best known
companies in Europe, including the U.K.
Few Children Are Sent Back
Thousands of children from Cen-
tral America are undertaking a per-
ilous journey to the U.S. border de-
spite warnings from the U.S. that
they will be sent back. In fact, many
will get to stay.
Data from immigration courts,
along with interviews with the chil-
dren and their advocates, show that
few minors are sent home and many
are able to stay for years in the U.S.,
if not permanently. That presents a
deep challenge for President Barack
Obama and lawmakers as they try to
shore up an overburdened deporta-
tion system.
In fiscal year 2013, immigration
judges ordered 3,525 migrant chil-
dren to be deported, according to
Justice Department figures. Judges
allowed an additional 888 to volun-
tarily return home without a formal
removal order.
Those figures pale in comparison
with the number of children appre-
hended by the border patrol. In each
of the last five years, at least 23,000
and as many as 47,000 juveniles
have been apprehended. Those to-
tals include Mexicans, who often are
sent home without formal deporta-
tion proceedings and so may not be
among those ordered removed last
year.
There are many reasons children
end up staying. Some see their cases
linger in backlogged courts and ad-
ministrative proceedings. Some win
the legal right to remain in the U.S.
And some ignore orders to appear
in court.
Children who enter the U.S. ille-
gally often are trying to reunite
with family members or escaping
gang violence and poverty. The U.S.
has been overwhelmed finding shel-
ters for them, and Mr. Obama has
repeatedly said that they wont be
allowed to stay. But the reality on
the groundthat so few are re-
turned to their home countrieswill
continue to encourage more to make
the journey north, said Doris Meiss-
ner, director of the Immigration Pol-
icy Program at the nonpartisan Mi-
gration Policy Institute.
Theyre here, and theyre stay-
ing, and whatever else might hap-
pen to them is at least a year or
more away, said Ms. Meissner, a
former Immigration and Naturaliza-
tion Service commissioner. Until
peoples experience changes, more
are going to continue to come, be-
cause theyre achieving what they
need: safety and reunification with
their families.
Last fiscal year, immigration
judges reached a decision in 6,437 ju-
venile cases, according to the court
data. About two-thirds of the minors
were ordered deported or allowed to
leave the country voluntarily, and 361
were given legal status. In most other
cases, the judge terminated the case,
meaning the child wasnt ordered out
of the U.S. but wasnt given explicit
permission to stay, either.
Separate data from the Depart-
ment of Homeland Security show
that in fiscal 2013, about 1,600 chil-
dren were actually returned to their
home countriesless than half the
number who were ordered re-
movedsuggesting that some are
evading deportation orders.
The head of the immigration
court system told a Senate hearing
this week that 46% of juveniles
failed to appear at their hearings
between the start of the 2014 fiscal
year last Oct. 1 and the end of June.
And court figures show that last
year, more than 2,600 out of about
6,400 orders were entered without
the juvenile presentin absentia.
Simply reaching a decision in
these cases can take years, and the
backlog is growing worse. As of June
30, there were 41,832 pending juve-
nile cases, up from about 30,000 nine
months earlier. In some jurisdictions,
it is common for court dates to be
set two or three years out.
Most illegal border crossers are
adults, children traveling with
adults, or juveniles from Mexico.
Their cases tend to be heard quickly,
and most are immediately sent back
to their home countries.
The current crisis at the border
is due to a different set of illegal im-
migrants, unaccompanied minors
from Central America. The long de-
lays largely can be traced to a 2008
federal law that requires cases in-
volving children traveling alone
from countries other than Mexico
and Canada be heard in immigration
court. The wait can stretch to sev-
eral years for a decision, even in a
straightforward case.
The vast majority of these chil-
dren are placed with family mem-
bers in the U.S. while the proceed-
ings unfold, but first they must
travel through facilities run by two
different government agencies,
which further extends the process.
On top of that, judges often de-
lay cases repeatedly to give the chil-
dren time to find legal representa-
tion. Just 15% of some 21,000
children sheltered by the Depart-
ment of Health and Human Services
between August 2012 and July 2013
were matched with attorneys while
in government custody, an HHS
spokesman said.
Helen Cruz, 16, said gang vio-
lence in her home of Tegucigalpa,
Honduras, pushed her to make the
1,900-mile trek to the Texas border
with her 17-year-old sister.
More than seven months after
she arrived, Ms. Cruzs legal pro-
ceedings have barely begun. Her
first court appearance is scheduled
for August, and it could take an-
other year or more for her case to
be adjudicated, said Wendi Adelson,
a professor at the Florida State Uni-
versity College of Law who is repre-
senting her pro bono.
Her August hearing will likely be
a short affair to inform the judge
she plans to apply for special immi-
grant juvenile status, a process that
could take many months. That will
require Ms. Cruz to obtain an order
from state juvenile court stating
that she has been abandoned by her
father and it isnt in her best inter-
est to return to Honduras. She then
will need to file an application with
the U.S. Citizen and Immigration
Service, where the number of pend-
ing special immigrant juvenile sta-
tus cases ballooned to 702 in the
year ending September 2013 from
47 during the same period in 2011,
agency statistics show.
Sometimes I feel like going back,
but Im in danger over there from
gang violence, Ms. Cruz said. If I can
stay here, I will get a chance to get
an education and be able to help the
people I love back home.
Under U.S. rulings, threat of gang
violence by itself doesnt qualify
someone for asylum. Nor does eco-
nomic hardship at home qualify
someone for legal status in the U.S.
At the same time, the U.S. some-
times is unable or unwilling to re-
turn children who have been or-
dered removed. So far, that is a
small problem, one official said, but
it is likely to grow as the U.S. seeks
to return many more youths to their
home countries.We just want to
make sure that kids dont fall
through the cracks, a senior admin-
istration official said. You cant
send them back without making
sure theres a system in place that
makes sure they dont wind up in an
unsafe environment.
Because of court backlogs, most
of the 2013 court and deportation
data represent cases of children
who arrived in earlier years. One ex-
planation for the low deportation
figures is that people apprehended
as juveniles turn 18 during the
course of court proceedings and so
become counted as adults. Deporta-
tion figures also dont include Mexi-
can youth who are turned around at
the border each year.
Some children are able to stay
because they qualify for asylum or
special visas given to victims of
crime or human trafficking. Advo-
cates say that a robust court system
is necessary to be sure those claims
are properly considered.
BY LAURA MECKLER
AND ANA CAMPOY
Adriana Ortez, 2, and her mother, Dayana Ortez, of El Salvador, wait for a bus in McAllen, Texas, to go to California.
A
s
s
o
c
i
a
t
e
d
P
r
e
s
s
U.S. NEWS
Sources: Bipartisan Policy Center analysis of Department of Homeland Security data (children apprehended); DHS (juveniles removed); Justice Department, Executive Ofce
for Immigration Review (judge decisions) The Wall Street Journal
1
Includes children traveling with adults and alone from all countries. Mexicans are often not subjected to formal deportation proceedings.
2
Case closed without an order to
leave the country, possibly because of insufcient evidence to support deportation.
3
Person given some ability to stay in the U.S.
Odds in Their Favor
Few of the children who make it across the southern U.S. border are sent back home.
Children apprehended at
the border
1
Juveniles physically removed from
the U.S., not all cases are subject to
deportation
Immigration judge decisions for
juveniles, scal year 2013
50,000
0
10,000
20,000
30,000
40,000
10 FY2009 11 12 13
0
10,000
20,000
30,000
40,000
10 FY2009 11 12 13
Ordered removed from U.S.
Terminated
2
Voluntary departure
Relief granted
3
Case dropped due to prosecutorial discretion
Other
3,525
1,589
888
361
38
36
Note: Fiscal year ends Sept. 30
47,397
1,600
New GOP
Leader Gets
His Signals
From Home
BAKERSFIELD, Calif.U.S. Rep.
Kevin McCarthy sat at Luigis Res-
taurant here on a recent Saturday,
slicing through a rare steak, as poli-
ticians and business owners in his
hometown took turns congratulating
the incoming House majority leader.
Anyone in search of Mr. McCarthy
on weekends needs to look no fur-
ther than Luigis, one of this citys
oldest family-run businesses. As the
man who orchestrated a 2010 Repub-
lican takeover of Congress by target-
ing Democrats who, in his estima-
tion, were out of touch with their
districts, Mr. McCarthy is keenly
aware that forsaking home for power
in Washington can spell defeat.
Just as it has in Washington, the
immigration debate has heated up
in Mr. McCarthys home district, as
hope for an overhaul remains stalled
and a surge of immigrants from
Central America has brought fresh
attention to the issue.
Mr. McCarthy feels the pressure
at home from the United Farm
Workers, the labor organization
founded by civil rights leader Cesar
Chavez and based in his district.
UFW President Arturo Rodriguez
said he would seek to defeat Mr.
McCarthy if he doesnt move immi-
gration-overhaul forward, noting
Latinos make up a third of the pop-
ulation in his district.
The time is not here yet, but I
think its going to come soon, be-
cause the demographics of this com-
munity are changing rapidly, Mr.
Rodriguez said. He is more con-
cerned about his own personal
power.He is putting that over the
benefit of his own constituents.
Mr. McCarthy says he favors
some overhaul measures. But he
doesnt support a path to citizen-
ship for those who came to the
country illegally, believes current
laws should be enforced and wont
support any legislation, he said, un-
til the borders are secure.
Mr. McCarthy also is facing pres-
sure from the right. Tom Pavich, a
farmer and a leader of the Bakers-
field Tea Party, said that while his
group was pleased to have their rep-
resentative in such a powerful posi-
tion, he would like to see Mr.
McCarthy develop a more conserva-
tive voting record.
The group believes Mr. McCarthy
could have fought harder during
Washingtons debt-ceiling debates
and done more to defund Obama-
care, Mr. Pavich said.
He is a very likable man and we
consider him our friend, Mr. Pavich
said, but added: Even with friends
you need to show some tough love.
Mr. McCarthy is doing what he
can to ensure he doesnt suffer the
fate of the man he replaces as ma-
jority leader, Rep. Eric Cantor,
whose Virginia primary loss last
month came at the hands of a virtu-
ally unknown tea-party candidate
who successfully attacked Mr. Can-
tor as having become too much part
of the Washington establishment.
Despite facing only a write-in op-
ponent this fall, Mr. McCarthy al-
ready has aired a campaign com-
mercial here. Being elected
majority leader was an honor, Mr.
McCarthy said in the spot. But the
highest honor is serving our com-
munity and you.
BY ALEJANDRO LAZO
PERSONAL JOURNAL
Who Is the Sorriest U.S. Airline?
Carriers Deploy Software and English Majors to Craft Letters Showing Contrition
Southwest Airlines uses soft-
ware to perform triage on upset
customers. Computers look for key-
words that show up in the letters,
then sort the notes into four per-
sonality categories:
Feelers, Drivers, Enter-
tainers and Thinkers.
Customer relations
agents then write to
that type of personality.
The driver wants bullet points
and results. The feeler needs to be
caressed. But we close with the
same result, said Wayne Shaw,
Southwests director of customer
relations.
Airlines apologize a lot to their
customers. Theyve made a science
of saying sorry out of necessity:
The Department of Transportation
fines airlines for not responding to
customers with substantive an-
swers to gripes.
Besides the regulatory require-
ment of a response within 30 days
for disability issues and 60 days for
other problems, airlines say han-
dling complaints is a crucial part of
their business. A good apology can
turn an angry customer into a loyal
customer; a bad apology can make
a bad situation worse.
A sincere apology is a hard
thing to deliver via email, Mr.
Shaw said.
Southwest, which was fined
$150,000 by the DOT last year for
failing to respond to a large num-
ber of complaints due to a com-
puter glitch, has 200 agents han-
dling customer complaints. Its an
entry-level job for college gradu-
ates. Southwest also employs
proofreaders, often English majors.
United Airlines, which had the
highest rate of complaints filed at
the DOT among major airlines the
past three years, has a team of
about 450 customer-care agents
handling general issues and re-
funds. Add to that 400 people
handing frequent-flier program is-
sues and about 100 answering bag-
gage-related letters and emails.
Delta Air Lines employs 150
people in Atlanta and Minneapolis
to email answers to angryand
complimentarycustomers. Many
get letter-writing training and are
experienced airport agents used to
dealing directly with customers.
Airlines say they try to make re-
sponses conversational and per-
sonal. They aim to apologize and
acknowledge the problem, provid-
ing more information about the
particular situation after research,
then offering some compensation
as a goodwill gesture, such as some
frequent-flier miles. Letters are
signed by an employee, though
many use pseudonyms.
Complaints are sorted by com-
plexity and by the value of the cus-
tomertop-tier frequent fliers and
big spenders get priority. A low-
level customer may get 3,000 fre-
quent-flier miles for a canceled
flight, while a high-value customer
who complains is soothed with
10,000 miles.
Agents research incidents to
verify and provide explanations.
Complaints also are tracked so air-
lines can peg frequent complainers
trawling for extra miles or dis-
counts.
Customer feedback is compiled
into reports for top executives, and
individual letterscomplaint or
complimentdo get forwarded to
supervisors and employees, airlines
say.
American Airlines uses a library
of responses built over the years
that agents can search and then
customize. That allows for consis-
tency and accuracy in responses.
Weve gone completely away from
corporate-speak to personally
showing empathy, said John Ro-
mantic, Americans managing di-
rector of service recovery.
United said it tries not to go
overboard on the apology. Gener-
ally we tell the customer we are
sorry they did not have the experi-
ence they expected on United,
spokesman Rahsaan Johnson said.
We try to be empathetic to the
customer but not sound insincere.
Delta gives its agents freedom
to be chatty and personal. That
strategy backfired with Margery
Rothenberg, a health-care market-
ing executive from the New York
City area who hit her head hard on
the corner of a row-number sign
protruding above her seat on a
Delta jet last month.
I saw stars, she said. A flight
attendant brought her ice and told
her it happens all the time; the
captain encouraged her to com-
plain to delta.com.
She did, attaching pictures in
hopes the airline would realize the
signs, with a protruding corner
sticking out above passenger
heads, are a hazard.
Unfortunately, you were hurt
by a seat marker. That truly sounds
unpleasant, and you should have a
nicer experience on our plane, a
Delta agent wrote. Although, our
flight attendant offered you ice
there was a bump at the place of
injury. Were working hard to
clean, modernize, and maintain our
planes.
Ms. Rothenberg, still with a big
bump on her head a week after the
incident, wasnt mollified. The
sentence construction is awkward
and childish, and I felt like it
wasnt really written to me in a
personal way, she said. The offer
of 3,500 Delta SkyMiles left me
feeling very shortchanged and un-
appreciated, she said.
Asked for comment on the re-
sponse to Ms. Rothenberg, Delta
reached out to her again offering
10,000 miles and asked if she
needed medical attention. Hers was
the first complaint about the pro-
truding signs, the company said,
and the airline would look into the
potential hazard further.
As for the language of the apol-
ogy, they are more individually
written than in past years, said
Delta spokesman Russell Cason.
Agents get training in language and
no longer use form letters.
We are trying to use a more
conversational language and tone,
Mr. Cason said.
Edwin Battistella, an English
professor at Southern Oregon Uni-
versity and author of a book on
public apology, says too often apol-
ogies say very little, stating the ob-
vious and avoiding responsibility.
The letter to Ms. Rothenberg is
not so much an apology as an ex-
cuse. Theyre not really sorry for
anything they did. Theyre sorry
for the injury, he said. Its an at-
tempt to manage the situation
rather than resolve it.
Good apologies are direct: They
identify what the transgressor did
wrong, take responsibility and ei-
ther say what will be different in
the future or offer some compensa-
tion, he said.
Its hard to imagine an industry
with more direct correspondence
with angry customers than airlines.
The industry proactively apolo-
gizes to customers who suffer long
delays or get stuck after cancella-
tions, instantly sending emails with
offers of miles or discounts before
passengers get home and get a
chance to complain.
When passengers do write to
the airline, the DOT or both, most
complaints revolve around flight
problemsdelays and cancella-
tions.
A 2009 study by researchers at
the University of Nottinghams
School of Economics in the United
Kingdom found that apologies can
be more valued by customers than
even compensation.
More than 600 customers of the
German eBay site who posted neu-
tral or negative reviews of a trans-
action were sent an apology or
compensation of under $7 to with-
draw their online evaluation.
Nearly 45% of customers who re-
ceived the apology withdrew the
evaluation, compared with about
21% of those who got compensa-
tion.
Our results suggest that firms
apologize so much because apolo-
gies do indeed influence custom-
ers behavior, the study concluded.
BY SCOTT MCCARTNEY
Im really sorry about the injury you
suffered on our flight. Unfortunately, you
were hurt by a seat marker.
That truly sounds unpleasant, and you should
have had a nicer experience on our plane.
Although, our flight attendant offered you ice
there was a bump at the place of injury. Were
working hard to clean, modernize, and maintain
all our planes. I wish the conditions on your
recent flight were better.
Also, thanks for taking the time to send us
your suggestion for the improvement of our in-
flight cabin. I realize you didnt receive the
service you expected and should have received.
u The language seems sort of parent to child, with the
intent of mollifying people without admitting any fault. It
seems very second-grade teacher-ish to me.
Edwin Battistella, Southern Oregon University English professor
ANATOMY OF AN APOLOGY
Heres an excerpt of a letter Delta Air Lines wrote passenger Margery Rothenberg
afer she complained about hitting her head during a ight, with an analysis of the text.
u The letter reects howDelta has worked hard to move
away fromscripted, less personal responses. Such re-
sponse have helped improve connections with customers
Keyra Lynn Johnson, Delta spokeswoman
u Its almost like they are talking down to the person. That
has to be avoided. You have to treat people as equals rather
than talk down like youre talking to a child.
Derek Arnold, Villanova University communications instructor
u Scripted tone. They do not acknowledge anything
was wrong. Mr. Battistella
u It doesnt meet our standards of showing that were
truly listening, caring and connecting with the customers in
a way that truly reects our brand. Ms. Johnson
THE
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EUROPE NEWS
Kievs Gains Costly for Towns in Crossfire
MYKOLAYIVKA, UkraineFor
Ukraines army, the two-day battle
here earlier this month was a break-
through victory that forced pro-Rus-
sia rebels to abandon their nearby
military stronghold of Slovyansk.
But in this small, impoverished
town, residents are reeling from ar-
tillery strikes that destroyed homes
and killed at least a dozen people,
including retiree Viktor Fanailov and
his wife, Emma, whose relatives say
they are still looking for body parts
amid the rubble.
In its fight to oust the rebels,
Kiev is deploying its main advan-
tage: Soviet-era artillery, tanks and
planes originally designed to battle
advancing Western armies on the
plains of Central Europe. Such heavy
weaponry lacks sophisticated tar-
geting, leading to shells that go
astray, causing collateral damage.
As Kiev gears up for the siege of
major urban centers such as Do-
netsk, which has around one million
residents, the army says special
forces, better suited to this kind of
urban fighting, are playing an im-
portant role. But they are in short
supply in Kievs chronically under-
funded military.
Ukrainian officials and locals also
say the rebel strategy so far fre-
quently appeared to be to provoke
the military into shooting at civilian
targets by firing from residential ar-
eas. The army says it is taking pains
to avoid hitting civilian targets.
To be sure, most buildings in
Mykolayivka remain largely intact,
as in Slovyansk, the center of the in-
surgency, which was under siege for
almost three months. But residents
here say they were shocked by the
intensity of the barrage, which se-
verely damaged or burned out doz-
ens of apartments.
Some in Slovyansk said they un-
derstand the need for the shelling to
rid the towns of armed rebels, many
of whom arent locals. Others criti-
cize the Ukrainian army for the
damage. Militants say they are de-
fending the cities and blame Ukrai-
nian forces for civilian casualties.
President Petro Poroshenko has
pledged to protect civilian lives by
not bombing Donetsk from the air or
fighting in the streets. But military
aides say targeted shelling could be
used to take out rebel positions.
Heavy shelling and multiple
deaths as in Mykolayivka could pour
fuel on local opposition to rule from
Kiev, and increase calls from the
West and Russia for a new cease-fire.
A truce, though, would provide a
reprieve for rebels that the military
has placed firmly on the back foot in
recent days.
The shelling of Mykolayivka, a
town of some 16,000 with a large
power station, began in the morning
on July 3.
About 3 kilometers from
Slovyansk, Mykolayivka was on the
main supply route for fighters,
weapons and food, according to offi-
cials and local residents.
Mrs. Fanailova, 75 years old, was
sleeping when the shell hit her small
house around 8:20 a.m., according
to her son-in-law. Mr. Fanailov, 78,
had just fed his three hens and was
sitting down to watch television.
Their son-in-law said he still hasnt
found Mr. Fanailovs head.
A few streets away, Raisa Ye-
liseyeva, 75, was cleaning the bath-
room in her fourth-floor apartment
when a shell hit. She forced open
her door but found the hallway floor
was no longer there. At least 10 peo-
ple died in her building as five
floors collapsed, officials and locals
said. They have turned the country
into ruins, said Mrs. Yeliseyeva,
who hid with many others in a
bomb shelter.
Residents say the militants had
checkpoints at the entrance and exit
to the town, and many of them took
up positions in the surrounding hills
as the shelling began. There were
also rebel positions in the town, of-
ficials said.
The barrage continued, on and
off, for nearly two days, locals say..
By the evening of July 4, the
president said rebels had been
flushed from the town.
Hours after the town was seized,
militants fled from Slovyansk, head-
ing south for Donetsk.
The victory in part reflects the
transformation of the army, which is
almost unrecognizable from the de-
moralized units that surrendered to
civilians in the early days of the op-
eration.
Now, 30,000 troops are involved,
supplied partly by an army of volun-
teers who bring food and flak jack-
ets and fix armored vehicles.
Officials say troops are improv-
ing their urban fighting skills as
they advance. The brunt of the fight-
ing is done by special forces, backed
by regular army units and national
guardsmen, including 2,000 volun-
teers, according to Andriy Parubiy,
the presidents top security adviser.
The rebels purposefully take up
positions near apartment buildings,
officials and some residents say.
It makes our job much harder
as the president gave a clear order
for civilians not to be harmed, said
Mr. Parubiy in an interview. The
concentration of [rebel] forces in
Donetsk and Luhansk has the same
aim and tactic: to take cover behind
peaceful citizens.
Alan Cullison
BY JAMES MARSON
G
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Russian Imperial Dream Faces Donetsk Showdown
DONETSK, UkraineThe military
noose was tightening around the
rebel city, and Alexander Borodai,
now the leader of pro-Russian sepa-
ratists in Donetsk, was urging deci-
sive action.
That was more than a decade
ago, in a different war and a differ-
ent cityGrozny, the capital of
Chechnya, which was fighting for in-
dependence from Russia. Mr. Boro-
dai, accompanying Russian troops
as a war correspondent, wanted to
see Grozny hit hard, all insurgents
killed, and Chechen autonomy eradi-
cated in favor of direct Moscow
rule.
Together, they will finally wipe
the hated city off the face of the
Earth, he wrote of Russian soldiers
preparing to enter Grozny in 2000.
Now as Ukrainian forces encircle
Donetsk for a final push against pro-
Russia insurgents holed up in this
regional capital, Mr. Borodai, head
of the rebel government, is likely to
find himself on the receiving end of
the kind of anti-separatist offensive
he once urged.
Mr. Borodais sudden emergence
at the helm of the pro-Russian sepa-
ratist movement in Ukraine shows
how Russia has struggled to find re-
liable local leaders in a fight the
Kremlin continues to insist it isnt
inciting. His comments on Chechnya
help explain the harsh worldview of
a Muscovite who has nurtured an
ideal of Russia for more than two
decades.
Mr. Borodai, 41 years old, says
hes ready to die in Donetsk for his
imperial dream, which he first be-
gan working toward in the early
1990s. Back then, as a 19-year-old
philosophy student in Moscow, he
spent a summer fighting alongside
pro-Russia rebels in Transnistria, a
breakaway republic that was carved
out of Moldova.
Later that decade, Mr. Borodai
began to cover Chechnya for a na-
tionalist Russian newspaper, Zavtra,
though he says he carried out other
unspecified roles there, not just
journalism. It is there that he
crossed paths with a man who
would become a close friendIgor
Strelkov, another Muscovite who
was then an officer with Russias
main intelligence agency, and is now
the defense minister of what the
separatists call the Donetsk Peoples
Republic.
The prominence of Mr. Borodai
and other Russian citizens at the
helm of the insurgency makes any
negotiated peace with Kiev harder
to attain and poses an image prob-
lem for Moscow, which has argued
that separatism in east Ukraine is a
grass-roots movement.
Andrei Purgin, a Donetsk man
who has been agitating for separat-
ism for more than a decade and now
serves as a deputy to Mr. Borodai,
says revolutionaries dont neces-
sarily make good administrators, so
we had to rely on specialists from
outside, on parachutists so to
speak.
Mr. Borodai arrived in May, after
an earlier stint in Crimea where he
helped midwife the Russian annexa-
tion behind the scenes as an adviser
to Crimeas separatist boss. In Do-
netsk, he stepped straight into the
spotlight, citing a dearth of local
talent.
Here he acts with near-absolute
authority. At a recent news confer-
ence, he gave its popular mayor an
ultimatumside with the separat-
ists or step down. He explained his
order: To step down doesnt mean
to stand against the wall and face a
firing squad. Over the weekend, he
demanded that local businesses pay
taxes to the separatists.
He believes autocracy is the best
form of government, though he says
he could cede power if a credible
homegrown alternative emerge. He
believes hes fulfilling a historical
mission on behalf of the Russian na-
tion, which he calls a super-ethnic-
ity glued together with Orthodox
Christianity.
The boundaries of the Russian
world are considerably larger than
the boundaries of the Russian Fed-
eration, Mr. Borodai, a pistol hol-
stered on his belt, said in an inter-
view in his spacious Donetsk office,
unadorned except for a picture of
Russian President Vladimir Putin
hanging above his desk.
Mr. Borodai smoked slim ciga-
rettes, his head shaved to a buzz-
cut, a tight black T-shirt hugging his
potbelly. Heavily armed guards
lounged on a couch outside his of-
fice discussing the latest weaponry.
His recipe for restoring the Rus-
sian world to its proper place means
expanding it and interfering on be-
half of ethnic Russians wherever
they may live: in Moldova where he
fought in a separatist war in the
early 1990s, and now in Ukraine.
Like much of Moscow in the past
decade, Mr. Borodai was busy mak-
ing money. He ran a consultancy,
and enjoyed an affluent lifestyle, he
says. One of his clients was a promi-
nent Moscow investment bank.
Asked about the irony of calling
for the annihilation of Chechen sep-
aratistsgiven that hes now a sep-
aratist himselfMr. Borodai paused
and offered this: Im in the same
exact situation; Im now also fight-
ing against separatists, not Chechen
separatists, but Ukrainian separat-
ists. Because theres Russia, the
great Russia, theres a Russian em-
pire. And now the Ukrainian sepa-
ratists who are in Kiev are strug-
gling against the Russian empire.
BY PHILIP SHISHKIN
A
s
s
o
c
i
a
t
e
d
P
r
e
s
s
Donetsk
Zelenopillya
Luhansk
Slovyansk
Kiev
RUSSI A BELARUS
POL.
ROMANI A
MOLDOVA
Bl ack Sea
CRIMEA
UKRAI NE
DETAIL
RUSSI A
U K R A I N E
DONETSK
LUHANSK
KHARKIV
50 miles
50 km
A house destroyed after bombardments by Ukrainian armed forces in a village near the city of Marinkao, on Sunday.
Alexander Borodai at a news conference in Donetsk, Ukraine, on June 21.
BOOKS
The Master Switch of Life
Freediving is a sport where
competitors plunge, sometimes
lashed to weighted sleds, hundreds
of feet below the oceans surface
without supplemental air. They
hold their breath for as long as 11
minutes. But why would they want
to? Dozens, perhaps hundreds, of
[free] divers are injured or die ev-
ery year, notes the journalist
James Nestor. Competing seems
like a death wish.
The freedivers that Mr. Nestor
meets in Deep: Freediving, Rene-
gade Science, and What the Ocean
Tells Us About Ourselves insist
that the opposite is truethat the
human body is engineered to sur-
vive underwater through a phe-
nomenon called the mammalian
dive reflex or, more lyrically, the
Master Switch of Life, the series
of life-sustaining physiological re-
actions that trigger once we sub-
merge. The deeper we dive, the
more pronounced the reflexes be-
come, writes Mr. Nestor, eventu-
ally spurring a physical transfor-
mation that protects our organs
from imploding under the immense
underwater pressure and turns us
into efficient deep-sea-diving ani-
mals.
Its a beautiful idea but sorely
tested by the realities of competi-
tors trying to outlast one another.
Mr. Nestor sees numerous freediv-
ers pulled to the surface blacked
out, their skin blue, blood stream-
ing from their mouths, noses and
eyes, rescuers slapping their faces
and screaming Breathe! Breathe!
I have a feeling, he writes, that
competitive freedivings continued
existence has a lot to do with the
fact that the local authorities dont
know what really goes on.
Yet Mr. Nestor is interested in
freediving less as an extreme sport
than as a way to explore the heart
of the oceanwhats in it, how it
functions, how we function within
it. His travels take him to compe-
titions in Greece (where one freed-
iver compares the brinkmanship to
playing poker), but he also
spends time on the water (and un-
der it) in Florida and California, in
Japan, and on the French island of
Runion. Whether charting the as-
toundingly acute electroreceptive
sense of sharks, the holographic
communication of cetaceans, or
our own ancient connection to the
ocean (some consider freediving a
spiritual practice), these explorers
send the same message: Youve
got to get wet. Mr. Nestor has an
eye for the telling fact (did you
know sea algae produce 70% of the
oxygen we breathe?) and a sunni-
ness that comes through even
when he is panicking or humili-
ated. The reader could not wish for
a better guide.
[The] current exploration of
the ocean is the equivalent of
snapping a photograph of a finger
to figure out how our bodies
work, he writes. Deep is orga-
nized by depth, with each chapter
focused on a specific zone, from
the photic (zero to 60 feet, where
sunlight is still visible) all the way
to the hadal at 28,700 feet. At 66
feet, Mr. Nestor encounters his
first band of young aquanauts:
graduate students doing 10-day
stints at the Aquarius Reef Base,
an undersea capsule off Key Largo,
Fla., researching things like the
population dynamics of sponges.
Life in the cramped space sounds
disgusting: Humidity is 100%, bac-
teria bloom and, because toilets
can explode at depth, aquanauts
prefer to do their business in the
water. And yet the researchers
are euphoric. They seem, basi-
cally, drunk, writes Mr. Nestor,
explaining that this is the effect of
nitrogen, which building up in the
blood produces a happy delirium.
The deeper one goes, however,
the larger the buildup, and, eventu-
ally, nitrogen narcosis sets in.
Freedivers can drift off to dream-
land. One diver told me that dur-
ing a very deep dive, she forgot
that she was underwater, writes
Mr. Nestor. She began to have
strange thoughts about her dog.
She pictured herself in a dark park
looking for him. As she headed
back toward the surface, and the
haze of nitrogen narcosis faded,
she remembered that she didnt
own a dog.
Part of Deep is Mr. Nestors
attempt to experience the unen-
cumbered bliss of freediving him-
self. As he is leaving the Aquarius
in his scuba gear, Mr. Nestor notes,
the constant gurgle from my regu-
lator scares off everything around
me; its like Ive gone bird watching
with a leaf blower strapped to my
back. He enlists the help of Hanli
Prinsloo, a young South African
who takes him through yoga and
breathing exercises to increase his
lung capacity and help him relax
enough to make it 40 feet below
the surface, the doorway to the
deep. It is here, Ms. Prinsloo
promises, that people experience
the most incredible transforma-
tion. The human body is suddenly
compressed enough by the ambient
pressure to become denser than
the water; instead of the water
bearing you up to the surface, it
gently pulls you down.
The transformation proves chal-
lenging. Try as he might, Mr.
Nestor repeatedly flails in 12 feet
of water, his ears screaming in pain
as he is unable to equalize the
pressure in his head. In a grubby
Japanese port town, his high-tech
freediving suit gets laughed at by a
group of elderly ama, women who
dive for sea delicacies. When he
asks the women, who traditionally
dived for pearls, if they have any
ancient freediving secrets theyd
like to share, he is laughed at
again and told: You just get in the
water!
Mr. Nestor keeps trying. He
trains in swimming pools and shal-
low water. He increases his lung
capacity from 50 seconds to more
than three minutes. He overcomes
his fear of swimming with sharks.
But the Master Switch he sees oth-
ers so effortlessly flick on remains
in him firmly off.
While trying to crack the
oceans mysteries, Mr. Nestor
puts in with a group off Runion
who tag bull sharks in order to
track and understand their move-
ments. The ragtag crew blasts the
German metal band Rammstein to
attract the sharks (who also like
AC/DC). And he takes a ride in an
unlicensed submarine hand-built
by a New Jersey prodigy named
Karl Stanley and run off the coast
of Honduras. There are no liability
waivers to sign. If something bad
happened, all passengers, includ-
ing Stanley (who pilots every
dive), would die, writes Mr.
Nestor.
The plunge in the 6-foot-wide
sub is sheer terror. Mr. Nestor and
a friend sit hunched and hyperven-
tilating in the tiny front compart-
ment, their anxiety ratcheting up
as they drop into the perpetually
black bathypelagic zone (2,300 to
13,000 feet, known as the mid-
night zone). It seems impossible
to Mr. Nestor that anything could
survive down there.
Keep looking out the window,
says Mr. Stanley, as bioluminescent
bursts of pink, purple and green
sparkle the darkness and a school
of squid look like glittering disco
balls. The sub sinks to 2,550 feet.
Here, a two-foot glob of flashing
color approaches, then hovers a
few inches from the window. The
glob, which Mr. Stanley identifies
as a comb jellyfish, is covered in
rows of bright lights, hundreds of
them that flash by individual color
and then in perfect synchronic-
ity.
The marine biologists that Mr.
Nestor meets are often unim-
pressed by freediving. (Im per-
fectly capable of collecting data
without freediving with the ani-
mals, thank you, a whale re-
searcher from the University of St.
Andrews tells him.) Yet it is freed-
ivers who guide him to the most
provocative facts about the ocean.
Sea mammals, for instance, use a
nonverbal form of communica-
tion to transmit three-dimen-
sional images (a process Mr. Nestor
compares to taking a photo with
your smartphone and sending it to
a friend); and the echolocation
clicks emitted by sperm whales
may be a precise, highly organized
language.
Mr. Nestor hears this language
off the coast of Sri Lanka. With
Ms. Prinsloo holding his hand and
urging him to trust himself, they
slide beneath the surface. They
stay very still as two sperm
whales, a mother and her calf,
swim close, then closer. They
keep their gaze upon us as they
pass within a dozen feet of our
faces, shower us with clicks, then
retreat slowly back into the shad-
ows, writes Mr. Nestor. Embold-
ened, or perhaps becalmed, by the
encounter, he soon succeeds in
flipping the Master Switch. Ive
hit zero gravity. The door is open,
he writes. When he finally comes
up for air, neither he nor Ms. Prin-
sloo says a word; they simply turn
around and fall back down past
the doorway of the deep.
Over the course of Deep, Mr.
Nestor comes to see competitive
freediving as egocentric, numbers-
driven and often foolishly danger-
ous. But he leaves the reader with
the idea of freediving as a tool to
better understand the life of the
sea and our place in the waters
eternal rhythms. Deep is a fasci-
nating, informative, exhilarating
book, and, I wager, it will at the
very least have you testing how
long you can hold your breath. My
personal best: 70 seconds.
Ms. Rommelmann is the author,
most recently, of Destination
Gacy: A Cross-Country Journey to
Shake the Devils Hand.
BY NANCY ROMMELMANN
Deep
By James Nestor
Houghton Mifflin Harcourt,
266 pages, $27
MERMAID DREAMS South African freediver Hanli Prinsloo balancing underwater.
A
n
n
e
l
i
e
P
o
m
p
e
Scuba diving is like
going bird watching
with a leaf blower
strappedonyour back.
EUROPE NEWS
France to Give Broader Mission
To Troops Deployed in Africa
PARISThe French government
said over the weekend that it was
rearranging its military forces scat-
tered across the Sahara to better
combat Islamist militants threaten-
ing the stability of several Western
African countries.
French Defense Minister Jean-
Yves Le Drian said Sunday that Paris
would assign a broader, regional
mission to the thousands of troops
it deployed 18 months ago to Mali to
help prevent the country from fall-
ing into the hands of jihadist and
separatist groups.
The new operation, code-named
Barkhaneafter crescent-shaped
Saharan duneswill have its head-
quarters in Chad and rely on about
3,000 soldiers already in the re-
gion.
The objective is principally one
of counterterrorism, Mr. Le Drian
said. The aim is to prevent what I
call the highway of all forms of traf-
fic to become a place of permanent
passage, where jihadist groups can
rebuild themselves between Libya
and the Atlantic Ocean.
Frances President Franois Hol-
lande is expected to formally launch
the operation this week when he
travels to the region and has a lay-
over in Chads capital NDjamena, a
person familiar with the matter
said.
The announcement will mark a
breakthrough for the French govern-
ment, which spent months haggling
with Chad over the right to base the
operation there.
The new military operation high-
lights how France is struggling to
relinquish its role as the gendarme
of many parts of Africa.
Paris has long tried to reduce its
military footprint on the continent,
a legacy of its colonial rule. But the
rise of radical offshoots of al Qaeda
across North and Western Africa,
which have designated France as a
target, has forced the French mili-
tary to retrench.
Early last year, France dis-
patched thousands of soldiers to
Mali after jihadist and separatist
groupswho controlled large
swaths of the countrys north
launched an offensive that French
officials feared placed them within
striking distance of the capital, Ba-
mako.
BY RUTH BENDER
New Center-Left Party
Wins Slovenian Election
LJUBLJANA, SloveniaA re-
cently formed center-left party in
Slovenia, started by a newcomer in
politics, scored a landslide victory in
a parliamentary election Sunday
amid voters distrust in established
parties and unease over state asset
sales in this small euro-zone state,
preliminary results of nearly 90% of
votes counted by the State Election
Commission showed.
The result, if confirmed, could
make Miro Cerar, a 50-year-old law
professor, the countrys fourth
prime minister since the 2008 start
of a global downturn.
Mr. Cerar, whose father is a well-
known Olympic medalist, launched
his Party of Miro Cerar just five
weeks ago. He quickly became popu-
lar among voters looking for a new
leader untarnished by corruption
scandals that have dogged some in-
cumbent parties.
Most current politicians have
been at their posts for the past 20
years and they havent done much
good, so I hope that this will now
change thanks to Mr. Cerar, said
Lea Kamnikar, a public worker in
Ljubljana, after casting her vote for
the new party.
The preliminary polls showed that
Mr. Cerars party won 34.8% of all
votes cast, giving it the largest bloc
in the 90-seat parliament, with 36
votes. Six other parties will hold the
remaining seats. The partial results
are in line with the earlier released
exit polls. Final results are expected
in late July after ballots cast by mail
and Slovenians abroad are counted.
Mr. Cerar will have to rely on
support from other smaller parties
to get a parliamentary majority, and
coalition-building talks are likely to
take several weeks.
Mr. Cerar said that he is ready
to negotiate with all parliamentary
parties except the Slovenian Demo-
cratic Party of former Prime Minis-
ter Janez Jansa. Last month, Mr.
Jansa began serving a two-year jail
sentence for corruption. Mr. Jansa,
who didnt run in the Sunday elec-
tion, has denied wrongdoing and
hopes the countrys Supreme Court
will reverse the sentence.
Nevertheless, Mr. Jansas conser-
vative Slovenian Democrats are
likely to become the largest opposi-
tion party, with 21 seats in the new
parliament, the exit polls showed.
The most likely partners in the
new coalition to be led by Mr. Cerar
are two center-left parties: the So-
cial Democrats and the Democratic
Pensioners Party of Slovenia, pro-
jected to hold six and 10 seats, re-
spectively, in the new parliament.
Mr. Cerar has pledged to stick
with budget deficit-slashing mea-
sures demanded by the European
Union. He has also promised to cut
red tape and simplify labor market
rules to help the economy, expected
to contract for a third consecutive
year in 2014.
BY LEOS ROUSEK
Portugal Isnt Europes Biggest Worry
Portuguese bank is controlled via
a cascade of family-owned holding
companies and came under
pressure when financial
irregularities were uncovered at
its ultimate parent, Esprito Santo
International SA, a conglomerate
with diverse interests all over the
world. Not only was the
Portuguese bank a lender to these
family interests, but it had allowed
units higher up the shareholder
structure to sell bonds directly to
its own customers. The market
feared a black hole.
But there are good reasons to
believe that BES isnt a serious
threat to the financial stability of
Portugal, let alone the euro zone.
Indeed, there are other risks that
should worry investors moreand
may have been a factor in last
weeks selloff.
The situation at BES looks
better contained than initially
feared. Its exposure to companies
higher up the shareholder
structure turns out to be just 1.1
billion ($1.5 billion)that is
manageable in the context of a
100 billion balance sheet and its
7 billion of equity, 2.1 billion
above the regulatory minimum.
Even if, in a worst-case scenario,
BES came under pressure to honor
guarantees given by its controlling
shareholder to buyers of its bonds,
the total exposure would rise by
700 million to 1.8 billion.
Of course, the debacle at BES is
sure to be painful for the banks
shareholders, many of whom only
recently subscribed to a 1 billion
capital increase and are already
nursing losses on their new
shares. The shares have so far lost
more than half their value since
early June.
Now they face the prospect of
not only filling the hole caused by
any losses on exposures to the
banks controlling shareholders,
but also the prospect of a 25%
stake in the bank coming onto the
market should the family be
forced to sell. If they refused to
put up money, the government
still has 6 billion of its bailout
money earmarked for bank
recapitalizations available to fill
any shortfall, threatening
shareholders with even deeper
dilution.
But there is no reason so far
why BESs problems should cause
longer-term difficulties for
Portugal beyond any short-term
knock to confidence. The country
is already seeing the benefits of a
far-reaching reform program;
growth this year is expected to be
above the euro-zone average at
1.2%, rising to 1.5% next year.
Unemployment has fallen for
seven consecutive quarters to
14.3% from a peak of 17.5%, which
has helped fuel a recovery in
domestic demand.
Despite BESs problems, growth
should be supported by a healthier
banking system. Portugals second-
largest listed lender, Millennium
BCP, is raising 2.25 billion of
new equity via a fully
underwritten rights issue. The
Portuguese banking system should
also be major beneficiaries of a
new European Central Bank long-
term cheap funding facility
announced in June.
What should worry investors is
less Portugal but the fact that
growth appears to be stalling in
some of the euro zones biggest
economies. The latest surveys
point to manufacturing having
contracted in June in Germany,
France and Italy. Some of this may
be explained by one-off factors,
including weather disruptions and
the timing of public holidays. The
crisis in Ukraine also appears to
have hit German exports.
But the real disappointment
has been in the weakness of the
recovery in the new sick men of
Europe: France and Italy, both of
which have been slow to deliver
the reforms that have been
boosting productivity and
competitiveness elsewhere in the
euro zone. Indeed, whereas J.P.
Morgan last week raised its
growth forecast for Spain for this
year to 1.5%, reflecting the success
of its reforms, it downgraded its
forecast for Italy to 0%.
Given the size of its economy
and the scale of its public debtat
133% of gross domestic product
Italys lack of growth remains the
biggest threat to the stability of
the euro zone. Yet to the concern
of many policy makers and
investors, Prime Minister Matteo
Renzi appears to be spending
more political capital seeking
changes to euro-zone fiscal rules
to allow Italy to borrow yet more,
than he is on pushing through
reforms that might boost Italys
growth prospects.
When Mr. Renzi took office in
February, he announced an
ambitious 100-day program to
change Italy. Having failed so far
to deliver on any of his goals, he
has now given himself a new
deadline of 1,000 days. Yet the
only substantial reform that now
looks likely to be achieved this
year is an overhaul of the electoral
rules and the Senatereforms of
totemic significance to the Italian
political class but of zero
economic consequence.
Far-reaching reforms of the
public administration, judicial
system, government spending and
labor market have been promised
but details remain scarce and
timing unclear.
Until Mr. Renzi proves he can
live up to his own domestic
reforming rhetoric, investors
should brace themselves for more
wobbly weeks like the last one.
For a few days last week, it was
dj vu all over again.
Fears over the collapse of a
Portuguese bank spooked the
market. European
stock markets fell;
bond spreads for
euro-zone
peripheral
countries widened,
spreads for core
countries
tightened; a Spanish bank pulled
its bond auction and a Greek
government bond issue raised less
than hoped.
Ghosts that investors had
begun to assume had been finally
banished appeared to be haunting
the markets again: the fragility of
the euro-zone banking system and
the risks of contagion.
Some would argue that a
market wobble was long overdue.
The tide of money that has poured
into Southern Europe this year has
been extraordinary. The markets
have been wide open to every
government and bank. Even
Cyprus has issued bonds and its
largest bank is on the road raising
equity. The European high-yield
bond market is on track for its
best year by volume. Regulators
have taken to warning that
investors may be underestimating
the risks still lurking in the euro
zoneperverse given that central-
bank policies have been explicitly
designed to encourage investors to
take these such risks.
The travails of Banco Esprito
Santo may have struck many
investors as a good excuse to take
money off the table. The
EUROPE FILE | By Simon Nixon
Growth Outlook
Annual change in GDP
Sources: Eurostat; European Commission (est.)
0
estimates
4
6
4
2
0
2
%
08 10 12 14 08 10 12 14
Italy Portugal
Locals welcomed French soldiers sent to northern Mali early last year.
A
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P
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e
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/
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BOOKS
How It Got Written
How did the Bible come to be
what it is today? In one sense,
thats an easy question. Place the
book in historical context and a
number of probabilities emerge.
Many Middle Eastern mythologies
and law codes show broad similari-
ties; so do early ritual practices.
The profession of scribe was com-
mon to a number of local regimes,
and the sanctity of shrines encour-
aged the storage of important doc-
uments. But the question of where
the Bible in particular got its wide-
spread, lasting and pre-eminent
authority is not as easy to answer,
for either the Hebrew Bible or the
Christian New Testament.
The Hebrew Bibles emergence
seems, in retrospect, particularly
fraught. Though this scripture it-
self celebrates a united kingdom of
Israel and Judahwhich would
have flourished around the 10th
century B.C., the period of the
kings David and Solomonthe
Jews in reality had almost no
chance to give their literature a
sustained prominence in the typi-
cal ways: through conquest, coloni-
zation and trade expansion.
That was how the Greeks en-
shrined their texts, particularly af-
ter Alexander the Greats lieuten-
ants established kingdoms in Egypt
and far into Asia; and it was how
the Romans perpetuated their own
texts during the long Pax Romana,
after they had subjugated most of
the known world. In contrast, the
Jews were almost always at the
receiving end when there was pres-
sure between their civilization and
a foreign one. It appears very likely
that they cherished their scripture
as one of the few things that, over
time, would allow them to endure
and transcend alien hegemony.
Most of the texts we now call
the Hebrew Bible were saved from
destruction and revived from ne-
glect despite threats and incur-
sions from Assyrians, Egyptians,
Babylonians, Persians and others.
They were written and rewritten
and fused together from diverse
sources and somehow authorized
and propagated. Then they were
added to and strengthened in au-
thority during further centuries of
national and religious struggle and
disaster.
Michael Satlows How the Bible
Became Holy tells this story and
the story of the New Testament
describing, in effect, the slow
growth in the Bibles sanctity. In
outline, he is helpful and persua-
sive. He begins, naturally, by trac-
ing the origins of the Hebrew Bible
in early Israel and Judah. He then
moves through centuries of reli-
gious and legal reforms and dis-
cusses, among much else, the
early- to mid-sixth-century Babylo-
nian Captivity and the subsequent
period, when a rebuilt Temple and
rebuilt walls in Jerusalem found a
counterpart in nation-building doc-
uments.
As Mr. Satlow stresses, there is
no solid evidence that, during this
entire time, scripture per se was
ever enforceable law, let alone that
it had constitutional force as Deu-
teronomy 17:14-20 suggests in
verses decreeing that the king him-
self is subject to the law. Very
probably, scripture was only a con-
comitant to belief and ritual and
was freely interpreted to adapt to
their various forms.
The Hebrew Bible began to
work toward a modern type of au-
thority only with a culminating di-
saster. For the Jews, the destruc-
tion of the Second Temple by the
Romans in A.D. 70 prevented sacri-
fice, which had been exclusively
centralized there, and so stripped
any of the priestly hierarchy who
survived of their basic function.
Rabbis, or teachers, with their por-
table scripture and versatile
knowledge of it, were left to main-
tain Jewish tradition, leading to
the Torah scrolls enshrinement as
a synagogues all-important trea-
sure.
Christians, for their part, expe-
rienced perhaps an even stranger
journey toward the sanctity and in-
stitutionalization of their scrip-
tures. The writings that came first
and that, many would argue, are
the theological core of the New
Testament comprise six or seven
letters by Paul of Tarsus, who dur-
ing much of his career as a mis-
sionary was in open conflict with
the crucified Jesus surviving fol-
lowers and relatives in Jerusalem.
Paul, who never met Jesus in the
flesh, preached the crucifixion as a
sacrifice for the salvation of hu-
mankind, the resurrection and the
Second Coming. He did not know
about or just never dwelt on Jesus
life, miracles or teachings as laid
out in the four Gospels.
The oldest surviving Christian
Biblesbeautifully lettered on du-
rable velummay be among the
ones expensively commissioned to
supply churches by the Roman Em-
peror Constantine after he legal-
ized Christianity and folded it into
the Roman state in the fourth cen-
tury. Already the better part of two
centuries had passed since Justin
Martyr prevailed in a bitter argu-
ment about the basic shape of the
Christian Biblewhich, it turned
out, was to include Jewish scrip-
ture and the Gospels. This long de-
lay is just one index of the Bibles
halting progress toward en-
shrinement as a unitary document
of sweeping significance.
Mr. Satlow, an accomplished
professor of Judaic studies at
Brown University, presents the es-
sentials of this progressin both
its Jewish and Christian manifesta-
tionswith impressive erudition,
but he often falls short by not tak-
ing the Bible seriously enough,
leaving the main conundrum un-
touched. The Bibles growth in au-
thority was slow indeed, but there
the Western world was anyway, by
not-so-late antiquity, with a Bible
of lofty and exquisite authority.
Could it be that the texts were liv-
ing, in the sense that they vindi-
cated themselves in many hard and
unexpected circumstances?
Mr. Satlow often uses the word
fantasy as a brush-off for idealis-
tic-looking passages in scripture,
as if his story were about nave ef-
forts to create a perfect world by
means of a book. The real story is
practically the opposite. It is true,
for instance, that Deuteronomy
never became a constitution per
se; but it put forward the idea of
accountable government at a time
of god-kingships. That human over-
reach might be checked by tran-
scendent law must have intrigued
both ordinary people and an elite
who came to realize that it was in
no position to thunder and
threaten and terrify. Through the
text, then, a new way of thinking
about law and society was
developed and valued.
Prophecy and oracle are
also for Mr. Satlow dismissive
terms, suggesting magic and
mumbo-jumbo. But such an atti-
tude discounts the most important
functions of the written word for
the ancients. Writing that was
held sacred was never properly
about throwing the bones to pre-
dict the future for the gullible. In
any particular case, someone at
first merely emitted words in a
world full of chatter. Rhetoric,
narrative, poetry and ritual utter-
ance were the communications
technology of Mediterranean
lands, with the effusions of
individuals playing the role of so
many websites and Twitter feeds.
But over time, with both popular
and hierarchical affirmation, some
words were set in the category of
truth, as plausibly connected to
the eternal. It was the seconding
of words meaning through collec-
tive and long-term experience that
mattered.
The operative paradox that Mr.
Satlow misses is that of popularity
and adaptability. No words were
more self-consciously and thunder-
ously holy than the curses in-
scribed on pharaohs tombs as
warnings, but these must merely
have entertained the robbers who
sacked every funerary hoard they
could find. Whats at issue isnt a
writers intention that a text be
holy, or any authoritys treatment
of it as holy, but the broad assent
that the text can win for its holi-
ness.
To argue, in effect, against this
process requires some questionable
moves on Mr. Satlows part. He
tries to undercut, for instance, the
well-founded consensus that Paul
was a Diaspora Jew, from a family
established in Tarsus (in modern-
day Turkey), who first lived in Je-
rusalem during his youth or young
adulthood for study and profes-
sional and religious development.
For this account Mr. Satlow substi-
tutes a speculative one of Paul as a
cradle Palestinian Jew, and he does
this seemingly in order to support
a widespread characterization of
the evangelist as a traitor to his
heritage: As far as scripture is con-
cerned, Paul hawked a debased
version among people he didnt
know and who themselves didnt
know any better; he wasnt one of
them, attuned to their needs and
aspirations; holy writing as he pre-
sented it and remade it thus has no
deep integrity.
Whatever the biographical real-
ity here, Mr. Satlow certainly does
not succeed in sweeping away the
data indicating a more critical real-
ity, one that broadly informed the
Bibles development. Two things
easily co-existed in Pauls thought
and contributed jointly to his suc-
cess: his great dependence on and
devotion to existing scripture
(from whichever geographical or
cultural sources he got them, he
snows down quotations, citations,
glosses); and a belief that existing
scripture profoundly belonged to
him, so that he should be able to
do as he liked with it.
Scholars like Elaine Pagels, sec-
onding the historical critics who
arose more than two centuries ago,
have stressed the arbitrariness of
scriptural authority. This authority
is supposed to result from the facts
of history, especially political and
institutional facts. We are
purportedly assigned certain be-
liefsbacked up by writingsthat
are useful to the powerful, and
what appeals to us makes little dif-
ference. Mr. Satlows How the Bi-
ble Became Holy makes me won-
der whether were entering a sort
of deconstructionist era of writing
about the Bible. No longer is the
authority of scripture said to be
artificial or illegitimate; it is said
never to have existed in the first
place. Of course, thats annoying to
the religious; but in the general fo-
rum of ideas, its annoying because
it cant conceivably be true.
Ms. Ruden is the author of Paul
Among the People: The Apostle
Reinterpreted and Reimagined in
His Own Time.
BY SARAH RUDEN
How the Bible Became Holy
By Michael L. Satlow
Yale, 350 pages, $35
ANCIENT WRITE The Shiloah inscription, found in the Hezekiah tunnel in East Jerusalem, is an early example of Hebrew and taken by some as validation of the biblical
account that King Hezekiah dug such a tunnel to prepare for an Assyrian invasion.
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Jews cherished scripture as
one of the fewthings that
allowed themto endure and
transcend alien hegemony.
NEWS
Kabul to Start
Auditing Votes
In Kerry Deal
KABULAfghanistan on Monday
begins preparing an unprecedented
audit of the 8.1 million votes cast in
the countrys June 14 presidential
election, a process that is supposed
to take at least three weeks and will
delay the inauguration of a new
president.
Former Finance Minister Ashraf
Ghani and former Foreign Minister
Abdullah Abdullah agreed after mar-
athon talks with U.S. Secretary of
State John Kerry this weekend to a
full audit of the bitterly contested
election, which had threatened to
split the country along ethnic and
territorial lines.
In a crucial political deal also
brokered by Mr. Kerry, the two can-
didates said that in addition to ac-
cepting the results of the audit, they
agreed that the winner of the elec-
tion would form a national unity
government that would include the
losing side.
This will be still a difficult road,
because there are important obliga-
tions of the audit, Mr. Kerry said in
a briefing with Afghan President
Hamid KarzaiBut tonight, Afghani-
stan saw a moment of what unity
can mean.
As part of a deal to break the
deadlock over Mr. Abdullahs allega-
tions of widespread fraud on his ri-
vals behalf, Afghans and the inter-
national community now face the
herculean task of retrieving all of
the ballots cast around the country
and scrutinizing each one for signs
of fraud.
The audit will be carried out in
Kabul, and it will begin within 24
hours, Mr. Kerry said late Saturday,
adding that the U.S.-led Interna-
tional Security Assistance Force
would handle the transporting of
ballot boxes from the countrys 34
provinces.
Election officials said the audit
will start in earnest as early as
Tuesday.
Mr. Kerry and several of his top
Afghan experts spent much of Fri-
day largely listening to the candi-
dates, trying to gauge the potential
for an agreement, according to offi-
cials involved in the talks.
Shortly before midnight on Sat-
urday, after 14 hours of discussions,
the two candidates linked arms to-
gether with Mr. Kerry to celebrate a
deal.
The clock is ticking. U.S. and in-
ternational combat troops are set to
withdraw by the end of this year,
and Mr. Karzai has refused to sign a
bilateral security agreement with
Washington that would allow the
U.S. to keep a small force in the
country to conduct training and
counterterrorism missions.
While both candidates say they
will sign the deal, the United Na-
tions and the candidates have now
asked the Afghan government to
push back the planned Aug. 2 date
for the new presidents inaugura-
tion, to allow time to conduct the
audit.
Jan Kubis, the U.N. envoy to Af-
ghanistan, described the process of
separating out ballots suspected of
fraud as a truly unprecedented, ab-
solutely unique, intrusive audit,
and he appealed to international or-
ganizations to send personnel to
help supervise the process.
Send as quickly as possible ob-
servers to augment the teams that
are here, he said. This support of
the international community is
needed to provide credibility to this
process of audit.
Technical details remain to be
worked out for the audit, represen-
tatives of both candidates said. Ne-
gotiations also lie ahead over the
composition of a government of na-
tional unity. The new president will
formally appoint a government
chief executive officer picked by
the runner-up, according to mem-
bers of both campaign teams.
The European Union said in a
statement Sunday that the EU Elec-
tion Assessment Team will closely
follow the agreed auditing of elec-
tion results.
Word of the agreement gave a
boost to some Afghans, who have
endured months of uncertainty over
the political transition. Currency
traders said the afghani had appre-
ciated against the U.S. dollar.
Investors fearing violence were
fleeing the country, but now they
are staying here and see a hope for
the future, said Ameen Jan Khos-
tay, a money changer in Sar-e
Shahzada, Kabuls bustling currency
market.
We saw an increase in daily
trade today, he added. This is pos-
itive progress, and we welcome it.
Habib Khan Totakhil
BY NATHAN HODGE
AND IAN TALLEY
Ashraf Ghani, left, and Abdullah Abdullah in Kabul on Saturday.
A
g
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SPORTS
LeBron James Is Returning to Cleveland
The Miami Heat Star Decides to Sign a New Deal With His Home-State NBA Team, the Cavaliers
LeBron James, the singular tal-
ent in his generation of newly pow-
erful professional basketball players,
has decided to return to the home-
town team he once spurned, a move
that will rearrange the NBAs com-
petitive furniture for years to come.
James ended weeks of specula-
tion about his basketball future Fri-
day by announcing he will sign with
the Cleveland Cavaliers, the team he
played for in the first seven years of
his career. James left in 2010 for
Miami, where he won two NBA titles
with the Heat.
That decision four years ago,
which was broadcast in a television
special called The Decision, re-
sulted in a backlash against James
in a city that had once revered him.
He was cast as a villain as soon as
he said he would take my talents to
South Beach to join fellow super-
stars Dwyane Wade and Chris Bosh.
Fridays decision was more un-
derstated and felt far less engi-
neered. With the basketball world
effectively frozen as he deliberated,
James announced his choice in a
952-word essay for Sports Illus-
trated.
In the article, the 29-year-old
James said he wouldnt be holding a
news conference or hosting a party
as he had the last time, but instead
wanted the opportunity to explain
himself without interruption. He
also said the decision reflected a re-
lationship with Ohio that was big-
ger than basketball.
I didnt realize that four years
ago, he said. I do now.
It is the unlikeliest of homecom-
ings for James, who grew up in
nearby Akron, Ohio, and was drafted
by the Cavaliers with the No. 1 pick
in 2003. On the July night in 2010
when James left Cleveland, Cava-
liers fans reacted by burning his jer-
sey outside the teams arena. The
teams owner denigrated James as
our former hero and called his act
a cowardly betrayal.
At no point in the last four
years did I ever think this was going
to happen, said John Krolik,
founder of Cavs: The Blog. In that
time, James reached a new level of
success in Miami, while establishing
himself as the NBAs best player
since Michael Jordan.
The Heat reached the NBA Finals
in all four of his seasons there, win-
ning twice. This season, they lost
decisively in the Finals to the San
Antonio Spurs.
But it was Miamis basketball
culture that affected James in the
most meaningful way. He learned
how to win, said Turner Sports an-
alyst and former NBA star Grant
Hill.
Meanwhile, Cleveland bottomed
out when James leftand that lack
of success scored the Cavaliers the
top draft picks necessary to sur-
round James with talent now. They
took Kyrie Irving, for example, with
the No. 1 pick in 2011, and signed
him to a contract extension this
week. Cavaliers fans are also hold-
ing out hope that Cleveland adds
another player, perhaps through a
trade, to round out a big three of its
own.
Jamess new deal makes the Cav-
aliers an immediate title contender
in a league that is suddenly wide
open. The online sports book Bo-
vada pegged the Cavaliers as the 7-
to-2 favorite to win next years
championship, even though they ha-
vent made the playoffs since James
last played for them.
They are still far from a sure
thing. The team has a first-year gen-
eral manager, David Griffin, and a
rookie coach, David Blatt. James
himself refused to promise a cham-
pionship right away. Were not
ready right now. No way, he wrote.
It will be a long process, much lon-
ger than it was in 2010.
Still, Jamess latest decision, and
the incredible amount of interest in
it, may have even wider implications
off the court, as it reflects the in-
creasing value of superstardom in
the NBAs new era.
NBA teams have never been
worth more than they are now that
financial titans have targeted them
as toys.
In the last three months, former
Microsoft CEO Steve Ballmer struck
a deal to buy the Los Angeles Clip-
pers for $2 billion, and hedge-fund
billionaires Marc Lasry and Wesley
Edens purchased the Milwaukee
Bucks for $550 million.
Players are becoming more con-
scious of their personal brands,
which is evident everywhere from
their off-season contract negotia-
tions to their pregame fashion
choices. In 1994, when Hill was a
rookie in the NBA, I dont even
think I knew what the word brand
meant, he said. Today, though,
theyre more aware of their power,
and theyre willing in a subtleand
sometimes not so subtleway to
use to that to their advantage, he
said.
James had a power struggle of
his own to navigate before returning
to Cleveland. His agent, Rich Paul,
kept an office in Cleveland, while
James still had a home in the area.
But there was still the issue of Cava-
liers owner Dan Gilbert, the founder
of Quicken Loans, who wrote a let-
ter after James left in 2010 that as-
sailed his character and wrongly
guaranteed the Cavaliers would win
an NBA title before James did. This
week, at long last, the letter was re-
moved from Clevelands website.
Everybody makes mistakes,
James wrote in his article. Ive
made mistakes as well. Who am I to
hold a grudge?
On Friday, minutes after James
went public with the decision that
overturned The Decision, Gilbert
wrote on Twitter: Welcome home.
BY BEN COHEN
While still with the Cavaliers in 2009, LeBron James throws powder into the air moments before game four of the NBA Eastern Conference Finals.
A
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Miamis basketball culture
had an impact on James.
He learned how to win
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COMING SOON
Relive the excitement, artistry
and heartbreak of the 2014
FIFA World Cupstories from
our coverage both on and
of the feld of the worlds
most popular sport, set in its
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THE WALL STREET JOURNAL.
PAGE TWO
Central-bank economic models
failed to foresee the storm that
devastated the global economy in
2008. Stephen Poloz, the head of
Canadas central bank, is trying an
alternative approach he thinks
will have better foresight: actual
human beings.
Since taking over in June 2013,
Mr. Poloz has pushed staff and
himself to look beyond models for
on-the-ground evidence to
understand Canadas economic
challenges.
His director of Canadian
research has traveled to Calgary
to quiz energy companies about
the investment outlook and to
Toronto to talk to big retailers
about competitive pressures in
setting consumer prices.
At policy meetings, a Bank of
Canada staffer delivers regular
reports showing where anecdotal
evidence from the hinterlands
differs from views inside the
banks Ottawa building. In small
round-table meetings, Mr. Poloz
presses business people to poke
holes in his views about the
economy.
In a December speech he
compared the worlds central
bankers to the sailors of another
era who were driven far off course
by a nasty storm. When things
calmed, they found themselves in
the Southern Hemisphere.
Suddenly the navigational chart
that they relied onthe night
skywas completely different.
His effort shines a light on a
problem that plagues economic
policy makers everywhere as
central banks scramble to fill
gaping cracks in their modeling
laid bare by the financial crisis. At
the Federal Reserve, a major
effort is under way to better
account for how troubled financial
institutions can upend the broader
economy.
Transcripts of Federal Reserve
policy meetings show officials
routinely bring up issues raised in
gatherings with business
executives. The Fed regularly
produces a Beige Book report
with anecdotes on the economy.
But few central banks go to the
lengths of the Canadians to solve
their countrys myriad puzzles.
One example: The central
banks models said a U.S.
economic recovery and a decline
in the Canadian dollar should lead
to a jump in exports and economic
output. But it hasnt.
Mr. Poloz and his staff have
been turning to exporters for
answers. His conclusion: Some key
sectors, like auto-parts
manufacturing, have lost
competitiveness, leading the U.S.
to buy more from lower-cost
producers such as Mexico and
overseas.
Thus a weaker Canadian
currency and more U.S. growth
arent helping them much and
Canadas economy has become
uncomfortably more dependent on
housing and household spending.
When I came, I couldnt put
my fingers on the export story,
Mr. Poloz said in an interview.
We had an export forecast that
was quite solid-looking and
seemed to me a little more
vigorous than anything I could
reconcile with conversations I had
with people. And sure enough,
that forecast recovery has not
materialized.
Christopher Ragan, a McGill
University associate economics
professor, said the approach is
helping Mr. Poloz get a more
complete view of the Canadian
economy than economic models
alone can do. But while all central
bankers rely on their judgment to
some extent, he said, few are as
comfortable as Mr. Poloz in
talking about that part of their
decision-making.
Some people believe judgment
is a hop, skip and a jump away
from a Ouija board, he said.
Mr. Poloz diverges in many
ways from his predecessor Mark
Carney, the hard-charging and
smooth-talking Oxford economics
Ph.D., Harvard undergraduate and
former Goldman Sachs banker
who ran the Bank of Canada and
then the Bank of England. Mr.
Poloz studied at small Canadian
schools and rose through the
ranks of Export Development
Canada, a government export-
promotion office, before becoming
head of the central bank.
Mr. Polozs instinct to turn to
business leaders for answers
stems in part from his years at
EDC, where he developed deep
ties with the nonfinancial
business community during the
financial crisis and recession.
He talks a little different, said
David Dodge, Mr. Carneys
predecessor at the Bank of Canada.
His approach may open him up
to criticism if he fails to navigate
Canadas return to more normal
economic and rate conditions. On
Wednesday, when the bank will
issue its regular policy decision,
Mr. Poloz is widely expected to
hold its overnight target rate for
interbank lending at 1%.
Some investors assert that a
recent rise in inflation might lead
the central bank to a less
accommodative stance.
But the economic backdrop is
challenging. A housing boom
could destabilize the economy
down the road. Meantime, the
Canadian dollar, or loonie, has
been strengthening, which could
squeeze exporters further.
Meanwhile, the Canadian
unemployment rate in June rose to
7.1% from 7%, which may bolster
Mr. Polozs contention that theres
enough slack in the economy to
warrant keeping rates low.
Whatever his precise language
on inflation, bank watchers can
likely count on him deploying a
metaphor to describe his decision.
Before one recent speech, he and
his colleagues debated whether to
liken Canadas overheated housing
market to a bad case of asthma or
a big tree with a crack in it. The
tree metaphor won out.
Its like if the tree in the
backyard has a crack in it. You
worry its vulnerable to a storm.
But if no storm happens, it goes
on and on, and maybe eventually
strengthens through growth. If
the right storm comes along and
knocks it onto your neighbors
house, youve got a problem, he
said in the interview.
Mr. Poloz likened himself to the
character George Costanza of
Seinfeld fame, a show that once
satirized itself as a show about
nothing. Weve done nothing so far
[on interest rates] but weve
explained it well, he said. Its
harder than it looks, doing nothing.
CanadaCentral Banker
HasanUnusual Approach
[ The Outlook ]
BY JON HILSENRATH
AND ELENA CHERNEY
Canadas Export Wedge
Canadas shrinking share of the U.S. nonenergy import pie comes
as its unemployment rate shows scant improvement.
Note: Canadas rate includes 15-year-olds, and has a broader denition of unemployed. The U.S. rate
includes people 16 and older.
Sources: U.N. Comtrade Database (imports); Statistics Canada and U.S. Labor Dept. (rate)
30
0
5
10
15
20
25
%
2000 05 10 13
Total
Total
(Excluding
commodities)
Commodities
(excluding energy)
Energy 10
5
6
7
8
9
%
12 13 14 2011
Canada (age 15+)
U.S. (age 16+)
Canadas share of U.S. imports Unemployment rate
i i i
Business & Finance
n Spanish banks say a modest
decline in bad loans in recent
months marks a postcrisis
turning point, but analysts
warn that a more comprehen-
sive measure of the banks
health points to a longer road
to recovery for lenders 15
n With the headwinds of the
global economic crisis mostly
behind the aerospace industry,
business is booming again. 15
n Intel is trying new ways to
woo small Chinese suppliers
that have lately had an outsize
impact on the evolution of the
tablet market. 15
n A $7 billion deal between
Citigroup Inc. and the U.S. Jus-
tice Department, expected to
be unveiled Monday, nearly fell
apart one day last month. 16
n General Motors CEO Mary
Barra returns to Capitol Hill
this week for what may be her
last and toughest hearings with
law makers over GMs botched
faulty-ignition-switch recall. 17
n Swiss candymaker Choco-
ladefabriken Lindt & Spruengli
AG is in talks to acquire Russell
Stover, the U.S. boxed-choco-
late seller, according to people
familiar with the matter. 17
n Reynolds American Inc. is
nearing a deal to acquire Loril-
lard Inc. that would transform
the U.S. tobacco industry and
put additional corporate mus-
cle behind the hot electronic-
cigarette market. 18
i i i
World-Wide
n Thousands of Palestinians
in the northern Gaza Strip fled
their homes for U.N. shelters
after the Israeli military
warned them with leaflets and
phone calls to evacuate ahead
of an intensified offensive. 9
n As Ukrainian forces encircle
Donetsk, the head of the rebel
government is likely to find
himself on the receiving end of
the kind of antiseparatist of-
fensive he once urged. 5
n U.S. Secretary of State John
Kerry warned of very signifi-
cant gaps in nuclear talks
with Iran, as he arrived in the
Austrian capital to join the ne-
gotiations. 8
n The U.S. and Germany tried
to play down tensions as their
top diplomats met for the first
time since a new furor erupted
over American espionage in
Berlin in recent weeks. 8
n New data show that the
hope drawing thousands of
children across the U.S.s
southwest borderthat they
will be able to stay in the
U.S.is largely realistic. 6
n Afghanistan on Monday be-
gins preparing an unprece-
dented audit of the 8.1 million
votes cast in the countrys
June 14 presidential election. 3
n France will in the coming
days launch a new military of-
fensive in North Africa to fight
terrorism in the wider Sahel
region. 4
Whats News
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Email: heard@wsj.com FINANCIAL ANALYSIS & COMMENTARY WSJ.com/Heard
Wells
Points to
Wellness
At Banks
Consider Wells Fargos
earnings as a quarterly medi-
cal checkup for banking.
While investors werent
overly impressed with a 3.8%
year-over-year rise in net in-
come in the second quarter,
its overall results appear to
confirm signs of health for
the basic business of banking.
Banking has a dual-valve
heart: taking deposits and
making loans. And that heart
is beating steadily at Wells.
Compared with a year earlier,
Wellss deposits grew by more
than 9% and loans by more
than 3.6%. Anemic loan
growth had been a drag on
banks in recent years.
The first half of this year
has seen a marked pickup,
though. Federal Reserve data
show that weekly, year-over-
year loan growth for U.S.
banks started this year at a
low point of 1.8%. It has risen
in a nearly straight line from
there, though, and stood at
5.2% at the end of June, Tor-
sten Slok of Deutsche Bank
noted Friday.
At Wells, business lending
was up by 10% from a year
earlier, faster than some ana-
lysts expected. As Morgan
Stanleys Ken Zerbe pointed
out, that bodes well for banks
like Zions Bancorp and Key-
Corp, which have significant
business-lending operations.
Mortgage originations at
Wells grew by 31% from the
first quarter, although the
spring pickup wasnt as ro-
bust as anticipated. Some 74%
of home loans were purchase
mortgages, up from 44% a
year ago. That suggests home
buyers may be beginning to
fill the gap left by the end of
the refinancing boom.
Commercial real-estate
lending, however, shrank by
0.8% from the first quarter
and may bode ill for some
midsize banks.
A measure of health for
the cardiovascular system of
banks is the net interest mar-
gin, or the difference between
their cost of funding and in-
terest earned on loans. It
shows how healthily funds are
flowing through a bank. While
this shrank by 0.05 percent-
age point at Wells compared
with the first quarter, the rate
of the decline was slower
than in the first quarter.
Meantime, loan quality
continued to improve, with
net charge-offs at Wells de-
clining and the bank releasing
an additional $500 million
from loan-loss reserves.
Combined, these factors
suggest bank performance
may end up being healthier
than expected in the second
quarter. John Carney
A Cashache for Companies
After the financial crisis,
companies built strong cash
buffers to ride out the storm.
But that comfort has come at
a cost to corporate treasur-
ers, who must grapple with
the consequences of persis-
tent ultraloose monetary pol-
icy.
Portugal Telecoms prob-
lems put a new focus on what
companies are doing with
their cash piles. The company
has 897 million ($1.22 bil-
lion) invested in commercial
paper from a unit of troubled
conglomerate Espirito Santo
International. Standard &
Poors already has withdrawn
its rating on Portugal Tele-
com because the company is
merging with Oi. But S&P is
considering cutting the rat-
ing of the Brazilian company
to junk because it fears the
cash is at risk. Portugal Tele-
coms shares have fallen 29%
in July.
The Portugal Telecom
case is, hopefully, an extreme
one. But it highlights that
getting cash management
wrong can be extremely
costly. And there is a lot of
cash to manage: S&P says the
2,000 nonfinancial companies
that spend the most on capi-
tal expenditure globally held
$4.5 trillion of cash at the
end of 2013.
With zero-rate policy de
rigeur for major central
banksand now, a negative
deposit rate at the European
Central Bankfinding a home
for that money has become
more complicated. Short-
dated government debt, like
three-month German or U.S.
bills, yields 0.01% or less; in
real terms rates are negative.
Compared with higher corpo-
rate funding rates, there is a
clear cost to keeping cash on
the balance sheet. For sure,
the prime task of any trea-
surer is to ensure that cash is
invested in instruments that
are liquid and secure; the
yield is a lesser concern. Re-
turn of capital trumps return
on capital.
But even so, changes to
market structures are making
life difficult. Banks are under
pressure to make more use of
longer-term funding and rely
less on short-term, corporate
deposits that can prove
flighty. Moreover banks
credit ratings have tumbled
from their lofty precrisis lev-
els, leaving corporate trea-
surers with little choice but
to tolerate higher credit risk.
The pool of very highly rated
government debt has shrunk
thanks to quantitative easing
and the euro-zone sovereign-
debt crisis.
So corporate treasurers,
like other investors, have to
sacrifice either liquidity or
credit quality to invest cash,
either by agreeing to lock it
up for longer, or by buying
paper from lower-rated, but
still investment-grade bor-
rowers. This isnt a search
for yield as virulent or frothy
as that afflicting fund man-
agers. But treasury depart-
ments, too, are taking more
risk.
Brighter economic condi-
tions should encourage com-
panies to spend some of their
cash hoard. But memories of
the liquidity drought of 2008,
when the banking system
came close to collapse, may
mean companies prefer to
keep higher cash positions
than precrisis. As long as
zero rates continue, the
headache for corporate trea-
surers will persist.
Richard Barley
Telecoms Dial Up Content Plays
Not content to dominate
cell phones and Internet con-
nections, Telefnica is on a
mission for television sets too.
The Madrid-based telecom
operator is bulking up in con-
tent, buying the part of the
Spanish pay-TV business Digi-
tal Plus that it didnt already
own for just over 1 billion
($1.4 billion).
Other European telecom
and cable operators could in-
creasingly fancy themselves
on the small screen, too. But it
still looks risky to dial up big
deals.
Telefnicas acquisition of
the 78% of Digital Plus it
didnt own was partly oppor-
tunistic. Majority owner Pro-
motora de Informaciones,
the troubled Spanish media
company, was an eager seller,
and Telefnica didnt face
competition from minority
partner Mediaset Espaa, ei-
ther.
But bulking up in the pay-
TV business also makes sense.
Pay TV is a way to lock in top-
spending households, reduc-
ing churn in Telefonicas do-
mestic fixed-line business.
Telefnica customers with pay
TV as part of their package
spend at least 20% more than
those that dont take the ser-
vice, estimates Morgan Stan-
ley.
Much of that logic extends
elsewhere in Europe, where
fixed-line operators are wad-
ing deeper into content as a
way to differentiate an other-
wise-commoditized service.
Liberty Global acquired Mid-
somer Murders producer
All3Media with Discovery
Communications in May and
its Belgian cable operator Te-
lenet bought a stake in a local
broadcaster. U.K. telecom BT
Group is buying rights to air
sports matches in a bid to ex-
pand broadband Internet
sales.
Adding a free-to-air broad-
caster like the U.Ks ITV or
European network RTL
Group, might be the next logi-
cal step. Both own production
studios, which could give a
buyer more original content.
ITVs studio business,
which produced the popular
Downton Abbey series, is ex-
pected to generate just under
a quarter of group sales this
year, J.P Morgan analysts esti-
mate. Owning a broadcaster
could also strengthen a dis-
tributors hand when negoti-
ating rights to others con-
tent. But broadcast stocks
arent cheap, having already
benefited from the pick-up in
ad spending. ITVs share price
has risen almost 400% over
the past five years to trade at
about 13 times forward earn-
ings. RTL Groups valuation
has risen from 11 times in
2009 to more than 15 times,
according to FactSet.
Moreover, fitting a broad-
caster into a telecom or cable
operators business isnt
straightforward. TV needs
scale to be profitable, suggest-
ing a buyer might still need to
sell much of its content to
third parties. That could limit
how much exclusive content
an operator is able to offer its
own paying subscribers.
Some operators are also
wary about adding cyclical ad-
vertising revenue to their de-
fensive, subscription-based
models.
The appeal of hooking in
phone customers with content
seems unlikely to fade. But
rather than splurging on big
deals, Europes telecom opera-
tors for now should be con-
tent to experiment.
Renee Schultes
Talk Show
Number of pay-TV subscribers
globally*
*As of last reported quarter
Source: Company reports
BT Group
1.0 million
Telefnica
3.6 million
Deutsche Telekom
5.8 million
Orange
6.6 million
It isnt exactly a secret
that financial advisers are
on the rise on Wall Street.
James Gorman has put
wealth management at the
center of Morgan Stanley, a
move that helped the Wall
Street firm buck the tide of
declining earnings last quar-
ter. Even Goldman Sachs,
which is still led by a com-
modities trader, is looking
to expand its once sleepy
financial-advisory operation
The revival of financial-
advisory services doesnt
just show up in quarterly
earnings, though. It can
also be seen in the Wed-
dings & Celebrations sec-
tion of the New York
Times. Thanks to Wed-
dingCrunchers.com, it is
possible to track trends in
the wedding announce-
ments going back to 1981.
A search of the relevant
terms reveals that invest-
ment bankers and traders
are now less-frequently
mentioned than are finan-
cial advisers.
Perhaps it is an unin-
tended consequence of the
Volcker Rule. On a related
note, Morgan Stanley now
leads the marriage league
tables, getting more men-
tions in the nuptial notices
than does Goldman Sachs.
OVERHEARD
Competition
Clouds Picture
For a Box IPO
For Box, the tricky part of
the next few months may be
convincing investors it is
more than its name implies.
The Silicon Valley com-
pany filed to go public in
March, but a sharp down-
swing for other so-called
cloud stocks forced it to hold
off. It effectively put more
time on the clock this week
with a $150 million funding
round that will tide it over
until it can make its debut,
likely sometime this fall.
Many are watching Box as
a gauge of investor appetite
for the turbulent cloud sec-
tor. Its most recent securities
filing drew cheers with up-
dated financial results show-
ing it can still grow revenues
at a breakneck pace while
holding the line on expenses.
Leave it to Amazon.com
to cloud the picture, though.
That companys cloud busi-
ness, AWS, announced a new
Web-based storage and shar-
ing system Thursday that
competes directly with Box.
This provides a stark re-
minder the company faces a
wide pool of deep-pocketed
competitors that also in-
cludes Google, Microsoft
and EMC.
Box may have new prod-
ucts of its own up its sleeve,
which could help convince
investors it is more than just
a convenient service for
workers to park their files.
But it still needs to prove the
sustainability of its business
modeland the latest filing
didnt settle that question.
Spending on sales and
marketing continues to ex-
ceed quarterly billings, and
billings growth slowed in the
April quarter from a year ago
as more customers elected to
pay in monthly or quarterly
installments instead of an-
nual, a possible sign of
weaker pricing power.
The IPO market also could
get crowded. While a fall de-
but for Box would likely
come after the massive Ali-
baba offering in progress,
more venture-backed cloud
and Internet companies
could join the fray.
Box has bought time. It
still needs to make its case.
Dan Gallagher
Slim Pickings
U.S. three-month T-bill yield
Sources: FactSet (yield); Moodys Investors Service (ratings)
5
0
1
2
3
4
%
06 08 10 12 14 04
Ratings of holdings in U.S.
prime money-market funds,
March 2014
Note: Percentages dont total
to 100% due to rounding.
A3 or lower
1.6%
Triple-A
21.5%
Double-A
45.8%
A1/A2
31.0%
Getting cash
management wrong
can be costly. And
there is a lot of cash
to manage.
VOL. XXXII NO. 113
MONDAY, JULY 14, 2014
At a luxury villa in the Mo-
roccan desert, an interna-
tional brokerage firm hosted
getaways for Libyans con-
nected to the countrys oil-
rich sovereign-wealth funds.
The men spent their days
lounging poolside and nights
partying at clubs in Mar-
rakesh.
The jaunts were part of a
campaign by Tradition Fi-
nancial Services of Switzer-
land to win business in
Moammar Gadhafis Libya, an
effort that included hiring rel-
atives of senior Libyan offi-
cials, according to people who
attended and to former em-
ployees of the firm.
The tactics evidently
worked. Tradition for years
handled investments for the
Libyan funds, earning millions
of dollars in commissions.
Now its efforts are under
scrutiny in wide-ranging U.S.
and British corruption probes
that are examining the
lengths to which some West-
ern financial firms went to
gain a piece of Libyas oil
wealth. The firms access to
Libya proved ephemeral when
Gadhafi fell in 2011. And some
have been left with a transna-
tional headache: multiple in-
vestigations of how they ob-
tained that access.
City of London Police pur-
suing a criminal probe have
interviewed former employees
of Tradition and are nearing a
decision on whether to bring
Swiss Broker Faces
Probe on Libya Deals
By David Enrich,
Michael Rothfeld
and Margaret Coker
How U.S. Airlines Apologize
PERSONAL JOURNAL 23
DJIA 16943.81 0.17% Nasdaq 4415.49 0.44% Stoxx Eur 600 336.91 0.16% FTSE 100 6690.17 0.27% DAX 9666.34 0.07% CAC 40 4316.50 0.35% Euro 1.3598 g 0.02% Pound 1.7106 g 0.09%
EUROPE EDITION
WSJ.com
$1.75 (C/V) - KES 250 - NAI 375 - 1.70
Investors Pay Little Heed
To Esprito-Driven Drop
Plunging European stocks,
wobbly bonds and grave con-
cerns about the health of Por-
tuguese lender Banco Esprito
Santo SA made last week feel
like a rerun of the euro crisis,
but most investors say it was
no more than a blip for a re-
surgent region.
Banco Esprito Santo has
been in investors sights since
December, when The Wall
Street Journal first reported
on accounting irregularities at
the complex firm. Nerves
frayed on Thursday when
Banco Esprito Santos parent
company said it wouldnt be
able to meet some short-term
debt obligations.
The stock dropped by 19%,
prompting regulators to step
in and halt trading. The coun-
trys government bonds stum-
bled and other European as-
sets judged to be havens
rallied, marking the first seri-
ous test of confidence in Por-
tugal, which exited its three-
year bailout program in May.
The full extent of Banco Es-
prito Santos stresses is un-
clear. But for now, many inves-
tors see a chance to buy
European assets on the cheap.
When investors take a
step back from bond markets,
we see a buying opportunity
in sovereign debt, said Nick
Gartside, chief investment of-
ficer for fixed income at J.P.
Morgan Asset Management in
London, which manages $1.65
trillion of assets.
Investors should pounce
while bond prices have yet to
fully recover, said Riccardo
Barbieri, chief European econ-
omist at Mizuho Interna-
tional in London.
The drop in the govern-
ment bonds of Portugal and
other bailout recipientsthe
so-called peripherywas an
anomaly in an otherwise
glowing year. Yields on Portu-
gals 10-year bonds have
plunged from 6.13% in Janu-
ary to a low of 3.3% in June.
Yields fall when prices rise.
But the yield crept back up to
BY JOSIE COX
Incrementalism at the
Farnborough Air Show
Business News ...... 15
Journal Report..R1-R8
Talk of raising interest
rates is heating up at
the Fed
U.S. News ............... 7
European telecoms
make content plays
Heard .................... 27
Inside
An Israeli soldier cleans his weapon on Israels border with Gaza, where thousands of Palestinians
fled their homes after the Israeli military warned of an intensified offensive. Article on page 9
Associated Press
Trading Slump
Frays Nerves
On Wall Street
UBS AGs trading floor in
Stamford, Conn., once teemed
with traders occupying a
space equal to two football
fields. The Guinness World
Records recognized it as the
biggest such facility on the
planet. And the Swiss bank
used it to showcase its Wall
Street credentials.
Today, there are virtually
no traders shouting into their
phones or staring at blinking
terminals. UBSs cavernous
floor is taken up mostly by
back-office, legal and technol-
ogy staffers, according to peo-
ple familiar with the bank.
A spokeswoman for UBS
said the trading floor was
built for 1,400 traders, but
wouldnt disclose the number
of employees at the facility.
A deep slump in trading
activity in everything from
stocks and bonds to currencies
is changing the face of Wall
Street. Businesses that once
contributed disproportionately
to the revenues of the worlds
largest banks are now bleed-
ing jobs and sparking fears of
a permanent decline.
Todays markets are bor-
ing, said Thomas Thees, a
former head of North Ameri-
can credit trading at Morgan
Stanley and a former co-head
of fixed income at Jefferies
Group. This is affecting the
opportunity to make money,
and ultimately the earnings
these [trading] businesses can
provide.
Global revenue from trad-
ing in fixed income, curren-
cies and commodities, or
FICC, dropped to $112 billion
last year, down 16% from a
year earlier and 23% from
2010, according to Boston
Consulting Group.
As big banks with large
trading operations such as J.P.
Morgan Chase & Co., Goldman
Sachs Group Inc. and Citi-
group Inc. report second-quar-
ter earnings results this week,
investors and analysts will be
trying to find out whether the
slowdown is temporary or a
lasting shift.
The forces arrayed against
banks trading businesses are
powerful. Since the financial
By Katy Burne,
Justin Baer
and Saabira Chaudhuri
Europe File: Italy, not BES, is
a threat to euro zone. ............ 4
Heard on the Street: A cash
headache for companies..... 27
Banking News
Spanish banks show
recovery is still fragile....... 15
Inside story of Citigroups
$7 billion settlement.......... 16
Heard on the Street: Wells
Fargos health report.......... 27
Israel Poised for Stepped-Up Military Assault
Victory travels in Louis Vuitton
T
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Monday, July 14, 2014 | R1
UNLEASHING INNOVATION | AVIATION
After Flight 370
The disappearance of Malaysia
Airlines Flight 370 has already
prompted the reassessment of
some basic airline operations.
But what more can be done? R3
Sky Force
New sensors and new software
mean that unmanned aircraft
have an optimistic future in the
commercial arena. R4
A Year of Probabilities
Helicopter accidents happen
too frequently, but can this
be the year best practice changes
the statistics? R5
Put to the Test
How Airbus has attempted to
tighten its testing procedures. R7
Lead Zeppelins
The lighter-than-air sector is
making a comeback with giant
blimps that can carry big
payloads efficiently. R8
WILLIT?
WONTIT?
Can this years Farnborough International Air Show
provide much-needed overseas buyers for
the U.S. F-35 Joint Strike Fighter?
EUROPE EDITION
[ INSIDE]
R8 | Monday, July 14, 2014 THE WALL STREET JOURNAL.
A
erospace giants and
startups are preparing
the revival of a century-
old concept: the
Zeppelin. Once envi-
sioned as a way to travel across
the Atlantic in great luxury, the
new generation of giant blimps is
being targeted at industrial sec-
tors with a track record of spend-
ing large amounts of money in the
pursuit of a competitive edge:
telecommunications, mining, and
defense.
Some of the top aerospace com-
panies, including Lockheed Martin
Corp. and Thales SA, are becoming
involved in the lighter-than-air sec-
tor that has long been championed
by a coterie of smaller companies.
Customer interest is also rising
as Icelandairs cargo arm and Car-
golux, one of the worlds largest in-
dependent airfreight operators, ex-
press interest in the form.
The attraction of the massive
hulls, which can measure more
than 500 feet in length, is their
ability to carry large amounts of
cargo from remote areas where
planes often cant land. Though
slower than a cargo jet, blimps
have far lower transport costs.
One of the biggest problems for
the Zeppelin zealots, however, has
been one of perception. The most
iconic image of the industry is that
of the Hindenburg disaster in 1937,
which was caught on film when the
hydrogen-filled hull caught fire, en-
gulfing the vehicle in flames, and
killing 36 people.
We have to change the public
perception, said Jean-Philippe
Chessel, who heads the StratoBus
airship project at Frances Thales.
The company plans to build a dem-
onstrator in about five years to
help build confidence among poten-
tial customers and safety regula-
tors. Thales said its vehicle will be
solar-powered, fly at 60,000 feet
and remain airborne for a year. It
could be used by the military in
crisis areas, carrying cameras, ra-
dars or telecommunication relays.
The airship would provide ad hoc
coverage at far lower cost than a
satellite, said Mr. Chessel.
Other prototypes have already
taken to the air. Lockheed Martin
flew the P-791 hybrid airship dem-
onstrator in 2006 and in 2012 be-
gan the process to win a type cer-
tificate for the LMZ1M airship
that would feature a gondola for
up to eight passengers and two
crew members. The vehicle could
also carry cargo in an internal bay
or externally.
Britains Hybrid Air Vehicles Ltd.
flew its Airlander 10 in 2012 under
a U.S. Army contract with Northrop
Grumman Corp. Its California-
based rival, Worldwide Aeros
Corp., flew the Dragon Dream vehi-
cle about 30 hours last year. The
craft is a half-scale prototype of
the planned ML866, designed to
carry 66 tons of payload.
Modern airships are far more
sophisticated than Zeppelin-era de-
signs, featuring advanced buoyancy
systems and the use of advanced
materials in their structure. The
Lockheed airship would feature fly-
by-wire electronic controls now
widely used on combat jets and
modern airliners.
Igor Pasternak, chief executive of
Worldwide Aeros, said airships
could spur a revolution in air trans-
port. We are creating the Internet
for logistics, he said. The company
is working with potential users to
explore how best to employ such
transportation systems. The chal-
lenge is how do we structure the
right business model, Mr. Paster-
nak said.
Establishing the industry hasn't
been without its setbacks. The
U.S. military canceled the program
involving HAVs Airlander after
deciding it couldn't meet military
needs in Afghanistan fast enough.
Hybrid bought the aircraft back
from the U.S. government and is
now rebuilding it for demonstra-
tion flights, said Chris Daniels,
head of partnerships at HAV. The
goal is to return it to flight early
next year. Work has also started
on a larger version, the Airlander
50, with a range of 2,600 nautical
miles.
Worldwide Aeross craft suf-
fered a partial roof collapse of a
hangar which heavily damaged the
Dragon Dream. The company isn't
sure it will rebuild the vehicle, Mr.
Pasternak said. It is, however,
pressing ahead with construction
of the first two operational
ML866s. Work on a vehicle capa-
ble of carrying 250 tons of cargo
will start in two years.
The biggest challenge for the
industry isn't technical, Mr. Pas-
ternak said, but financing. World-
wide Aeros is funded for the next
12 months, but needs more capital
to complete construction of its
first operational vehicles. Hybrid
is funded through to early next
year and the planned return flight
of the Airlander. It hopes to se-
cure orders by then to proceed
with building further vehicles.
The companies are confident,
however, that the market holds
enough promise to help them
raise funds. Hybrid sees a poten-
tial market of 650-1,000 airships
over several decades, although Mr.
Pasternak said it is difficult to
gauge the size of the market accu-
rately since airships are a disrup-
tive technology.
Production plans are ambitious.
Worldwide Aeros has plans to build
as many as 12 vehicles a year. Hy-
brid targets production of 30-40
airships a year toward the end of
the decade. Our biggest issue is
likely to be satisfying demand, Mr.
Daniels said.
Not everyone is a convert. Air-
bus Group NV, which explored the
airship concept, has shelved plans,
said Sebastien Remy, the com-
panys head of innovation. The
company saw too many obstacles
for a viable system, though Mr.
Remy wouldn't rule out an eventual
reversal, in partnership with an-
other company.
The NewZeppelins
Giant blimps are coming back, with the ability to
carry massive payloads cost-efficiently.
But can the industry really rebuild
itself successfully?
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FROM PAST TO PRESENT: The end of the Hindenburg in 1937; the new airships in the shape of the Dragon Dream, top, and HAVs Airlander
BY ROBERT WALL
T
he international air show debut
of the F-35 Joint Strike Fighter
was always going to capture
headlines, but lingering uncer-
tainty over whether it would ap-
pear following a serious engine fire on one
test jet last month has dominated coverage
in the run-up to Farnborough.
The jet is due to be declared combat
ready by the U.S. Marine Corps in 12
months, and F-35 supporters planned to use
the show to shift the focus of the much-de-
layed and overbudget program toward pre-
paring the jets for operations, and help nail
down some much-needed overseas orders.
The Pentagon and the F-35 team led by
Lockheed Martin Corp. need more interna-
tional buyers to counter the slower-than-ex-
pected pace in U.S. ordersa legacy of bud-
get pressuresto keep production lines
humming more efficiently and accelerate ef-
forts to lower the jets cost.
The U.S. is expected to order more than
2,400 of the supersonic jets, with antici-
pated deals for almost 700 more from inter-
national partners, helping to spread devel-
opment costs.
The F-35 would replace thousands of
F-16s and other fighters, with a radar-evad-
ing shape and sophisticated electronics that
are meant to help it evade detection and
provide a communications hub for other
planes, ships and ground forces.
There are eight flags hanging alongside
the stars and stripes in the nondescript of-
fice block outside Washington, D.C., thats
the nerve center of the F-35 program, repre-
senting the international partners whose
confidence needs to be retained to bring
down costs and keep the jet affordable.
Two of the eightDenmark and Can-
adahave yet to order the plane, while oth-
ers such as Italy have already reduced the
number they had planned to buy and are
considering further cuts.
Pentagon procurement chief Frank Kend-
all last month said he was considering a
system of financial incentives and penalties
to retain and attract international partners
in an effort to maintain planned production
increases that are central to reducing the
cost of each jet.
Details have yet to be worked out, but
F-35 officials have previously said smaller-
than-expected deals by existing partners
could inflate the cost of each jet by 2% to
3%. There would be an impact on price,
Mr. Kendall said after a meeting in June of
senior executives from the F-35 contractor
team at Eglin Air Force Base in Florida.
The annual meeting had been billed as a
step toward shaking off the F-35s troubled
past. It was due to enter service in 2010 and
the cost of the planned U.S. purchases has
climbed by 50% to almost $400 billion.
What youre going to see is a shift to-
wards sustainability and reliability of the
aircraft rather than debating the technical
issues, said Orlando Carvalho, executive
vice president of Lockheeds aerospace unit,
in an interview on the eve of the annual
two-day meeting.
Lt. Gen. Chris Bogdan, the military head
of the F-35 program, had identified reliabil-
ity as the main barrier to the plane being
combat ready for the U.S. Marine Corps by
next July, as planned. Gen. Bogdan last year
expressed concerns over problems such as
tires that failed too often. He reported prog-
ress after the June meeting, citing as an ex-
ample how mechanics now had to check oil
less frequently.
Just days later, however, an in-flight
emergency was declared on one jet after it
experienced an oil problem. It landed safely
but fleet checks were carried out afterward.
Then, on June 23, a U.S. Air Force F-35A
the type being bought or considered by
most international partnerscaught fire on
takeoff from Eglin and the Pentagon subse-
quently grounded the entire fleet while in-
vestigators probed the cause.
The two incidents have put pressure on
the testing schedule and continuing efforts
to improve reliability and bring down
costs, and dented the planned marketing
push at Farnborough.
Our first priority is to get the cost
down, Mr. Carvalho said, with the F-35
team aiming to bring the price of each new
jet down by around a third to less than $85
million by 2019.
The F-35s problems are hardly unique.
Other European combat jets such as the Eu-
rofighter also suffered long delays and took
years to become combat ready, as did the
USAFs previous jet, the F-22.
But the scale of the F-35 program, with
purchase plans from multiple countries for
more than 3,000 jets, has made its setbacks
more visible.
The Marines want to have 10 F-35Bs
which can take off and land vertically
ready by next summer. The Air Force is due
to follow the Marines in 2016 with the
F-35A and the U.S. Navy planning to put the
aircraft-carrier based C model into service
in 2018.
What is been harder to plan for are the
orders from allies. Turkey has so far or-
dered just two of a planned 100-jet buy and
Canadas plans remain in flux. Denmark is
evaluating various candidates and will not
buy a plane until next year. Meanwhile,
countries such as the Netherlands and Italy
have curtailed purchase plans.
The U.K., which once said it would take
138, now is expected to take far fewer,
though a revised figure hasnt been set.
More positively, the Pentagon expects
Japan and Israel to add to their existing or-
ders, and a hard-fought deal to sell 40 to
South Korea was agreed earlier this year.
Singapore also has signaled interest, while
Gulf states eager for the most advanced
technology will have to until Israel starts
operating the jet before being allowed to
place orders of their own.
BY DOUG CAMERON AND ROBERT WALL
C
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FORMATION OF THE F-35
TAKING FLIGHT: Above, the F-35 Lightning II
Joint Strike Fighter in action during test
sessions. Left, an F-35 is marshaled to a stop at
its new home at Eglin Air Force Base, Fla.
COVER: An F-35A Lightning II in April, 2013, at
Nellis Air Force Base, Nev.
THE WALL STREET JOURNAL. Monday, July 14, 2014 | R7
Testing, Testing, Testing
Airbus has tried to run its testing schedule of the A350 as tightly
as possible, and, though not without flaws, so far it
has gone remarkably smoothly
F
or cold-weather testing,
Airbus Group NV dis-
patched to the U.S. its
new A350 long-range jet.
It went to Florida;
and it was May.
This seemingly counterintuitive
move was part of the plane
makers effort to minimize risk in
the 10 billion ($13.61 billion) de-
velopment program, whose end is
now in sight. The trip was
planned as a precautionary mea-
sure, in case a winter visit to Can-
ada failed to yield sufficiently cold
conditions to validate that the
A350s systems can be started in
extreme conditions, an important
test to win regulatory approval.
The U.S. Air Force operates a
climatic laboratory at Eglin Air
Force Base in Florida in which the
jet was subjected to temperatures
as low as minus 40C.
The excursion was one of a se-
ries of novelties Airbus intro-
duced in development of the
A350 as a result of painful les-
sons the Toulouse-based plane
maker learned from past experi-
ences, and problems it witnessed
at rival Boeing Co.
When Airbus introduced the
four-engine A340-600 in the
early 1990s, which will be sup-
planted by the A350, its develop-
ment stumbled, and, subse-
quently, reliability of the A380
superjumbo, the companys flag-
ship product, also had more
faults than expected. Boeings
Dreamliner, despite being deliv-
ered years late, suffered repeated
technical glitches. The 787
Dreamliner was also grounded in
2013 for more than three months
after battery fires.
Airbus quickly stripped its
A350 of the kind of lithium-ion
batteries Boeing used to avoid
having the same problem, and re-
verted to a more traditional pow-
ercell design.
Almost from the beginning we
were looking to see what we can
do to eradicate the problems we
have seen on other programs,
said Didier Evrard, who heads the
program.
Airbus also for the first time
has been operating its fleet of
A350 test planes under airline-like
conditions to identify problems so
that customers dont encounter
them. That means that when jets
land with a technical fault, they
have to be repaired with the in-
structions and tools carriers
might employ to remedy the issue,
Mr. Evrard said. The experience
has yielded valuable lessons, he
said, among them showing that el-
ements of the landing-gear doors
needed to be redesigned to boost
reliability.
The result has been a test pro-
gram that to outside observers
has gone remarkably smoothly. In-
vestors who were nervous about
the program are now adopting an
almost complacent attitude, said
Nick Cunningham, an analyst at
Agency Partners.
The A350, which can seat be-
tween 270 and 350 passengers de-
pending on the version and fly up
to 8,500 nautical miles, is due to
enter service this year with Qatar
Airways Ltd. The plane also makes
its first appearance at the Farn-
borough International Air Show
this week after debuting at last
years annual aerospace gathering
in Le Bourget, outside Paris, only
days after the jets first flight.
The planes development hasn't
been without its flaws. Airbus in
2012 had to delay delivery plans
several months to the second half
of 2014 amid problems assembling
wings. Since then the schedule has
held, with safety authorities look-
ing to sign off on the design in
August. The aircraft, like most
new planes, is overweight at ser-
vice entry, at 3.3 metric tons
above its design goal. Mr. Evrard
said that risks remain in the
2,500-flight trial programs,
though most of the difficult tech-
nical tests have been completed.
All five test planes are now flying
and Airbus has clocked more than
2,000 flight-test hours.
Flight trials of new planes,
which are expensive, have been
taking longer and longer. That is a
trend Airbus wanted to arrest
with the A350, said Fernando
Alonso, the head of flight testing
at Airbus.
The flight-test portion of the
A350-900, the first version to seek
approval, will have been com-
pleted in about 14 months. That is
a step in the right direction, Mr.
Alonso said, though more time
could be saved.
As development ends and pro-
duction of the A350 ramps up,
Airbus now is focused on cutting
the cost to build the plane, which
is higher than planned. That is
crucial for Airbus since the A350
will be the mainstay of its wide-
body deliveries and its A380 su-
perjumbo has yet to make a profit.
We believe we can tackle it,
said Fabrice Brgier, head of the
commercial airplane unit. Profit-
able A350s should be shipped to-
ward the end of the decade, the
company has said. Airbus has set
up a team dedicated to finding
ways to cut costs, Mr. Evrard said.
Engineers are looking at simplify-
ing how parts are made or
whether a component used in one
part of the plane can find applica-
tion elsewhere. Ideas are being
generated as design teams work
on the A350-1000, the largest
model due in 2017, he said.
Another looming challenge for
Airbus is the speed with which it
plans to build A350s, in what
should be the steepest rise in
widebody output it has ever at-
tempted. With an order backlog of
more than 800 aircraft, Airbus is
pressured to achieve production
of 10 A350s a month in 2018.
Demonstrating whether all Air-
buss preparations yield success
will fall to Qatar Airways, the
largest buyer of A350s and a noto-
riously exacting customer. The
airline is due to begin flying its
first jets by year-end.
BY ROBERT WALL
A
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r
b
u
s
2
0
1
4
F
.
L
a
n
c
e
l
o
t
;
S
.
R
a
m
a
d
i
e
r
;
a
n
d
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a
s
t
e
r
F
i
l
m
s
/
J
.B
.
A
c
c
a
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z
More Online
>>
See more on the 2014 Farnborough
International Airshow at WSJ.com
TIGHT TIMETABLE: Clockwise, from leftLong-
haul testing under commercial conditions; taking
the aircraft to minus 40C at Eglin; and
water-ingesting testing
R
egardless of what investi-
gators ultimately deter-
mine happened to Malay-
sia Airlines Flight 370, its
disappearance already
has prompted reassessment of
some basic airline operating rules.
Facing a groundswell of public
concern, airlines and government
safety experts want to change the
way aircraft will be routinely
tracked, and how emergency
searches will be conducted in the
future. But as they have done in
the past, industry leaders are
gearing up to oppose other
changes they contend are unnec-
essary and overly expensive.
Something this rare and this
unpredictable requires dramatic
action, according to Olumuyiwa
Benard Aliu, council president of
the International Civil Aviation
Organization, the air-safety arm of
the United Nations. Industry is
absolutely in solidarity, says
Nancy Graham, ICAOs top safety
staffer, because there is this ner-
vousness about Flight 370.
Carriers, equipment makers
and communication-service pro-
viders are moving to voluntarily
ensure that the more than 120,000
airline flights world-wide each
dayincluding those on polar or
long overwater routes lacking tra-
ditional radar coveragewill re-
port their position at least every
few minutes. The airline industrys
top trade association, the Interna-
tional Air Transport Association,
announced that
unequivocal goal
in Aprilmore
than a month be-
fore it had drafted
any specifics or of-
ficially appointed
all the members of
a high-level advi-
sory group.
Airlines are responding to
public outrage and disbelief that
despite todays digitally-con-
nected world, a nearly 250-ton-
airliner could simply vanish with-
out a trace. Flight 370 is bound to
be a shadow over us for a
while, according to Tony Tyler,
executive director of the IATA.
We cannot let another aircraft
simply disappear.
Recommendations for
changes, including enhanced sat-
ellite connections, are expected
as soon as the fall. That is an un-
precedented timetable because
getting consensus for such
sweeping efforts typically takes
years instead of months. Every-
one is moving as fast as we pos-
sibly can, said Ms. Graham.
On one red-hot topic, however,
airline officials dont support
swift action. When it comes to
making air-traffic-control tran-
sponders, satellite-messaging sys-
tems and other onboard communi-
cations gear tamper-proof,
industry leaders seem opposed to
major shifts. Since those propos-
als likely would entail significant
costsand could take planes out
of service for extended periods
airlines increasingly question the
need for the extra safeguards.
Almost from the first day the
Boeing 777 dropped off civilian ra-
dar screens, a team of interna-
tional investigators has said delib-
erate action by some person or
group on the plane turned off tran-
sponders and satellite links. Aus-
tralian authorities reiterated that
last month, concluding the autopi-
lot was purposely engaged before
the last several hours of flight.
Airline officials argue that ac-
tions by cockpit crews or passen-
gers to disable aircraft communi-
cation systems have been so rare
over the years that preventing
such incidents simply doesnt war-
rant massive retrofits or expen-
sive redesign ef-
forts.
After hijackers
attacked the
World Trade Cen-
ter and the Penta-
gon in 2001 with
commandeered
jets that had their
transponders
turned off, the Federal Aviation
Administration proposed regula-
tions to make the devices tamper-
proof. Airlines objected about
costs and technical details, and
the FAA eventually abandoned the
idea. Similar debates in the wake
of the 2009 crash of an Air France
jet watered down responses.
This time, too, the industry ap-
pears to be girding for a fight.
Proposals to make transponders
and satellite connections tamper-
proof may try to do something
that is not yet necessary, says
Kevin Hiatt, IATAs senior vice
president for safety.
All this activity comes more
than four months after the Malay-
sian Boeing 777 carrying 239 peo-
ple veered off its assigned course
to Beijing from Kuala Lumpur and,
according to investigators, flew to
a remote section of the Indian
Ocean. Investigators believe the
plane ran out of fuel and probably
corkscrewed into the water, but so
far no debris has been found.
With underwater searches set
to resume in August, the current
focus remains on how airlines are
implementing lessons learned. In-
dustry officials, though, are frus-
trated because it is hard to come
up with detailed responses when
so many questions about the
flight remain unanswered.
Nonetheless, experts are con-
sidering new types of circuit
breakers that cant be manually
removed. Officials also are moving
to revamp rescue procedures for
missing airliners, including more-
realistic drills featuring actual
search planes, helicopters, ships
and emergency personnel.
Most of all, issues roiling the
industry may dramatically alter
the way high-profile crashes will
be investigated in coming years.
The international team trying to
dissect what occurred on Flight
370 includes representatives of
half a dozen countries. Malaysia
has ceded authority over the
continuing hunt for wreckage to
Australia.
Such broad international coop-
eration could become the norm as
crash probes become ever more
complex and expensive.
BY ANDY PASZTOR
G
e
t
t
y
I
m
a
g
e
s
AnotherAirliner
SimplyCannot
Disappear
There is solidarity in
the airline industry
over lessons that have
to be learned from the
mystery of Flight 370
Something this rare and
this unpredictable
requires dramatic action
FUTILE SEARCH? A Royal New
Zealand aircraft was part of the
international search for Flight
370 in April 2014 covering parts
of the Indian Ocean
It takes aspecial kindof compass tounderstand
thepresent andnavigatethefuture.
Financial services gearedtoour future
adreamour software couldbringtolife.
Innovative thinkers everywhere use
INDUSTRY SOLUTIONEXPERIENCES
from Dassault Systmes to explore the
true impact of their ideas. Predictive
insights help banks and insurance
companies better understand risks,
manage operations and deliver
intelligent services to customers.
How long before we feel comfortable
with whats around the corner?
3DS.COM/FINANCIAL-SERVICES
couldseewhats coming,
wouldwemakebetter decisions?
WSJ APP
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R4 | Monday, July 14, 2014 THE WALL STREET JOURNAL. THE WALL STREET JOURNAL. Monday, July 14, 2014 | R5
UNLEASHING INNOVATION | AVIATION UNLEASHING INNOVATION | AVIATION
Panorama of Options
Opens Up for the Drone
UNMANNED AIRCRAFT, first de-
signed for militaries, have been
given a host of new sensors and
software to make them more use-
fuland safeas they enter the
commercial market.
In the U.S., the Federal Aviation
Administration is working on rules
that would open up the skies to
commercial drones.
Some U.S. entrepreneurs are,
however, already using the de-
vices, and the FAA allows hobby-
ists to fly drones for recreation.
Drone policies vary elsewhere,
though Australia, France and Ja-
pan have some of the most accom-
modating regulations.
Many countries require un-
manned aircraft to stay a certain
distance away from airports. In
response, SZ DJI Technology Co.,
one of the largest consumer drone
makers, has designed software for
its popular Phantom drones that
automatically keep them away
from government-restricted zones
around airports. DJI Phantoms are
unable to fly or take off within 2.4
kilometers of large airports.
Another company has solved a
different safety issue for DJI Phan-
toms: the problem of running into
things. Panoptes UAVa division
of Aurora Flight Sciences Corp.
sells sensor-embedded shells that
screw into DJI Phantoms and con-
nect with their autopilots, or soft-
ware brains. The sensors use
echolocation, like a bat, to recog-
nize walls and other objects and
stay at least 5 feet from them, said
Terrence McKenna, chief executive
of Panoptes.
The company is also working on
customizable, 3D-printed shells
that can be added to any drone. In
addition, it is developing optical
sensors that will augment its
eBumper product to better recog-
nize things. Cameras cant see
windows, but sonar can, Mr.
McKenna said. Sonar doesnt work
well on leaves, but vision would.
Meanwhile, 3D Robotics Inc., a
California drone maker, this
month debuted a feature that has
a decidedly more recreational pur-
pose: Follow-Me mode, in which
the drone autonomously follows
its owner and keeps its camera
trained on that person, creating a
sort of aerial selfie. The drone
uses GPS data to follow the
owners smartphone.
The company is now develop-
ing a mode in which the drone
takes more-creative moving self-
ies. You can say, Lead me, or
Pan me, or have it start behind
you and swing over you, said 3D
Robotics co-founder and CEO
Chris Anderson. Were internaliz-
ing what a director of photogra-
phy would do.
Then there are more ambitious
advancements. Aurora Flight Sci-
ences, which has helped develop
some of the largest drones for
military use, has developed laser
sensors and software to enable an
unmanned helicopter to autono-
mously select a landing site and
land itself.
That technology is a step to-
ward how drones are going to
change short-haul air transporta-
tion, Auroras CEO John Langford
said at a drone conference in May.
Getting people on board these
things is really where its going in
the next five years.
BY JACK NICAS
P
a
n
o
p
t
e
s
U
A
V
Helicopter Safety in Spotlight
THE COMMERCIAL HELICOPTER in-
dustry sees 2014 as a pivotal time
to reduce stubbornly high global
crash rates, as industry officials
seek new ways to promote, as well
as to measure, safety.
With previous safety efforts
stalled in nearly every region of
the globeand U.S. chopper acci-
dent counts actually rising slightly
in recent yearsmanufacturers
and operators are resorting to a
simplistic slogan. Land and Live
urges pilots to make more fre-
quent precautionary landings.
Spotty success with traditional
crash-prevention strategies has
also shifted the focus toward life-
saving technologies, aimed at pro-
tecting passengers and crew if
something goes terribly wrong.
Weve clearly reached a pla-
teau, and we need to break through
that, said Matthew Zuccaro, presi-
dent of Helicopter Association In-
ternational and co-chair of the In-
ternational Helicopter Safety Team.
On average, nearly 40 commer-
cial rotorcraft still go down world-
wide each month; and since the
latest ground-based simulators
are just being phased in for many
pilots, training flights remain the
most dangerous type of commer-
cial operation. There were 439 ci-
vilian accidents globally in 2012,
the last year for which the IHST
has reliable data, amounting to
15% more than in 2011 and higher
than in any of the preceding four
years.
The numbers are only slightly
better in the U.S., where annual
crash totals have crept past the
2008 level of 143; and the 30 fatal
accidents in 2013 substantially ex-
ceeded numbers at the start of the
safety drive in 2005.
Running out of fuel, blundering
into dangerous weather, and over-
looking early signs of malfunc-
tions all continue to claim lives.
Despite years of voluntary efforts
and stepped-up government scru-
tiny, Weve seen some trends go-
ing in the wrong direction, ac-
cording to Christopher Hart,
acting chairman of the U.S. Na-
tional Transportation Safety
Board.
Industry leaders projected a
much different outcome when
they initially set out to dramati-
cally bring down crash statistics.
In 2005 they launched an ambi-
tious initiative targeting an 80%
reduction in global accident rates
by the end of 2015.
It was patterned after a hugely
successful effort by the U.S. air-
line industry, which flew some 3.7
billion people over the past five
years without a single passenger
fatality due to a crash.
By contrast, Mr. Zuccaro ac-
knowledges that the helicopter in-
dustry, which by some measures
averages one accident per roughly
20,000 hours of flight time, re-
mains far from its goal. Were
not going to achieve that in 10
years, he says, partly due to the
wide disparity of users, from sin-
gle-engine private choppers to
small agricultural operators to
fleets of multi-crew, medical evac-
uation models jammed with the
latest night-vision goggles, flight-
data recorders and video cameras.
The industry takes credit for
cutting accident rates by roughly
30% over the past five years,
though segments such as agricul-
tural spraying are persistently
high risk.
But industry officials have ba-
sically stopped measuring global
accident rates altogether and
opted instead to compile total ac-
cident numbers, arguing it is too
hard to determine annual cumula-
tive flight hours. By contrast, out-
side experts contend that analyz-
ing yearly changes in crash rates
per hours flown is a much better
safety tool.
To raise the bar, some advo-
cates are embracing advanced fly-
by-wire systems and encouraging
use of simulators. But there are
some prominent gaps, such as
Robinson Helicopter Co., a leading
manufacturer of less-expensive
workhorse models, which many
industry officials contend is reluc-
tant to voluntarily install video
cameras. A spokeswoman says the
company is researching and eval-
uating options for a lightweight
system that could help investiga-
tors identify causes of crashes.
Reaction to safety threats has
been most pronounced in the U.K.,
following a series of crashes in-
volving rotorcraft transporting
workers to offshore oil and gas
platforms in the North Sea.
U.K. air safety regulators in
February rolled out a series of
measures including a ban on fly-
ing in severe weather and an ex-
amination of whether escape win-
dows had to be enlarged, or larger
workers banned from flying.
Another mandate covered new
breathing equipment to improve
survivability in the event of a
ditching in the North Seas often
hostile waters.
BY ANDY PASZTOR AND DOUG CAMERON
M
e
h
d
i
F
e
d
o
u
a
c
h
i
/
A
F
P
/
G
e
t
t
y
I
m
a
g
e
s
A NEW GENERATION: DJIs Phantom
and close-up with eBumper additions
Drones will change short-
haul air transportation
DORDOGNE A crash in 2013 killed a
Chinese tycoon and French winemaker
Weve seen some trends
going in the wrong direction.
R4 | Monday, July 14, 2014 THE WALL STREET JOURNAL. THE WALL STREET JOURNAL. Monday, July 14, 2014 | R5
UNLEASHING INNOVATION | AVIATION UNLEASHING INNOVATION | AVIATION
Panorama of Options
Opens Up for the Drone
UNMANNED AIRCRAFT, first de-
signed for militaries, have been
given a host of new sensors and
software to make them more use-
fuland safeas they enter the
commercial market.
In the U.S., the Federal Aviation
Administration is working on rules
that would open up the skies to
commercial drones.
Some U.S. entrepreneurs are,
however, already using the de-
vices, and the FAA allows hobby-
ists to fly drones for recreation.
Drone policies vary elsewhere,
though Australia, France and Ja-
pan have some of the most accom-
modating regulations.
Many countries require un-
manned aircraft to stay a certain
distance away from airports. In
response, SZ DJI Technology Co.,
one of the largest consumer drone
makers, has designed software for
its popular Phantom drones that
automatically keep them away
from government-restricted zones
around airports. DJI Phantoms are
unable to fly or take off within 2.4
kilometers of large airports.
Another company has solved a
different safety issue for DJI Phan-
toms: the problem of running into
things. Panoptes UAVa division
of Aurora Flight Sciences Corp.
sells sensor-embedded shells that
screw into DJI Phantoms and con-
nect with their autopilots, or soft-
ware brains. The sensors use
echolocation, like a bat, to recog-
nize walls and other objects and
stay at least 5 feet from them, said
Terrence McKenna, chief executive
of Panoptes.
The company is also working on
customizable, 3D-printed shells
that can be added to any drone. In
addition, it is developing optical
sensors that will augment its
eBumper product to better recog-
nize things. Cameras cant see
windows, but sonar can, Mr.
McKenna said. Sonar doesnt work
well on leaves, but vision would.
Meanwhile, 3D Robotics Inc., a
California drone maker, this
month debuted a feature that has
a decidedly more recreational pur-
pose: Follow-Me mode, in which
the drone autonomously follows
its owner and keeps its camera
trained on that person, creating a
sort of aerial selfie. The drone
uses GPS data to follow the
owners smartphone.
The company is now develop-
ing a mode in which the drone
takes more-creative moving self-
ies. You can say, Lead me, or
Pan me, or have it start behind
you and swing over you, said 3D
Robotics co-founder and CEO
Chris Anderson. Were internaliz-
ing what a director of photogra-
phy would do.
Then there are more ambitious
advancements. Aurora Flight Sci-
ences, which has helped develop
some of the largest drones for
military use, has developed laser
sensors and software to enable an
unmanned helicopter to autono-
mously select a landing site and
land itself.
That technology is a step to-
ward how drones are going to
change short-haul air transporta-
tion, Auroras CEO John Langford
said at a drone conference in May.
Getting people on board these
things is really where its going in
the next five years.
BY JACK NICAS
P
a
n
o
p
t
e
s
U
A
V
Helicopter Safety in Spotlight
THE COMMERCIAL HELICOPTER in-
dustry sees 2014 as a pivotal time
to reduce stubbornly high global
crash rates, as industry officials
seek new ways to promote, as well
as to measure, safety.
With previous safety efforts
stalled in nearly every region of
the globeand U.S. chopper acci-
dent counts actually rising slightly
in recent yearsmanufacturers
and operators are resorting to a
simplistic slogan. Land and Live
urges pilots to make more fre-
quent precautionary landings.
Spotty success with traditional
crash-prevention strategies has
also shifted the focus toward life-
saving technologies, aimed at pro-
tecting passengers and crew if
something goes terribly wrong.
Weve clearly reached a pla-
teau, and we need to break through
that, said Matthew Zuccaro, presi-
dent of Helicopter Association In-
ternational and co-chair of the In-
ternational Helicopter Safety Team.
On average, nearly 40 commer-
cial rotorcraft still go down world-
wide each month; and since the
latest ground-based simulators
are just being phased in for many
pilots, training flights remain the
most dangerous type of commer-
cial operation. There were 439 ci-
vilian accidents globally in 2012,
the last year for which the IHST
has reliable data, amounting to
15% more than in 2011 and higher
than in any of the preceding four
years.
The numbers are only slightly
better in the U.S., where annual
crash totals have crept past the
2008 level of 143; and the 30 fatal
accidents in 2013 substantially ex-
ceeded numbers at the start of the
safety drive in 2005.
Running out of fuel, blundering
into dangerous weather, and over-
looking early signs of malfunc-
tions all continue to claim lives.
Despite years of voluntary efforts
and stepped-up government scru-
tiny, Weve seen some trends go-
ing in the wrong direction, ac-
cording to Christopher Hart,
acting chairman of the U.S. Na-
tional Transportation Safety
Board.
Industry leaders projected a
much different outcome when
they initially set out to dramati-
cally bring down crash statistics.
In 2005 they launched an ambi-
tious initiative targeting an 80%
reduction in global accident rates
by the end of 2015.
It was patterned after a hugely
successful effort by the U.S. air-
line industry, which flew some 3.7
billion people over the past five
years without a single passenger
fatality due to a crash.
By contrast, Mr. Zuccaro ac-
knowledges that the helicopter in-
dustry, which by some measures
averages one accident per roughly
20,000 hours of flight time, re-
mains far from its goal. Were
not going to achieve that in 10
years, he says, partly due to the
wide disparity of users, from sin-
gle-engine private choppers to
small agricultural operators to
fleets of multi-crew, medical evac-
uation models jammed with the
latest night-vision goggles, flight-
data recorders and video cameras.
The industry takes credit for
cutting accident rates by roughly
30% over the past five years,
though segments such as agricul-
tural spraying are persistently
high risk.
But industry officials have ba-
sically stopped measuring global
accident rates altogether and
opted instead to compile total ac-
cident numbers, arguing it is too
hard to determine annual cumula-
tive flight hours. By contrast, out-
side experts contend that analyz-
ing yearly changes in crash rates
per hours flown is a much better
safety tool.
To raise the bar, some advo-
cates are embracing advanced fly-
by-wire systems and encouraging
use of simulators. But there are
some prominent gaps, such as
Robinson Helicopter Co., a leading
manufacturer of less-expensive
workhorse models, which many
industry officials contend is reluc-
tant to voluntarily install video
cameras. A spokeswoman says the
company is researching and eval-
uating options for a lightweight
system that could help investiga-
tors identify causes of crashes.
Reaction to safety threats has
been most pronounced in the U.K.,
following a series of crashes in-
volving rotorcraft transporting
workers to offshore oil and gas
platforms in the North Sea.
U.K. air safety regulators in
February rolled out a series of
measures including a ban on fly-
ing in severe weather and an ex-
amination of whether escape win-
dows had to be enlarged, or larger
workers banned from flying.
Another mandate covered new
breathing equipment to improve
survivability in the event of a
ditching in the North Seas often
hostile waters.
BY ANDY PASZTOR AND DOUG CAMERON
M
e
h
d
i
F
e
d
o
u
a
c
h
i
/
A
F
P
/
G
e
t
t
y
I
m
a
g
e
s
A NEW GENERATION: DJIs Phantom
and close-up with eBumper additions
Drones will change short-
haul air transportation
DORDOGNE A crash in 2013 killed a
Chinese tycoon and French winemaker
Weve seen some trends
going in the wrong direction.
R
egardless of what investi-
gators ultimately deter-
mine happened to Malay-
sia Airlines Flight 370, its
disappearance already
has prompted reassessment of
some basic airline operating rules.
Facing a groundswell of public
concern, airlines and government
safety experts want to change the
way aircraft will be routinely
tracked, and how emergency
searches will be conducted in the
future. But as they have done in
the past, industry leaders are
gearing up to oppose other
changes they contend are unnec-
essary and overly expensive.
Something this rare and this
unpredictable requires dramatic
action, according to Olumuyiwa
Benard Aliu, council president of
the International Civil Aviation
Organization, the air-safety arm of
the United Nations. Industry is
absolutely in solidarity, says
Nancy Graham, ICAOs top safety
staffer, because there is this ner-
vousness about Flight 370.
Carriers, equipment makers
and communication-service pro-
viders are moving to voluntarily
ensure that the more than 120,000
airline flights world-wide each
dayincluding those on polar or
long overwater routes lacking tra-
ditional radar coveragewill re-
port their position at least every
few minutes. The airline industrys
top trade association, the Interna-
tional Air Transport Association,
announced that
unequivocal goal
in Aprilmore
than a month be-
fore it had drafted
any specifics or of-
ficially appointed
all the members of
a high-level advi-
sory group.
Airlines are responding to
public outrage and disbelief that
despite todays digitally-con-
nected world, a nearly 250-ton-
airliner could simply vanish with-
out a trace. Flight 370 is bound to
be a shadow over us for a
while, according to Tony Tyler,
executive director of the IATA.
We cannot let another aircraft
simply disappear.
Recommendations for
changes, including enhanced sat-
ellite connections, are expected
as soon as the fall. That is an un-
precedented timetable because
getting consensus for such
sweeping efforts typically takes
years instead of months. Every-
one is moving as fast as we pos-
sibly can, said Ms. Graham.
On one red-hot topic, however,
airline officials dont support
swift action. When it comes to
making air-traffic-control tran-
sponders, satellite-messaging sys-
tems and other onboard communi-
cations gear tamper-proof,
industry leaders seem opposed to
major shifts. Since those propos-
als likely would entail significant
costsand could take planes out
of service for extended periods
airlines increasingly question the
need for the extra safeguards.
Almost from the first day the
Boeing 777 dropped off civilian ra-
dar screens, a team of interna-
tional investigators has said delib-
erate action by some person or
group on the plane turned off tran-
sponders and satellite links. Aus-
tralian authorities reiterated that
last month, concluding the autopi-
lot was purposely engaged before
the last several hours of flight.
Airline officials argue that ac-
tions by cockpit crews or passen-
gers to disable aircraft communi-
cation systems have been so rare
over the years that preventing
such incidents simply doesnt war-
rant massive retrofits or expen-
sive redesign ef-
forts.
After hijackers
attacked the
World Trade Cen-
ter and the Penta-
gon in 2001 with
commandeered
jets that had their
transponders
turned off, the Federal Aviation
Administration proposed regula-
tions to make the devices tamper-
proof. Airlines objected about
costs and technical details, and
the FAA eventually abandoned the
idea. Similar debates in the wake
of the 2009 crash of an Air France
jet watered down responses.
This time, too, the industry ap-
pears to be girding for a fight.
Proposals to make transponders
and satellite connections tamper-
proof may try to do something
that is not yet necessary, says
Kevin Hiatt, IATAs senior vice
president for safety.
All this activity comes more
than four months after the Malay-
sian Boeing 777 carrying 239 peo-
ple veered off its assigned course
to Beijing from Kuala Lumpur and,
according to investigators, flew to
a remote section of the Indian
Ocean. Investigators believe the
plane ran out of fuel and probably
corkscrewed into the water, but so
far no debris has been found.
With underwater searches set
to resume in August, the current
focus remains on how airlines are
implementing lessons learned. In-
dustry officials, though, are frus-
trated because it is hard to come
up with detailed responses when
so many questions about the
flight remain unanswered.
Nonetheless, experts are con-
sidering new types of circuit
breakers that cant be manually
removed. Officials also are moving
to revamp rescue procedures for
missing airliners, including more-
realistic drills featuring actual
search planes, helicopters, ships
and emergency personnel.
Most of all, issues roiling the
industry may dramatically alter
the way high-profile crashes will
be investigated in coming years.
The international team trying to
dissect what occurred on Flight
370 includes representatives of
half a dozen countries. Malaysia
has ceded authority over the
continuing hunt for wreckage to
Australia.
Such broad international coop-
eration could become the norm as
crash probes become ever more
complex and expensive.
BY ANDY PASZTOR
G
e
t
t
y
I
m
a
g
e
s
AnotherAirliner
SimplyCannot
Disappear
There is solidarity in
the airline industry
over lessons that have
to be learned from the
mystery of Flight 370
Something this rare and
this unpredictable
requires dramatic action
FUTILE SEARCH? A Royal New
Zealand aircraft was part of the
international search for Flight
370 in April 2014 covering parts
of the Indian Ocean
It takes aspecial kindof compass tounderstand
thepresent andnavigatethefuture.
Financial services gearedtoour future
adreamour software couldbringtolife.
Innovative thinkers everywhere use
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How long before we feel comfortable
with whats around the corner?
3DS.COM/FINANCIAL-SERVICES
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WSJ APP
Breaking News. Peerless Insight.
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T
he international air show debut
of the F-35 Joint Strike Fighter
was always going to capture
headlines, but lingering uncer-
tainty over whether it would ap-
pear following a serious engine fire on one
test jet last month has dominated coverage
in the run-up to Farnborough.
The jet is due to be declared combat
ready by the U.S. Marine Corps in 12
months, and F-35 supporters planned to use
the show to shift the focus of the much-de-
layed and overbudget program toward pre-
paring the jets for operations, and help nail
down some much-needed overseas orders.
The Pentagon and the F-35 team led by
Lockheed Martin Corp. need more interna-
tional buyers to counter the slower-than-ex-
pected pace in U.S. ordersa legacy of bud-
get pressuresto keep production lines
humming more efficiently and accelerate ef-
forts to lower the jets cost.
The U.S. is expected to order more than
2,400 of the supersonic jets, with antici-
pated deals for almost 700 more from inter-
national partners, helping to spread devel-
opment costs.
The F-35 would replace thousands of
F-16s and other fighters, with a radar-evad-
ing shape and sophisticated electronics that
are meant to help it evade detection and
provide a communications hub for other
planes, ships and ground forces.
There are eight flags hanging alongside
the stars and stripes in the nondescript of-
fice block outside Washington, D.C., thats
the nerve center of the F-35 program, repre-
senting the international partners whose
confidence needs to be retained to bring
down costs and keep the jet affordable.
Two of the eightDenmark and Can-
adahave yet to order the plane, while oth-
ers such as Italy have already reduced the
number they had planned to buy and are
considering further cuts.
Pentagon procurement chief Frank Kend-
all last month said he was considering a
system of financial incentives and penalties
to retain and attract international partners
in an effort to maintain planned production
increases that are central to reducing the
cost of each jet.
Details have yet to be worked out, but
F-35 officials have previously said smaller-
than-expected deals by existing partners
could inflate the cost of each jet by 2% to
3%. There would be an impact on price,
Mr. Kendall said after a meeting in June of
senior executives from the F-35 contractor
team at Eglin Air Force Base in Florida.
The annual meeting had been billed as a
step toward shaking off the F-35s troubled
past. It was due to enter service in 2010 and
the cost of the planned U.S. purchases has
climbed by 50% to almost $400 billion.
What youre going to see is a shift to-
wards sustainability and reliability of the
aircraft rather than debating the technical
issues, said Orlando Carvalho, executive
vice president of Lockheeds aerospace unit,
in an interview on the eve of the annual
two-day meeting.
Lt. Gen. Chris Bogdan, the military head
of the F-35 program, had identified reliabil-
ity as the main barrier to the plane being
combat ready for the U.S. Marine Corps by
next July, as planned. Gen. Bogdan last year
expressed concerns over problems such as
tires that failed too often. He reported prog-
ress after the June meeting, citing as an ex-
ample how mechanics now had to check oil
less frequently.
Just days later, however, an in-flight
emergency was declared on one jet after it
experienced an oil problem. It landed safely
but fleet checks were carried out afterward.
Then, on June 23, a U.S. Air Force F-35A
the type being bought or considered by
most international partnerscaught fire on
takeoff from Eglin and the Pentagon subse-
quently grounded the entire fleet while in-
vestigators probed the cause.
The two incidents have put pressure on
the testing schedule and continuing efforts
to improve reliability and bring down
costs, and dented the planned marketing
push at Farnborough.
Our first priority is to get the cost
down, Mr. Carvalho said, with the F-35
team aiming to bring the price of each new
jet down by around a third to less than $85
million by 2019.
The F-35s problems are hardly unique.
Other European combat jets such as the Eu-
rofighter also suffered long delays and took
years to become combat ready, as did the
USAFs previous jet, the F-22.
But the scale of the F-35 program, with
purchase plans from multiple countries for
more than 3,000 jets, has made its setbacks
more visible.
The Marines want to have 10 F-35Bs
which can take off and land vertically
ready by next summer. The Air Force is due
to follow the Marines in 2016 with the
F-35A and the U.S. Navy planning to put the
aircraft-carrier based C model into service
in 2018.
What is been harder to plan for are the
orders from allies. Turkey has so far or-
dered just two of a planned 100-jet buy and
Canadas plans remain in flux. Denmark is
evaluating various candidates and will not
buy a plane until next year. Meanwhile,
countries such as the Netherlands and Italy
have curtailed purchase plans.
The U.K., which once said it would take
138, now is expected to take far fewer,
though a revised figure hasnt been set.
More positively, the Pentagon expects
Japan and Israel to add to their existing or-
ders, and a hard-fought deal to sell 40 to
South Korea was agreed earlier this year.
Singapore also has signaled interest, while
Gulf states eager for the most advanced
technology will have to until Israel starts
operating the jet before being allowed to
place orders of their own.
BY DOUG CAMERON AND ROBERT WALL
C
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FORMATION OF THE F-35
TAKING FLIGHT: Above, the F-35 Lightning II
Joint Strike Fighter in action during test
sessions. Left, an F-35 is marshaled to a stop at
its new home at Eglin Air Force Base, Fla.
COVER: An F-35A Lightning II in April, 2013, at
Nellis Air Force Base, Nev.
Testing, Testing, Testing
Airbus has tried to run its testing schedule of the A350 as tightly
as possible, and, though not without flaws, so far it
has gone remarkably smoothly
F
or cold-weather testing,
Airbus Group NV dis-
patched to the U.S. its
new A350 long-range jet.
It went to Florida;
and it was May.
This seemingly counterintuitive
move was part of the plane
makers effort to minimize risk in
the 10 billion ($13.61 billion) de-
velopment program, whose end is
now in sight. The trip was
planned as a precautionary mea-
sure, in case a winter visit to Can-
ada failed to yield sufficiently cold
conditions to validate that the
A350s systems can be started in
extreme conditions, an important
test to win regulatory approval.
The U.S. Air Force operates a
climatic laboratory at Eglin Air
Force Base in Florida in which the
jet was subjected to temperatures
as low as minus 40C.
The excursion was one of a se-
ries of novelties Airbus intro-
duced in development of the
A350 as a result of painful les-
sons the Toulouse-based plane
maker learned from past experi-
ences, and problems it witnessed
at rival Boeing Co.
When Airbus introduced the
four-engine A340-600 in the
early 1990s, which will be sup-
planted by the A350, its develop-
ment stumbled, and, subse-
quently, reliability of the A380
superjumbo, the companys flag-
ship product, also had more
faults than expected. Boeings
Dreamliner, despite being deliv-
ered years late, suffered repeated
technical glitches. The 787
Dreamliner was also grounded in
2013 for more than three months
after battery fires.
Airbus quickly stripped its
A350 of the kind of lithium-ion
batteries Boeing used to avoid
having the same problem, and re-
verted to a more traditional pow-
ercell design.
Almost from the beginning we
were looking to see what we can
do to eradicate the problems we
have seen on other programs,
said Didier Evrard, who heads the
program.
Airbus also for the first time
has been operating its fleet of
A350 test planes under airline-like
conditions to identify problems so
that customers dont encounter
them. That means that when jets
land with a technical fault, they
have to be repaired with the in-
structions and tools carriers
might employ to remedy the issue,
Mr. Evrard said. The experience
has yielded valuable lessons, he
said, among them showing that el-
ements of the landing-gear doors
needed to be redesigned to boost
reliability.
The result has been a test pro-
gram that to outside observers
has gone remarkably smoothly. In-
vestors who were nervous about
the program are now adopting an
almost complacent attitude, said
Nick Cunningham, an analyst at
Agency Partners.
The A350, which can seat be-
tween 270 and 350 passengers de-
pending on the version and fly up
to 8,500 nautical miles, is due to
enter service this year with Qatar
Airways Ltd. The plane also makes
its first appearance at the Farn-
borough International Air Show
this week after debuting at last
years annual aerospace gathering
in Le Bourget, outside Paris, only
days after the jets first flight.
The planes development hasn't
been without its flaws. Airbus in
2012 had to delay delivery plans
several months to the second half
of 2014 amid problems assembling
wings. Since then the schedule has
held, with safety authorities look-
ing to sign off on the design in
August. The aircraft, like most
new planes, is overweight at ser-
vice entry, at 3.3 metric tons
above its design goal. Mr. Evrard
said that risks remain in the
2,500-flight trial programs,
though most of the difficult tech-
nical tests have been completed.
All five test planes are now flying
and Airbus has clocked more than
2,000 flight-test hours.
Flight trials of new planes,
which are expensive, have been
taking longer and longer. That is a
trend Airbus wanted to arrest
with the A350, said Fernando
Alonso, the head of flight testing
at Airbus.
The flight-test portion of the
A350-900, the first version to seek
approval, will have been com-
pleted in about 14 months. That is
a step in the right direction, Mr.
Alonso said, though more time
could be saved.
As development ends and pro-
duction of the A350 ramps up,
Airbus now is focused on cutting
the cost to build the plane, which
is higher than planned. That is
crucial for Airbus since the A350
will be the mainstay of its wide-
body deliveries and its A380 su-
perjumbo has yet to make a profit.
We believe we can tackle it,
said Fabrice Brgier, head of the
commercial airplane unit. Profit-
able A350s should be shipped to-
ward the end of the decade, the
company has said. Airbus has set
up a team dedicated to finding
ways to cut costs, Mr. Evrard said.
Engineers are looking at simplify-
ing how parts are made or
whether a component used in one
part of the plane can find applica-
tion elsewhere. Ideas are being
generated as design teams work
on the A350-1000, the largest
model due in 2017, he said.
Another looming challenge for
Airbus is the speed with which it
plans to build A350s, in what
should be the steepest rise in
widebody output it has ever at-
tempted. With an order backlog of
more than 800 aircraft, Airbus is
pressured to achieve production
of 10 A350s a month in 2018.
Demonstrating whether all Air-
buss preparations yield success
will fall to Qatar Airways, the
largest buyer of A350s and a noto-
riously exacting customer. The
airline is due to begin flying its
first jets by year-end.
BY ROBERT WALL
A
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a
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J
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More Online
>>
See more on the 2014 Farnborough
International Airshow at WSJ.com
TIGHT TIMETABLE: Clockwise, from leftLong-
haul testing under commercial conditions; taking
the aircraft to minus 40C at Eglin; and
water-ingesting testing
Monday, July 14, 2014 | R1
After Flight 370
The disappearance of Malaysia
Airlines Flight 370 has already
prompted the reassessment of
some basic airline operations.
But what more can be done? R3
Sky Force
New sensors and new software
mean that unmanned aircraft
have an optimistic future in the
commercial arena. R4
A Year of Probabilities
Helicopter accidents happen
too frequently, but can this
be the year best practice changes
the statistics? R5
Put to the Test
How Airbus has attempted to
tighten its testing procedures. R7
Lead Zeppelins
The lighter-than-air sector is
making a comeback with giant
blimps that can carry big
payloads efficiently. R8
WILLIT?
WONTIT?
Can this years Farnborough International Air Show
provide much-needed overseas buyers for
the U.S. F-35 Joint Strike Fighter?
EUROPE EDITION
[ INSIDE]
A
erospace giants and
startups are preparing
the revival of a century-
old concept: the
Zeppelin. Once envi-
sioned as a way to travel across
the Atlantic in great luxury, the
new generation of giant blimps is
being targeted at industrial sec-
tors with a track record of spend-
ing large amounts of money in the
pursuit of a competitive edge:
telecommunications, mining, and
defense.
Some of the top aerospace com-
panies, including Lockheed Martin
Corp. and Thales SA, are becoming
involved in the lighter-than-air sec-
tor that has long been championed
by a coterie of smaller companies.
Customer interest is also rising
as Icelandairs cargo arm and Car-
golux, one of the worlds largest in-
dependent airfreight operators, ex-
press interest in the form.
The attraction of the massive
hulls, which can measure more
than 500 feet in length, is their
ability to carry large amounts of
cargo from remote areas where
planes often cant land. Though
slower than a cargo jet, blimps
have far lower transport costs.
One of the biggest problems for
the Zeppelin zealots, however, has
been one of perception. The most
iconic image of the industry is that
of the Hindenburg disaster in 1937,
which was caught on film when the
hydrogen-filled hull caught fire, en-
gulfing the vehicle in flames, and
killing 36 people.
We have to change the public
perception, said Jean-Philippe
Chessel, who heads the StratoBus
airship project at Frances Thales.
The company plans to build a dem-
onstrator in about five years to
help build confidence among poten-
tial customers and safety regula-
tors. Thales said its vehicle will be
solar-powered, fly at 60,000 feet
and remain airborne for a year. It
could be used by the military in
crisis areas, carrying cameras, ra-
dars or telecommunication relays.
The airship would provide ad hoc
coverage at far lower cost than a
satellite, said Mr. Chessel.
Other prototypes have already
taken to the air. Lockheed Martin
flew the P-791 hybrid airship dem-
onstrator in 2006 and in 2012 be-
gan the process to win a type cer-
tificate for the LMZ1M airship
that would feature a gondola for
up to eight passengers and two
crew members. The vehicle could
also carry cargo in an internal bay
or externally.
Britains Hybrid Air Vehicles Ltd.
flew its Airlander 10 in 2012 under
a U.S. Army contract with Northrop
Grumman Corp. Its California-
based rival, Worldwide Aeros
Corp., flew the Dragon Dream vehi-
cle about 30 hours last year. The
craft is a half-scale prototype of
the planned ML866, designed to
carry 66 tons of payload.
Modern airships are far more
sophisticated than Zeppelin-era de-
signs, featuring advanced buoyancy
systems and the use of advanced
materials in their structure. The
Lockheed airship would feature fly-
by-wire electronic controls now
widely used on combat jets and
modern airliners.
Igor Pasternak, chief executive of
Worldwide Aeros, said airships
could spur a revolution in air trans-
port. We are creating the Internet
for logistics, he said. The company
is working with potential users to
explore how best to employ such
transportation systems. The chal-
lenge is how do we structure the
right business model, Mr. Paster-
nak said.
Establishing the industry hasn't
been without its setbacks. The
U.S. military canceled the program
involving HAVs Airlander after
deciding it couldn't meet military
needs in Afghanistan fast enough.
Hybrid bought the aircraft back
from the U.S. government and is
now rebuilding it for demonstra-
tion flights, said Chris Daniels,
head of partnerships at HAV. The
goal is to return it to flight early
next year. Work has also started
on a larger version, the Airlander
50, with a range of 2,600 nautical
miles.
Worldwide Aeross craft suf-
fered a partial roof collapse of a
hangar which heavily damaged the
Dragon Dream. The company isn't
sure it will rebuild the vehicle, Mr.
Pasternak said. It is, however,
pressing ahead with construction
of the first two operational
ML866s. Work on a vehicle capa-
ble of carrying 250 tons of cargo
will start in two years.
The biggest challenge for the
industry isn't technical, Mr. Pas-
ternak said, but financing. World-
wide Aeros is funded for the next
12 months, but needs more capital
to complete construction of its
first operational vehicles. Hybrid
is funded through to early next
year and the planned return flight
of the Airlander. It hopes to se-
cure orders by then to proceed
with building further vehicles.
The companies are confident,
however, that the market holds
enough promise to help them
raise funds. Hybrid sees a poten-
tial market of 650-1,000 airships
over several decades, although Mr.
Pasternak said it is difficult to
gauge the size of the market accu-
rately since airships are a disrup-
tive technology.
Production plans are ambitious.
Worldwide Aeros has plans to build
as many as 12 vehicles a year. Hy-
brid targets production of 30-40
airships a year toward the end of
the decade. Our biggest issue is
likely to be satisfying demand, Mr.
Daniels said.
Not everyone is a convert. Air-
bus Group NV, which explored the
airship concept, has shelved plans,
said Sebastien Remy, the com-
panys head of innovation. The
company saw too many obstacles
for a viable system, though Mr.
Remy wouldn't rule out an eventual
reversal, in partnership with an-
other company.
The NewZeppelins
Giant blimps are coming back, with the ability to
carry massive payloads cost-efficiently.
But can the industry really rebuild
itself successfully?
G
e
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I
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a
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e
s
;
W
o
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C
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.;
H
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FROM PAST TO PRESENT: The end of the Hindenburg in 1937; the new airships in the shape of the Dragon Dream, top, and HAVs Airlander
BY ROBERT WALL

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VOL. XXXII NO.

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