Foreclosure freeze could undermine housing market

Michelle Conlin, AP Real Estate Writer, On Monday October 11, 2010, 8:48 am EDT

NEW YORK (AP) -- Karl Case, the co-creator of a widely watched housing market index, was upbeat three weeks ago. Mulling the economy while at a meeting at a resort near the Berkshires, Case thought the makings of a recovery were finally falling into place.

"I'm a 60-40 optimist," he said at the time.

Today, Case's mood is far more subdued. In scarcely two weeks, he and other housing analysts have watched as the once-staid world of back-office bank procedures has spawned a scandal that threatens to further unhinge the housing market.

Allegations of possible mortgage fraud against financial giants GMAC, JPMorgan Chase and Bank of America read like a corporate thriller: forged documents, faked Social Security numbers, phantom titles, disappearing paper trails, "robo-signers" and mortgages sliced and diced so many times that nobody really knows who owns them.

On Friday, PNC and mortgage servicer Litton Loan Servicing joined those three financial institutions in suspending some foreclosures while they review how documents were handled. Bank of America, which had already announced a halt for 23 states, expanded the suspension to cover the whole nation. If other banks follow suit, it raises the specter of a national foreclosure moratorium.

In all, the banks will have to review the paperwork for hundreds of thousands of mortgages. On top of that, class action lawyers and state attorneys general have filed lawsuits and called for foreclosure moratoriums.

In the near term, the freezes could actually benefit both homeowners and the housing market. Homeowners would have time to live rent-free and chip away at their debt. Prices might stabilize because so many homes are penned up.

But the long-term implications are grave. Only a month ago, housing watcher Mark Zandi, chief economist at Moody's Analytics, predicted that a housing recovery would be under way by the third quarter of next year. Now he believes the foreclosure scandal could prolong the housing depression for at least another few years.

The alleged document fraud could open up the entire chain of foreclosure proceedings to legal challenge. Some foreclosures could be overturned, others deemed outright fraudulent.

Before a housing recovery can occur, all those foreclosed properties have to be re-scrutinized by the banks and then sold. With any foreclosure-related deal open to legal challenge, that inventory could be taken off the market while the legal challenges make their way through the courts.

That's not to mention the questions being raised about missing paper trails on mortgages owned by people who have never missed a payment. What started as simple paperwork bungling in a Pennsylvania office park now threatens to bring to a standstill the nation's entire foreclosure machinery.

The development is especially troubling given how large the foreclosure market is. Before the scandal erupted, forecasters at John Burns Real Estate Consulting predicted that 41 percent of residential sales this year would be on distressed properties. Typically, distressed properties account for 7 percent.

Since housing is the engine that in the past seven recessions has pulled the economy out of recession, any further damage couldn't come at a worse time.

"As far as I'm concerned, anything that slows the foreclosure process is a bad thing," Case said this week.

The debacle injects yet more uncertainty into a frail recovery that is still trying to find its strength.

"This is definitely one of the last things anyone needed to have to deal with," says Diane Pendley, managing director of Fitch Ratings.

The news that GMAC, recently renamed Ally Financial, and JPMorgan Chase and Bank of America were stopping foreclosure proceedings in 23 states was merely the beginning. Federal lawmakers are calling for a federal investigation, saying the excuses from the industry are not credible, and on Wednesday the Ohio attorney general filed a fraud suit against GMAC, calling it "the tip of an iceberg of industrywide abuse." GMAC denies the allegations.

In at least six states, attorneys general are calling for foreclosure moratoriums and launching their own investigations. And this week, the attorneys general of up to 40 states are expected to announce a joint investigation into banks' use of flawed foreclosure paperwork.

A person briefed on the investigation said over the weekend that an announcement of the 40-state investigation could come as early as Tuesday. The person spoke on condition of anonymity because the investigation was not yet public. Iowa Attorney General Tom Miller will lead the investigation.

The Obama administration is studying the situation. Problems with foreclosure procedures were discussed during two recent conference calls involving officials of the Treasury Department, Department of Housing and Urban development, White House and other agencies, an administration official said on condition of anonymity.

A top White House adviser questioned the need Sunday for a blanket stoppage of all home foreclosures, even as pressure grows on the Obama administration to do something about mounting evidence that banks have used inaccurate documents to evict homeowners.

"It is a serious problem," said David Axelrod, who contended that the flawed paperwork is hurting the nation's housing market as well as lending institutions. But he added, "I'm not sure about a national moratorium because there are in fact valid foreclosures that probably should go forward" because their documents are accurate.

Axelrod said the administration is pressing lenders to accelerate their reviews of foreclosures to determine which ones have flawed documentation.

"Our hope is this moves rapidly and that this gets unwound very, very quickly," he said.

Lawyers who have already filed class action lawsuits in Maine and Kentucky are now signing up entire neighborhoods as new clients. They're hiring private eyes to track down former industry employees and holding marathon conference calls to strategize on how to get every speck of dirt on the banks that they can.

The low-level bank employees in question were supposed to have reviewed mortgage documents in detail. Instead, they say they never so much as glanced at the papers. Nor did they even know where the papers were.

"They were just so haphazard and so gloriously incompetent to save a few pennies here and there," says Barry Ritholtz, director of equity research at Fusion IQ. "But a few pennies times millions of documents is a billion dollars."

The banks insist that most of the people involved in the foreclosure deals were legitimately behind on their payments. But even so, if the procedures that put them into foreclosure are deemed fraudulent, it will nullify the deals and require that the entire process start all over again.

The financial institutions insist that, in most if not all cases, there was no fraud, the borrowed missed their payments and the foreclosures are justified. Delays may occur, they say, but the outcomes will be the same. Moreover, they insist they are strengthening their procedures. They are chalking up much of the controversy to possible shoddy paperwork.

But the pronouncements have done little to assuage those connected to the mortgage industry, and the uncertainty is spreading fast.

On Sept. 23, Standard and Poor's warned of a possible downgrade on GMAC. The next day, Moody's Investors Service also placed GMAC on a watch. On Sept. 29, Fitch Ratings said it was reviewing the mortgage servicers' practices.

Perhaps most worrisome was the news on Oct. 1 that title insurer Old Republic National - which provides protection to the homebuyer and mortgage provider in case any unpaid taxes, questionable ownership or other problems turn up - had ordered its agents to cease offering policies on foreclosed properties owned by GMAC or JPMorgan Chase. On Oct. 7, another title insurer, Stewart Title, issued an internal memo making it incredibly difficult - if not impossible - for an agent to write a policy for any foreclosure property connected to any of the now-tainted banks.

"Right now everyone in the industry is trying to understand the scope and breadth of the problem, and is looking to lenders to get their paperwork in order so that sales can resume," says Kurt Pfotenhauer, chief executive of the trade group American Land Title Association.

Meanwhile, real estate agents who specialize in selling bank-owned properties say the market is locking up. Dorothy Buse, a Coldwell Banker agent in the Orlando, Fla., area, said that out of the 200 foreclosures she has listed for sale, 40 are now in the foreclosure freeze. Of the 40, 12 that were already under contract are now on hold.

"There's nothing within my power -- or my staff's power -- that we can do, except try to reassure them that we're working on this," Buse says.

In addition, legal challenges are mounting. On Sept. 24, a district court judge in Maine threw out a ruling in favor of GMAC to foreclose on a house owned by an unemployed mother of two. Now that case will go to a bench trial in Portland.

The court also sanctioned GMAC about its paperwork process, noting that "this case is not the first time that GMAC's high-volume and careless approach to affidavit signing has been exposed."

Michael Holmes is one of the thousands of mortgage holders whose house was put into foreclosure by the now infamous "robo-signer," the GMAC employee who signed 10,000 foreclosure affidavits a month. On Oct. 1, GMAC informed Holmes that the foreclosure on his Belfast, Maine, home had been put on hold. The bank didn't say for how long.

The temporary halt has done little to subdue Holmes' stress. He spent the past year and a half fighting to get a loan modification from GMAC, a process he says yielded a file the size of a Manhattan phone book and virtually no response from the bank. He also claims he received no written notice of a foreclosure.

Now Holmes, a former hospitality executive at such Boston hotels as the Ritz-Carlton and the Copley Plaza, says he wants to fight to keep the Victorian he grew up in. But from one day to the next, he doesn't know what will happen.

"The one safe place you have is your home," Holmes says. "It's your comfort zone, and to have that in limbo, it feels like the wolves are on my porch."

AP Business writers Alan Zibel in Washington and David Pitt in Des Moines, Iowa, contributed to this report.

Meet the new boss, same as the old boss...

WASHINGTON (AP) -- The Obama administration blocked efforts by government scientists to tell the public just how bad the Gulf oil spill could become and committed other missteps that raised questions about its competence and candor during the crisis, according to a commission appointed by the president to investigate the disaster.

In documents released Wednesday, the national oil spill commission's staff describes "not an incidental public relations problem" by the White House in the wake of the April 20 accident.

Among other things, the report says, the administration made erroneous early estimates of the spill's size, and President Barack Obama's senior energy adviser went on national TV and mischaracterized a government analysis by saying it showed most of the oil was "gone." The analysis actually said it could still be there.

"By initially underestimating the amount of oil flow and then, at the end of the summer, appearing to underestimate the amount of oil remaining in the Gulf, the federal government created the impression that it was either not fully competent to handle the spill or not fully candid with the American people about the scope of the problem," the report says.

The administration disputed the commission findings, saying senior government officials "were clear with the public what the worst-case flow rate could be."

In a statement Wednesday, National Oceanic and Atmospheric Administration chief Jane Lubchenco and White House budget director Jeffrey Zients pointed out that in early May, Interior Secretary Ken Salazar and Coast Guard Adm. Thad Allen told the public that the worst-case scenario could be more than 100,000 barrels a day, or 4.2 million gallons.

For the first time, the documents -- which are preliminary findings by the panel's staff -- show that the White House was directly involved in controlling the message as it struggled to convey that it, not BP, was in charge of responding to what eventually became the biggest offshore oil spill in U.S. history.

Citing interviews with government officials, the report reveals that in late April or early May, the White House budget office denied a request from NOAA to make public its worst-case estimate of how much oil could spew from the blown-out well. The Unified Command -- the government team in charge of the spill response -- also was discussing the possibility of making the numbers public, the report says.

The report shows "the political process was in charge and science really does not have the role that was touted," said Christopher D'Elia, dean of environmental studies at Louisiana State University.

The White House budget office has traditionally been a clearinghouse for administration domestic policy. Why exactly the administration didn't want to emphasize the worst-case scenario is not made clear in the report.

However, Kenneth Baer, a spokesman for the Office of Management and Budget, said the budget office had concerns about the reliability of the NOAA estimates.

"The issue was the modeling, the science and the assumptions they were using to come up with their analysis. Not public relations or presentation," he said. "We offered NOAA suggestions of ways to improve their analysis, and they happily accepted it."

Jerry Miller, head of the White House science office's ocean subcommittee, told The Associated Press in an interview at a St. Petersburg, Fla., scientific conference on the oil spill that he didn't think the budget office censored NOAA.

"I would very much doubt that anyone would put restrictions on NOAA's ability to articulate factual information," Miller said.

The explosion in the Gulf of Mexico killed 11 workers, spewed 206 million gallons of oil from the damaged oil well, and sank the Deepwater Horizon drilling rig.

BP's drilling permit for the well originally estimated the worst-case scenario to be a leak of 6.8 million gallons per day. In late April, just after the spill began, the Coast Guard and NOAA received an updated worst-case estimate of 2.7 million to 4.6 million gallons per day.

While those figures were used as the basis for the government's response to the spill -- they appeared on an internal Coast Guard situation report and on a dry-erase board in NOAA's Seattle war room -- they were never announced to the public, according to the report.

However, they were, in fact, announced, as news stories from May 2 to May 5 show, though the figures received little attention at the time.

For more than a month after the explosion, government officials were telling the public that the well was releasing 210,000 gallons per day. In early August, in its final estimate of the spill's flow, the government said it was gushing 2.6 million gallons per day -- close to the worst-case predictions.

The documents also criticize Carol Browner, director of the White House Office of Energy and Climate Change Policy, saying that during a series of morning-show appearances on Aug. 4, she misrepresented the findings of a federal analysis of where the oil went and incorrectly portrayed it as a scientific assessment that was peer-reviewed by inside and outside experts.

"I think it's also important to note that our scientists have done an initial assessment, and more than three-quarters of the oil is gone," Browner said on NBC's "Today" show.

But the analysis never said it was gone, according to the commission. It said it was dispersed, dissolved or evaporated -- meaning it could still be there. And while NOAA administrator Jane Lubchenco was more cautious in her remarks at a news conference at the White House later that day, the commission staff accuses the two senior officials of contributing to the perception that the government's findings were more exact than they actually were.

Florida State University professor Ian MacDonald, who has repeatedly clashed with NOAA and the Coast Guard over the size of the spill, the existence of underwater plumes and oil in the sea floor, said he felt gratified by the report.

From the beginning, there was "a contradiction between discoveries and concerns by academic scientists and statements by NOAA," MacDonald said in an interview with the AP at the oil spill conference.

And he said it is still going on. MacDonald and Georgia Tech scientist Joseph Montoya said NOAA is at it again with statements saying there is no oil in ocean floor sediments. A University of Georgia science cruise, which Montoya was on, found ample evidence of oil on the Gulf floor.

Online: National Oil Spill Commission: http://www.oilspillcommission.gov

Pentagon Loses Control of Bombs to China Metal Monopoly

By Peter Robison and Gopal Ratnam - Sep 29, 2010

A senior manager at a company that churns out metals routinely used in U.S. smart bombs pauses in mid-sentence when his phone rings: a Wall Street stockbroker looking for information. He makes a note to have an assistant call back -- someone who is fluent in English, not just Chinese.

“It’s a seller’s market now,” says Bai Baosheng, 43, puffing a cigarette in his office in Baotou, China, where his company sells bags of powder containing a metallic element known as neodymium, vital in tiny magnets that direct the fins of bombs dropped by U.S. Air Force jets in Afghanistan.

A generation after Chinese leader Deng Xiaoping made mastering neodymium and 16 other elements known as rare earths a priority, China dominates the market, with far-reaching effects ranging from global trade friction to U.S. job losses and threats to national security.

The U.S. handed its main economic rival power to dictate access to these building blocks of modern weapons by ceding control of prices and supply, according to dozens of interviews with industry executives, congressional leaders and policy experts. China in July reduced rare-earth export quotas for the rest of the year by 72 percent, sending prices up more than sixfold for some elements.

Military officials are only now conducting an inventory of where and how U.S. suppliers use the obscure but essential substances -- including those that silence the whoosh of Boeing Co. helicopter blades, direct Raytheon Co. missiles and target guns in General Dynamics Corp. tanks.

Warning Signs

“The Pentagon has been incredibly negligent,” said Peter Leitner, who was a senior strategic trade adviser at the Defense Department from 1986 to 2007. “There are plenty of early warning signs that China will use its leverage over these materials as a weapon.”

China may already be flexing its muscles amid a diplomatic spat with its East Asian neighbor Japan. China last week imposed a “de facto” ban on exports to Japan of the metals used in liquid crystal displays and laptop computers, Japanese Economy Minister Banri Kaieda said Sept. 28. That followed Japan’s detention of a Chinese fishing boat captain whose ship collided with two Japanese Coast Guard vessels. Japan later released the man.

No such ban exists, China’s Ministry of Commerce spokesman Chen Rongkai said.

New Factor

“What it does, clearly, is bring a new factor into the consideration of supply of critical materials,” said Dudley Kingsnorth, director of Industrial Minerals Co. of Australia, a forecaster in Perth.

The U.S. Congress’s investigative arm, the Government Accountability Office, in April warned of “vulnerabilities” for the military because of the lack of domestic rare-earth supplies. The House of Representatives Armed Services Committee will hold a hearing in October, the same month a Pentagon report on how to secure future supplies of the metals is due.

“The department has long recognized that rare-earth elements are important raw material inputs for many defense systems and that many companies in our base have expressed concern regarding the future availability of the refined products of these elements,” Brett Lambert, director of the Pentagon’s Office of Industrial Policy, said.

While two rare-earth projects are scheduled to ramp up production by the end of 2012 -- one owned by Molycorp Inc. in California and another by Lynas Corp. in Australia -- the GAO says it may take 15 years to rebuild a U.S. manufacturing supply chain. China makes virtually all the metals refined from rare earths, the agency says. The elements are also needed for hybrid-electric cars and wind turbines, one reason supply may fall short of demand in 2014 even with the new mines, according to Kingsnorth of Imcoa.

Doggy Day Care

Just how far U.S. manufacturing has waned is apparent at a factory in Valparaiso, Indiana, where dogs skitter across a bare concrete shop floor, their nails clicking. This brick plant on Elm Street once made 80 percent of the rare-earth magnets in laser-guided U.S. smart bombs, according to U.S. Senator Evan Bayh, a Democrat from Indiana. In 2003, the plant’s owner shifted work to China, costing 230 jobs.

Now the plant houses Coco’s Canine Cabana, a doggy day care the current tenants started to supplement sagging income from their machine shop. On most days dogs outnumber the 15 metalworkers, said Kathy DeFries, co-owner of Excel Machine Technologies Inc.

“When things got slow for manufacturing, we had this big empty shop floor,” said DeFries, nuzzling a floppy-eared puppy. “It’s a great stress reliever.”

Expensive to Mine

The rare earths are chemically similar elements, with names such as yttrium and dysprosium. China has the largest share of worldwide reserves, about 36 percent, and the U.S. is second, with 13 percent, the U.S. Geological Survey says. While the elements aren’t rare, they’re less frequently found in profitable concentrations, expensive for Western producers to extract and often laced with radioactive elements.

China produced 120,000 tons, or 97 percent, of the world’s 124,000-ton supply last year, according to the GAO. Half of that came from Baotou, said Kingsnorth. The raw elements have many applications. Neodymium is used by Chinese companies including magnet makers, who sell to U.S. suppliers of defense contractors.

Export Quotas

Export quotas and taxes for overseas buyers that the GAO says can reach 25 percent are pushing up prices of elements even in relatively large supply. For example, the cost of a kilogram of samarium powder, needed for the navigation system of General Dynamics’ M1A2 Abrams tank, jumped to $34 in early September, from $4.50 in June, according to U.K. researcher Metal Pages Ltd.

The U.S. and the European Union consider Chinese restrictions on a range of raw goods part of a strategy to draw in higher-paying manufacturing jobs by making them cheaper to buy inside China. The export taxes violate World Trade Organization rules because China pledged to limit them to 84 product categories when it joined the trade group in 2001, said Terence Stewart, managing partner of Washington law firm Stewart & Stewart. In 2010, China had taxes on 329, he said.

The U.S. and the EU filed a WTO complaint over raw materials including bauxite and coke last year. China’s commerce minister, Chen Deming, said Aug. 28 that the policies comply with WTO rules.

Some manufacturers in China are lobbying the ministry to back off the latest quotas because a dispute will disrupt the market, said Constantine Karayannopoulos, chief executive officer of Toronto-based Neo Material Technologies Inc., which has rare-earth production facilities in China.

Risk of Trade War

“It was very sudden and didn’t give the industry any time to adjust,” he said. “This quota action could risk a trade war.”

For Western companies, China’s policies are creating the real “unobtanium,” the fictional mineral fought over in James Cameron’s 2009 film “Avatar.”

It’s taking as long as 10 weeks to get neodymium magnets, double the previous wait time, said Joe Schrantz, group supply chain manager at Moog Inc. in East Aurora, New York. He said the company buys hundreds of thousands of magnets a year to make motors for cars, trucks and weapons including Raytheon’s AMRAAM -- or Advanced Medium-Range Air-to-Air Missile -- and Boeing’s Joint Direct Attack Munition, a tail fin kit for making precision-guided “smart” bombs out of ordinary weapons.

Rising Prices

Rising neodymium prices are forcing up the price of magnets, which typically cost between $2 and $30 apiece. That’s having a “significant” effect on profit, and suppliers say costs will keep going up, Schrantz said. The company is considering buying blocks of raw material and storing it.

“If everybody does that, then it’s going to get really crazy,” he said.

Neodymium, a silvery metal, is essential in a magnetic alloy developed separately by engineers at General Motors Co. in Detroit and Sumitomo Special Metals Co. in Japan in the 1980s. The magnets are now in millions of stereo speakers, computer disk drives and motors.

In missiles, they replace a hydraulic system of pumps and fluids that was costlier and heavier. Motors in weapons like the JDAM might be three times as big without advanced magnets, said Todd Brewster, senior design engineer at Kollmorgen, a unit of Washington-based Danaher Corp. The JDAM has been used extensively in Iraq and Afghanistan.

Hybrid-Electric Motors

A Chinese supplier makes neodymium magnets for hybrid- electric motors the Navy is developing to cut fuel use of Arleigh Burke-class destroyers, according to the GAO. The agency also says Lockheed Martin Corp.’s SPY-1 radar on Aegis destroyers contains samarium-cobalt magnets that will need to be replaced over 35 years. China is virtually the only supplier of yttrium needed for laser gun sights in the General Dynamics Abrams tank, the U.S. Geological Survey says.

“It’s amazing how this issue seems to have caught the country off guard,” said U.S. Representative Mike Coffman, a Colorado Republican who was a U.S. Marine Corps infantry officer. He noted that China’s capabilities have expanded significantly since 2001, when the U.S. Army canceled plans to buy Chinese-made berets under pressure from Congress. “How ironic is that we were concerned about berets?”

Jon Kasle, a spokesman for Raytheon of Waltham, Massachusetts, said his company hasn’t experienced supply shortages. Spokesmen for Bethesda, Maryland-based Lockheed Martin; General Dynamics, of Falls Church, Virginia; and Chicago-based Boeing declined to comment. “There is a particular need to focus on rare-earth minerals,” said Alexis Allen, spokeswoman for the Aerospace Industries Association, an Arlington, Virginia-based lobby group for defense contractors. “The Department of Defense should consider many alternatives to reliable access.”

Stockpile

One option is to stockpile the metals with allies. Since 1994 the Pentagon has sold off excess raw materials for $7 billion.

Another is subsidies of U.S. manufacturing. The U.S. House of Representatives approved yesterday a proposal by Representative Kathy Dahlkemper, a Pennsylvania Democrat, that would set up a research and development program at the Department of Energy to help U.S. rare-earth manufacturers such as Molycorp with measures including loan guarantees. To become law the bill, which cleared the House on a 325-98 vote, must have a matching Senate version and be signed by the president. Currently there is no such measure.

While Molycorp plans to mine almost 20,000 tons of rare earths annually by late 2012, it doesn’t yet have the capacity to refine the raw elements into metals.

‘No Substitute’

Complicating matters is that even the Pentagon has been unsure of its own needs. Stephen Luckowski, chief of materials manufacturing and prototype technology at the U.S. Army’s Picatinny Arsenal in New Jersey, told participants at a February conference in Cleveland that it took him a month to learn that rare-earth metals are in the nose of the Excalibur missile, and he still wasn’t certain of the exact supply route. Luckowski, a metallurgist, was sure the Army needed the rare earths. “That may be a case where you have no substitute,” he said.

China’s dominance in the materials comes as it scours the planet for resources to feed its economy, which is expanding more than 10 percent this year while the U.S. struggles with an almost 10 percent unemployment rate. The country has been snapping up oilfields, buying copper mines and investing in wind power. China is also expanding its military, developing an aircraft carrier, nuclear-powered submarines and ballistic missiles, the Pentagon said in an August report.

Deng’s Quotation

In the lobby of Bai’s company, a unit of state-owned Baotou Iron & Steel Group Co., a now-famous 1992 quotation by Deng is emblazoned in pink marble. It reads: “The Middle East has oil, and China has rare earths.” A May interview with Bai is regularly interrupted by calls from stockbrokers, analysts and fund managers looking to learn more about the company.

“Because export quotas are limited, we basically can choose our clients; we are no longer compelled to sell to just about anybody who comes knocking,” said Bai, who handles investor relations for Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co. The shares have more than doubled in the past year, reaching 72.72 yuan on Sept. 29, giving the company a market value of $8.8 billion.

The company is especially proud of the samarium-cobalt magnets used in the Shenzhou 7 space capsule that lifted Chinese astronauts into space in 2008. They were developed at the nearby Baotou Research Institute of Rare Earths.

Environmental Costs

The export restrictions compensate for the heavy environmental toll, said Zhang Anwen, vice secretary of the Chinese Society of Rare Earths, a group of researchers in Beijing. “It’s unfair for the U.S. to be pointing fingers at China now,” he said. “To undo the damage done to the earth, we need to return the vegetation, increase water flow and treat the ground. It’s an extremely costly repair.”

Deng set China on its path with a 1986 initiative whose goals included acquisition of technology in “exotic materials” such as rare-earth metals, new energy compounds and high- capacity engineering plastics, according to a U.S. House of Representatives committee report.

That year Zhu Weiheng, an electrical engineer at the Chinese Academy of Sciences, wrote a report to Chinese officials suggesting they control exports of rare-earth minerals because of their high value in manufacturing. Zhu had studied at the Massachusetts Institute of Technology in Cambridge, Massachusetts, and in 1965 designed a motor for China’s first satellite, the East is Red. Later he spent part of Chinese leader Mao Zedong’s Cultural Revolution under arrest as a suspected spy.

‘Real Revolution’

By the early 1980s, Zhu was testing samples of neodymium iron boron, the alloy perfected by engineers at GM and Sumitomo. Two Chinese research institutes also developed it, said Zhu, 91. “It was a real revolution,” he said.

In 1990, Zhang Hong, the Chinese academy’s deputy director of technology, visited Magnequench, a GM unit in Indiana that used a spinning wheel to quench, or cool, the molten alloy into flakes to make magnets. Five years later, a group including then state-owned San Huan New Materials and Hightech Inc. agreed to buy Magnequench.

The Committee on Foreign Investment in the United States, a cross-agency board that reviews foreign takeover deals, allowed the purchase partly because the partners agreed to keep open facilities in the U.S.

Shipped to China

The company opened a new plant in Tianjin in 1998 and shut a former GM operation in Anderson, Indiana, four years later. Magnequench also purchased and later closed the factory in Valparaiso, where Kathy DeFries now boards dogs for $5 an hour. That plant’s tools were shipped to three San Huan operations in China, according to Shannon Song, a Beijing-based executive at Magnequench.

“What they were basically doing was replicating the production lines in China,” said Leitner, the former Pentagon official.

Indiana’s Bayh and Hillary Clinton, now U.S. secretary of state, both cited Magnequench as an example of the U.S. losing jobs and expertise to China. In the 1990s a dozen U.S.-based suppliers of magnets employed 6,000 people. Today there are four, employing 500, said Ed Richardson, vice president of Thomas & Skinner Inc. in Indianapolis, one of the survivors.

Business Decision

The plant closures were a business decision after the technology bust in 2000 hurt sales, Song said. Most of the Valparaiso factory’s business came from computer makers; defense was a minor share, she said. In 2001, labor costs in Anderson averaged $7.32 per kilogram of neodymium powder on top of $10.07 in direct production overhead, she estimates. In 2003 in Tianjin, labor costs were 16 cents and overhead $3.20.

“It was a question of letting the ship sink or doing something to cut the operating cost,” she said.

Toronto-based AMR Technologies Inc. bought Magnequench in 2005 and renamed the merged company Neo. The company’s shares rose to C$4.92 yesterday from as little as C$1.05 in early 2009.

San Huan, now known as Beijing Zhong Ke San Huan High-Tech Co., went public in 2000. Sales have risen more than fourfold, from 371 million yuan that year to 1.6 billion yuan in 2009. The stock has almost tripled in the past year, reaching 17.14 yuan on Sept. 29.

God and Magnets

“God created the universe from nothing and organized it with the help of a magnet,” the company declares on its website, in English and Chinese.

Shares of Aluminum Corp. of China Ltd. rose 18 percent over the past two days in Shanghai trading after its parent announced a plan to invest at least 10 billion yuan ($1.5 billion) to build a rare earth production base in Jiangxi province with a local partner.

A group of U.S. investors led by Denver-based private equity firm Resource Capital Funds wants to challenge China’s dominance by restoring the fortunes of Molycorp, the largest supplier of rare earths for much of the last century. Its mine, west of Las Vegas in California’s Mojave Desert, shut eight years ago, under pressure from Chinese competitors and regulatory scrutiny of wastewater spills.

Molycorp, based near Denver, says it needs $511 million to refurbish and expand. It raised $379 million in its July share sale, and has applied for a $280 million loan guarantee under a U.S. Department of Energy program for “innovative technologies.” The shares have almost doubled, closing at $26.73 yesterday from $14 in July.

Joshua Trees

Costs of environmental compliance will be steep, Molycorp warns in a filing that says it spent $3 million last year alone. Beyond a 300-foot-deep open pit, John Benfield, manager of quality assurance, points to a valley sheltering Joshua trees where slurry left after processing ore will be pumped and harden like concrete.

The trees, protected under California law, will be given new homes after their precise positions are measured with compasses. Their bark burns in the desert sun without the right orientation. Even so, only 20 percent of replanted trees survive, Benfield said.

The company will keep processing costs to $1.26 per pound, half the average in China, by recycling more water and using a single acid to separate elements, said Mark Smith, Molycorp’s CEO. Molycorp is also negotiating with potential partners to alloy metals and turn them into neodymium magnets in the U.S., creating as many as 900 jobs.

“It was a very, very strategic move that the Chinese made,” he said. “They created a very, very large number of jobs for the citizens of China. We ought to be looking at executing that exact same strategy here in this country.”

To contact the reporters on this story: Peter Robison in Seattle on robison@bloomberg.net Gopal Ratnam in Washington at gratnam1@bloomberg.net.

To contact the editor responsible for this story: Melissa Pozsgay in Paris at mpozsgay@bloomberg.net Gary Putka in Boston on gputka@bloomberg.net.

http://www.bloomberg.com/news/print/2010-09-29/pentagon-losing-control-of-afghanistan-bombs-to-china-s-neodymium-monopoly.html

Franken Fish

We Need More Research On Genetically Altered Salmon Says FDA Advisory Panel

A panel of experts that advises the US Food and Drug Administration (FDA) decided on Monday more research was needed before it could vote on whether to recommend approval to allow genetically modified salmon to be bred for human consumption in the US.

An analysis by FDA staff that was released prior to the meeting had concluded that the AquAdvantage salmon from AquaBounty Technologies of Waltham, Massachusetts, was as safe to eat as conventional Atlantic salmon and posed little risk to the environment, reports the Wall Street Journal.

However on reviewing the available evidence, the FDA's Veterinary Medicine Advisory Committee did not vote on the issue but instead offered a series of recommendations calling for more evidence, for instance on whether the genetically altered fish might provoke allergic reactions and other health problems in consumers, said a report in the Los Angeles Times.

If approved, the AquAdvantage salmon would be the first genetically altered food animal to be consumed in the US.

Panel member Dr James McKean, a veterinarian and professor at Iowa State University told the LA Times that there were "questions that have not been answered by the data that has been presented".

Other panel members were of the opinion there was essentially no difference between the genetically engineered salmon and the conventional type.

A professor and fish researcher at Washington State University, Dr Gary Thorgaard, told the paper that he would "not feel alarmed about eating this kind of fish".

The FDA has been considering the case of this particular salmon for over a decade: scientists starting producing the modified fish in the lab nearly 13 years ago.

According to AquaBounty, one of the advantages of the genetically engineered AquAdvantage salmon is that it grows twice as fast as conventional salmon, but is in other respects indistinguishable from Atlantic salmon: it just reaches the same size faster.

To make the genetically modified Atlantic salmon, they take the growth gene from the Pacific chinook salmon and insert it into the DNA of newly fertilized Atlantic salmon eggs. However, this of itself is not enough to keep the salmon growing all year round: to keep the growth gene permanently "switched on", the AquaBounty scientists also add a small piece of DNA from another fish called the ocean pout.

In the wild, Atlantic salmon differs from Pacific salmon in many ways, including appearance, habitat, and ability to survive in different environments.

One of the main differences between Atlantic salmon and Pacific salmon is that Atlantic salmon do not die after returning to spawn in the streams in which they hatch: they can go back to the sea. Mature Pacific salmon, however, generally die within a few days or weeks of spawning.

AquaBounty says its genetically modified Atlantic salmon, which would be bred exclusively on inland fish farms, is reproductively sterile (all the fish would be sterile females), which "eliminates the threat of interbreeding amongst themselves or with native populations, a major recent concern in dealing with fish escaping from salmon farms".

Curiously, the FDA's powers to regulate genetically modified animals for human consumption (under the provisions of the Federal Food, Drug, and Cosmetic Act, FFDCA) require them to consider the "new product" as if it is a drug. In this case, the "drug" is the piece of DNA that is added to the Atlantic fish eggs to change its characteristics.

Under the FFDCA provisions, the agency must assess the health of the affected animal, examine the characteristics of the food products derived from it (such as milk, cheese, meat), consider the risk of a toxic reaction to these products in humans, and also assess the impact on the environment.

To date, the FDA has approved one application related to a genetically engineered animal: this was for a genetically altered goat that produces a human pharmaceutical compound in its milk. The pharmaceutical, recombinant human antithrombin III, for use in individuals with clotting disorders, has also been approved in Europe.

The FDA has also given approval to many genetically modified plant products, including quinoa, soybeans, cotton, flax, corn, rapeseed (Canola), rice, potatoes, bananas, and squash.

The FDA panel meets again on Tuesday in open session and will consider comments from the public, for instance on what should appear on the consumer product label, if the salmon is approved.

Sources: FDA, AquaBounty Technologies, Sacramento Bee, LA Times, Wall Street Journal.

Written by: Catharine Paddock, PhD
Copyright: Medical News Today

Third Party Park Atlanta Handing Out Tickets Willy-Nilly

ATLANTA -- Some Atlanta residents said they are fuming after getting parking tickets in front of their own homes.The city-contracted private company, Park Atlanta, gave David Kwon and his wife a ticket for parking in the wrong direction along their quiet, residential street.People living all over the city are making similar complaints.“To get a ticket like that, it just kind of feels like a slap in the face honestly,” said David Kwon's wife.

Gold Hits Record High

NEW YORK (Dow Jones)--Investors propelled gold to record highs Tuesday as they continued buying the precious metal as a way to offset potential losses from a faltering global economic recovery and dollar.

The most actively traded gold contract, for December delivery, rose $24.60, or 2%, to a record settlement of $1,271.70 an ounce on the Comex division of the New York Mercantile Exchange. The intraday high was $1,276.50. Nearby but thinly traded September gold also settled at a record, $1,269.70, up $24.60, or 2%.

Gold--seen as a relatively safe place to park cash during times of economic uncertainty--took a bump higher after news of a sharp drop in a closely watched survey of expectations for Germany, Europe's largest economy.

"Safe-haven demand is continuing as there are increasing doubts about the robustness of the recent economic recovery and concerns that markets may be subject to further turmoil," said Mark O'Byrne, director of Dublin-based bullion dealer GoldCore.

The dollar--which sank to a 15-year low against the yen, dipped below parity versus the Swiss franc and fell to a series of one-month lows against the euro--also helped dollar-denominated gold, by making it less expensive for buyers using other currencies, boosting demand.

As the yellow metal moved higher, more and more traders began piling on.

"Do the fundamentals justify it? Probably not," said Craig Ross, vice president of Chicago-based brokerage ApexFutures.com. "It's going up more because people read about it going up last week. You can't stand in front of this freight train."

Gold is used to diversify investment portfolios because it isn't as closely linked to economic cycles as more-industrial materials like copper and oil, or equities that act as proxy for the economic outlook.

Just last week, gold posted a record settlement on fresh worries over Europe's banking sector. It then fell back as those concerns eased, but investors remained reluctant to sell the metal too aggressively.

Traders keep bidding the metal higher as interest rates remain at historically low levels, reducing the opportunity costs of holding gold, which pays no interest. Investors have been reluctant to move money back into real estate, and although equities are doing better, they remain wary because questions about the ability of some European nations to manage their debt loads persist.

"People aren't sure where to put their money," Ross said.

The Federal Reserve will probably keep its short-term interest rate close to zero at least through 2012 because of the protracted weakness in the U.S. economy, according to Goldman Sachs Group Inc. The Fed also could announce a new program of asset purchases to support a weak economy as early as November, Jan Hatzius, chief economist at the bank, said Tuesday.

In addition to the low interest rates, keeping easy monetary policy in place is generally considered supportive for gold as some see it weakening the dollar and potentially fostering inflation over the long term. However, such concerns have been floating around the market since the Fed engaged its response to the 2008 financial crisis, and prices overall haven't crept up.

"Market discussion ... of quantitative easing is supportive of gold," said Jim Steel, senior vice president and metals analyst with HSBC in New York.

Gold also has a backdrop of support from seasonal factors and on news that Russian production of the metal is on the decline, said Ira Epstein, director of the Ira Epstein division of the Linn Group in Chicago.

Russia produced 98.08 metric tons of gold in the first seven months of the year, or 3.15 million troy ounces, 3.6% less than in the corresponding period last year, according to figures released Tuesday by the gold producers' union. Gold mining in the period produced 83.892 tons, down 5.93% on the year.

September also often is a stronger month for gold as market participants return from summer holidays and festival- and wedding-related buying ramps up in India, the world's largest gold-jewelry market.

This year, however, that buying could be dented if gold's rally continues.

A move above $1,300 could push world jewelry demand in the fourth quarter down as much as one-fifth on the year, London-based metals consultancy GFMS Ltd. said Tuesday.

Gold demand in India, the world's largest consumer, has picked up due to festivals, but purchases are still below expectation as prices continue to rise, industry executives said Tuesday.

Other precious metals traded in New York also rose Tuesday. Comex December silver gained 1.4% to settle at $20.432, after extending its highest point since July 2008 to $20.550. Nymex October platinum rose 2.9% and hit its highest point since August 4. December palladium on the exchange added 4.5% and touched its strongest price since April.

San Francisco, San Bruno Gas Line Explosion

The level of degradation in America's aging infrastructure is appalling. This didn't have to happen.

In a frightening conflagration fueled by a broken 24-inch gas main, a massive fire in San Bruno on Thursday destroyed 53 homes in the hillside community, killed at least six people, critically injured two dozen and sent scores of residents fleeing as firefighters battled the ferocious blaze.

Early this morning the fire chief said that at least six people have died and that authorities fear the death toll may rise as more homes are searched, according to according to ABC7-TV..

Motorists from nearby Interstate 280 and eyewitnesses described the towering flames reaching as high as 60 feet into the air more than an hour after the huge fireball ignited with a sudden explosion in the packed residential community,

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a few miles from the San Francisco International Airport.

Yasmine Kury, who lives in an apartment complex near the fire's origin, saw black smoke drift over Interstate 280, after a thunderous explosion rocked the Crestmoor community in the area of Skyline Boulevard and Sneath Lane about 6:15 p.m.

"We heard it and felt it, and everyone ran out of the building," Kury said. "It was just a huge explosion."

The noise was so deafening that residents at first thought a plane had crashed, but Pacific Gas & Electric officials said one of its natural gas pipelines had erupted, fueling the flames that quickly began devouring homes and forced a wide-scale evacuation. PG&E, however, said the cause of the blaze had yet to be

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determined.

About 200 firefighters from across the Bay Area rushed to help control the huge fire that had already damaged 120 homes. As of 11 p.m. Thursday, fires continued to burn, turning the neighborhood into an apocalyptic scene. Only half of the fire had been contained.

Two brothers, Bob and Ed Pellegrini, live near the house at the center of the explosion, reported to have occurred at Claremont and Glenview drives. As the ground shook violently, they thought an earthquake had rattled the Bay Area. Then they saw the flames outside their window.

"It looked like hell on earth. I have never seen a ball of fire that huge," Bob Pellegrini said.

It was too hot to escape out the front door, so the brothers ran out the back and up the hill, the fire chasing them. It felt like a blowtorch on the back of their necks, they said. Then they saw that their house and four cars were destroyed in the fire.

"The house is gone," Ed said. "I have nothing. Everything is gone. We're homeless."

As helicopters dropped water and fire retardant on the leaping flames, San Mateo County opened emergency centers and a shelter at the San Bruno Recreation Center while activating a reverse 911 message system to alert

residents. Many of the injured victims were taken to San Francisco and Daly City hospitals.

Fire officials confirmed one fatality, but there were late reports of two others dead. City officials declared the city a disaster area, as it seeks state and federal resources.

The California Public Utilities Commission, meanwhile, is investigating the cause of the explosion and fire, working with local officials and federal agencies as well as PG&E. Some residents in the neighborhood reported "a really strong smell of gas" last week, with PG&E responding at the time.

At Bayhill Shopping Center, residents huddled together in shock and tears as they watched the terrifying scene unfold on television.

Patty Blick, who lives on Claremont Drive, was driving home from work when she was suddenly met with flames and heat. "My house is gone. I'm just not really here right now," she said, sniffling. "I just don't want to leave even though I know nothing is there. I keep thinking I will find something."

John McGlothlin, who lives on the same street, was at home when the explosion happened.

"To me, it felt like an earthquake. Hearing rumbling, movement, stuff like that," said McGlothlin, who was buying a sweatshirt and other essentials at the shopping center where police initially directed many of the displaced residents.

In the San Bruno neighborhood where the explosion rattled the largely residential community, emergency vehicles blanketed the

area.

Marilyn Siacotos, a neighbor who lives at the intersection of Fairmont Drive and Concord Way, drove by and picked up a family of four who lost their cat in the fire.

Siacotos, 76, escaped through the back door because the flames were licking down the front of her street.

"I didn't look back," she said. "I just got out before anybody (emergency responders) came."

Siacotos, and the family members, who did not want their names used, said the explosion originated at a home in the immediate vicinity of Fairmont Drive, a one-block road enclosed on both sides by Claremont Drive.

None of them had any time to grab any belongings before fleeing the scene.

Many described a chaotic scene, with residents scrambling for their lives, some suffering burns and cuts as they escaped the intense, radiating heat.

Retired San Bruno Fire Battalion Chief Bob Hensel, who also had to evacuate, said it was the biggest fire he had seen in decades. When he left the house, with his two cats left behind, he saw his wife's car bumpers melt from the heat.

"I heard a big whooshing sound and there was a boom. Stuff started hitting the house and then it got yellow outside and then real warm," Hensel said.

Though Thursday's explosion may have resulted from a possible ruptured natural gas main, it brought reminders of a similar incident in the Bay Area.

In November 2004, a fuel pipeline killed five construction workers in Walnut Creek -- the deadliest gasoline pipeline explosion since one that killed six people in Texas in 1983.

"What makes this fire so devastating and so difficult is essentially it creates the equivalent of an eight-alarm fire in the heart of a residential neighborhood," retired Contra Costa Fire Battalion Chief Dave George said. "It behaves differently than most other fires because it grows in all directions at the same time. Whatever it wants to do, it does."

George said the heat of the fire would be upward of 1,200 degrees, which could create radiant heat hot enough to burn a couch inside a brick home through the window.

"This is really a worst-case scenario," he said. "The closest thing to something like this is when a wildland fire hits a residential neighborhood."