WSJA FLP FranklinTempleton 081211 China

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Dear Participants,

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V O L . X X XV I N O . 7 1 * * Thursday, December 8, 2011

The Delhi Durbar

And Liberal IndiaOPINION Page 15

The Delhi Durbar

And Liberal IndiaOPINION Page 15

Obama Takes aPopulist SwingWORLD NEWS Page 10

ASIA

Asof12 p.m.ET DJIA 12102.82 g 0.39% FTSE100 5546.91 g 0.39% Nikkei225 8722.17 1.71% Shanghai Comp. 2332.73 0.29% HangSeng 19240.58 1.58% Sensex 16877.06 0.43% S&P/ASX200 4292.50 0.72%

asia.WSJ.com

(India facsimile Vol. 3 No. 132)

Aust ral i a:A$ 6 00( I nc l GS T ) Brunei :B$ 7 00C h i na:RMB2 5 00HongK ong:HK $ 2 000( I nc l Mac au) I nd i a:Rs3 000I nd onesi a:Rp

1 8 000( I nc l P P N) J apan:Y en5 00( I nc l J C T ) K orea:Won2 5 00

New DelhiBacks OffOn RetailReforms

India shelved recently an-nounced plans to allow inter-national supermarkets anddepartment stores to enterthe country, disappointing re-tailers and damaging the gov-ernments credibility but end-ing an impasse between theruling Congress party and theopposition.

Finance Minister PranabMukherjee announced them ov e i n Pa rl ia me nt o nWednesday after the govern-ment met its coalition allies

as well as opposition parties.It suspends a cabinet decisionto allow 51% foreign direct in-vestment in multibrand re-tailwhich includes compa-nies such asWal-Mart StoresInc. and Tesco PLCuntil anagreement on how to do it isreached among the main po-litical parties. Observers saidthat would take months, if ithappens at all.

The decision to bring 51%foreign direct investment in

Please turn to page 20

By Vibhuti AgarwalinNew Delhi

andMegha Bahreein Mumbai

Chinese Firms Fill Lending GapBEIJINGChinese compa-

nies ranging from pharmaceu-tical makers to shipbuildersare making big bets on a po-tentially lucrative business:lending money to cash-strapped companies.

But that emerging profitcenter is becoming a hin-drance for some of the lend-ers, as scrutiny increases onan expanding but murky cor-ner of Chinas shadow bank-ing system.

Yangzijiang Shipbuilding(Holdings)Ltd., a Singapore-traded Chinese shipbuilder,earned a third of its total in-come through the third quar-

ter from investment productsand lending to small busi-nesses, a category that was up65% from a year earlier.

But the company has beendefending its loan business in

recent weeks in light of a re-cent slew of bankruptcies ofsmall manufacturers that

failed to repay private loansat high interest rates. In astatement in October, Yangzi-

jiang said it does not foreseepotential negative impact onits financial performance. Itdeclined to comment further.Its shares are down 53% sofar this year compared with a14% drop in Singapores mainbenchmark.

So-called entrustedloans, as this type of com-pany-to-company debt iscalled, increased by 562.5 bil-lion yuan ($87.9 billion) froma year earlier to 1.07 trillionyuan in the first three quar-ters, according to the most re-cent data from the PeoplesBank of China.

The jump came even asChinas total social financing,a broad measure of credit,

shrank 1.26 trillion yuan to9.8 trillion yuan over thesame period largely due to adrop in bank loans amid Bei-

jings tightened monetary pol-Please turn to page 20

BY LINGLINGWEI

Corporate CashCompany-to-company loans, or entrusted loans, have been onthe rise in China this year, even as total social financing, a broadmeasure of credit, has declined.

Sources: ChinaScope Financial; Peoples Bank of China

5 trillion yuan

0

1

2

3

4

'1120101Q 2Q 3Q 1Q 2 Q 3 Q 4Q

Total social financing Entrusted loans as a share

of total social financingIssuance of entrusted loans

20%

0

4

8

12

16

Sarkozy,Merkel Press

IntegrationFrench President Nicolas

Sarkozy and German Chancel-lor Angela Merkel on Wednes-day set out their plan to pressahead with changes to the Eu-ropean Union treaty, a day be-fore EU leaders convene at acrucial Brussels summit toshore up the euro zone.

Mr. Sarkozy and Ms.Merkel, who made their pro-posals in a letter to EuropeanCouncil President HermanVan Rompuy, issued an ulti-matum to the 27 EU govern-

ments, saying they must de-cide whether they will acceptgreater central control overtheir national budgets.

We are convinced that weneed to act without delay,the two leaders said in theletter. We need to make a de-cision at our next EuropeanCouncil meeting in order tohave the new treaty provi-sions ready by March 2012.

Should some countries de-cide not to participate, the 17countries in the euro zone

will press ahead with a moreintegrated union by signing anew agreement outside EUtreaties, they said.

Mr. Sarkozy and Ms.Merkel outlined the procedureto increase the automatic ap-plication of sanctions againstbudget-rule busters, one ofthe most-contentious pointsof the Franco-German pro-posal because it implies an ef-fective transfer of sovereigntyfrom national parliaments toEU institutions.

As soon as the commissionascertains that a memberstate is in breach of the 3%

ceiling of deficit to gross do-mestic product, penalties willbe automatic unless the con-sensus of euro-zone statesblocks the move, acting byqualified majority.

The two leaders said thePlease turn to page 6

BY GABRIELEPARUSSINI

ANDWILLIAMBOSTON

Chinese and U.S. defense officials began military talks Wednesday in Beijing, after ties were recently

strained by American arms sales to Taiwan and a planned troop deployment in the Pacific. Above, a

Chinese officer in Beijing stands beneath a portrait of the late Chairman Mao Zedong.

China, U.S. Begin Talks on Reducing Military Risks

Getty Images

Geithner says euro effort

will succeed................................. 6

Japan stands by Europedespite downgrade risk.......... 6

Heard on the Street: ECBs

potential for radical action 36

6 0.43% S&P/ASX2004

Thiselectronicnewspaperisprovided

aspartofaWallStreetJournalAsia

FutureLeadershipProgramonly.

Unauthorizeduseorduplicationisprohibited.


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2 * * T H E WA L L S T R E E T J O U R N A L . Thursday, December 8, 2011

THE WALL STREET JOURNAL ASIA

Dow Jones Publishing Company (Asia)

25/F, Central Plaza, 18 Harbour Road, Hong KongTel 852-2573 7121 Fax 852-2834 5291

www.wsj-asia.com

SUBSCRIPTIONS and Address Changes, pleasetelephone our local customer service hotline, HongKong/Taiwan: 852-2831 2555; Beijing: 86-10 6581 4090;Shanghai: 86-21 5836 8228; Indonesia: 62-21 527 7592;Japan: 81-3 6269-2760; Korea: 82-2 756 1695;Malaysia: 60-3 2026 4061; Philippines: 63-2 848 5873;Singapore: 65-6415 4000; Thailand: 66-2 690 4222 to 7;India: 91-11 6462 0215. Or email: [email protected] SALES worldwide through Dow JonesInternational. Hong Kong: 852-2831 2504; Singapore: 65-6415 4300; Tokyo: 81-3 6269-2701; Frankfurt: 49 6929725390; London: 44 207 842 9600; Paris: 33 1 40 1717 01; New York: 1-212 659 2176. Or email:[email protected] appearing herein are used under license fromDow Jones & Company. USPS 337-350ISSN 0377-9920

PAGE TWO

ONLINE TODAY

Most read in Asia

1. Attacks Point to New AfghanConflict2. Panel Calls Olympus Rotten atCore3. The Health Risks of Being Left-Handed4. An iPhone Rival, Not on Price5. Obama Takes Populist Swing

Most emailed in Asia1. The Health Risks of Being Left-Handed2. Chinas Rarest Bankers:Sponsors

3. China Fuels Energy Innovation4. S&P Warns on 15 Euro-ZoneNations5. Chinas New Foray Westwardfor Deals

Videowsj.com/chinarealtime

American basketballstar StephonMarbury is feeling athome in China. In avideo, he shares hisexperiences.

Deal Journal Australia

The resurrection of healthdeals in 2012:blogs.wsj.com/dealjournalaustralia

Heard on the Runwaywsj.com/runway

Chanel designer KarlLagerfeld says thehouses Paris-Bombay-themedshow was a fantas-tical idea of India.

i i i

Business & Finance

n Chinese antitrust regulatorsapproved Nestls $1.7 billion offerfor candy maker Hsu Fu Chi Inter-national, another sign China isopen to foreign takeovers. 21

n Olympus said it is prepared totake legal action against any cur-rent and former executives whohelped to hide more than $1.5 bil-lion in investment losses. 21, 24

n The planned mergerofDeutsche Brse and NYSE Euron-ext is facing severe challenges, de-spite the firms efforts to appeaseEuropean regulators.31

n ING fourth-quarter earningswill take a hit of up to $1.47 bil-

lion from the companys U.S.-an-nuities business.28

n The U.S. government filedcivil-fraud charges against fourChinese citizens and a China-based firm for highly profitableand highly suspicious trading. 22

n Citigroup will eliminate about4,500 jobs over the next few quar-ters and take a $400 millioncharge in the fourth quarter. 23

n A Chinese court dismissed Ap-ples lawsuit against a Chinesecompany that owns the trademarkfor the iPad brand in China. 23

n RIM was temporarily barredfrom using the name BBX for itsnext generation smartphones at aconference in Asia, the latest in a

series of setbacks for the Black-Berry maker.23

n BOJ policy board member KojiIshida said Japan wouldnt be im-mune to any global financial tur-moil if the European debt crisisdeepens.4

n Japans foreign-exchangere-serves hit a record in November,after efforts by the government toweaken the yen through marketintervention boosted the countrysdollar holdings. 27

i i i

World-Wide

n Former Soviet leader MikhailGorbachev called for annullingSundays parliamentary electionresults as discontent simmered

across Russia over widespread al-legations of election fraud.

n Turkey will open new traderoutes to bypass existing channelsthrough Syria, underlining Damas-cuss growing isolation.7

n Three men were killed in Iraq

amid a rise in attacks aimed at in-flaming ethnic and sectarian ten-sions as U.S. troops pull out. 7

n South Koreas ruling party fellinto crisis as three of its sevenleaders quit their posts amid avote-suppression scandal.4

n Pakistani President Zardariwas in stable condition in Dubaifollowing symptoms related tohis pre-existing heart condition,the prime ministers office said.

Afghan President Karzai said he would ask Pakistan for answers in the deaths of dozens in two suicide bombings that have heightened strains between theneighbors. Above, Mr. Karzai talked Wednesday at a Kabul hospital with an Afghan girl who was wounded in Tuesdays suicide bomb attack. Page 7

Associated

Press

Inside

Capital: Separating

fact from fiction on

the Feds loans.10

Life & Style: Uncork-

ing a classic case of

Christmas cheer.12

In Depth:Russia con-

fronts fresh crisis over

airline safety.16-17

Heard on the Street:

Chinas gray budget is

hard to predict.36

Whats News


4/37

Thursday, December 8, 2011 T H E WA L L S T R E E T J O U R N A L . 3

WORLD NEWS

Mining Investment Boom Spurs Australia GrowthSYDNEYAustralias commodity-

based economy roared in the thirdquarter as the full force of a mininginvestment boom began to exert it-self. But the road ahead is less cer-

tain as Europes future remains farfrom clear and Asian growth isslowing.

Gross domestic product grew 1%in the third quarter from the secondand climbed 2.5% from a year ear-lier, the Australian Bureau of Statis-tics said Wednesday. Economists onaverage expected a 0.8% quarterlyrise in GDP. The ABS also revisedhigher second-quarter GDP growth

to 1.4% from 1.2%.Business investment jumped 13%

in the third quarter, led by engi-neering work. Australias gas sectoris building huge projects across thecountrys north, while port, rail andmine expansions are also being pur-

sued aggressively.With 450 billion Australian dol-

lars (US$461 billion) in mining andenergy projects either under way orin planning, the countrys minersare driving the expansion of theeconomy, showing little regard forthe worsening global backdrop andsigns of a slowdown in China. About70% of Australian exports go toAsia.

However, some senior minerswarned recently that if the worldeconomy loses further momentum,some projects may be mothballed orscrapped.

Todays result underscores theunderlying strength and resilience

of the Australian economy andshows we are better placed than vir-tually any other advanced economyto deal with ongoing global instabil-ity and the unfolding crisis in Eu-rope, Treasurer Wayne Swan saidin a statement.

The economy continues to battleits way back from devastatingfloods a year ago. Queenslands coalmines, a key engine of growth, are

yet to return to full production.Queensland Premier Anna Bligh

said Tuesday the states mines arestill back at only 80% production,with overall volumes in 2011-12likely to fall short of forecasts.

Australias economy is powering

ahead despite the relentless nega-tive news out of Europe, accordingto David DeGaris, senior economistat National Australian Bank.

Still, there are headwinds thatcould pick up in the coming months,with the central bank already actingto cushion the nations economywith two cuts to interest rates, an-nounced in November and Decem-ber.

BY JAMES GLYNN

Australias GDPChange from previous quarter,

seasonally adjusted

Source: Australian Bureau of Statistics

1.5

1.0

0.5

0.0

0.5

1.0

%

'112010

1Q 2 Q 3 Q 1Q 2Q 3Q 4Q

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Automatic chronograph LV 277

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4 T H E WA L L S T R E E T J O U R N A L . Thursday, December 8, 2011

WORLDNEWS: ASIA

Seoul Party Leaders Quit PostsThree Council Members of Embattled Ruling GNP Leave Amid Vote-Suppression Scandal

SEOULSouth Koreas ruling

political party fell into crisis asthree of its seven leaders quit theirposts and others tried to distancethemselves from a scandal involv-ing legislative aides who police saytampered with the governmentelection agencys computers duringrecent polling.

The rapidly-unfolding scandal isthe latestand most significant,analysts saidthreat to the re-elec-tion chances for the ruling GrandNational Party. The three who re-signed were on the Supreme Coun-cil of the GNP, the members of Par-liament who lead the party.

The GNP chairman, Hong Joon-pyo, said at a news conferenceWednesday that he wouldnt resign,despite pressure from key mem-bers. Instead, Mr. Hong said he

might dissolve the party and re-start it under a new name in hopesof creating some stability beforethe April parliamentary elections.

I have a road map and an alter-native to re-create the party, but itis not the right time to disclose it,Mr. Hong said.

The conservative party, whichcontrols a sizable majority in the299-seat National Assembly and in-cludes President Lee Myung-bak,has lost popularity in every elec-tion since it took power in 2008, apattern that is typical in Koreanpolitics.

But over the past year, discon-tent with the party and Mr. Lee hasgrown, because they are consideredto have been slow to address thenations uneven recovery from the2008 global economic crisis. Thegovernment handled the crisismainly by creating favorable condi-tions for the nations exporters,while smaller businesses struggledas domestic consumption slumped.

Politicians in opposition partieshad positioned the GNPs supportfor the Korea-U.S. free trade agree-ment as the main issue for focusingthe broader anger. The anti-FTA ef-fort was undercut, however, by aminor-party politician who releasedtear gas in the Parliament duringthe trade-ratification vote and by

violence at recent opposition-ledstreet protests.

Mr. Lee and the GNP , in an ef-fort to appear responsive to publicsentiment, recently proposed sev-eral welfare-related measures, suchas creating free child-care servicesfor working parents.

The emergence of the allegedvote-suppression effort in the re-cent election to fill a small numberof vacant posts could further dam-age the partys chances in the regu-lar election next April, when everyparliamentary and provincial seatis at stake, analysts said.

People are fed up with whatthe GNP was doing, said KangWon-taek, a political scientist atSeoul National University. Im notsure it will work to change theparty name. Its just a cosmetic wayto escape from the current crisis.

Police last Friday arrested anaide to a GNP lawmaker for alleg-

edly creating a denial-of-service at-tack on the website of the NationalElection Commission on the morn-ing of the Oct. 26 election, prevent-ing voters from finding addressesof polling sites. On Monday, an aideto Assembly Speaker Park Hee-taealso was questioned about his rolein the attack. So far, no elected of-ficials have been implicated in thecomputer attack.

The GNPs candidate in the mar-quee race that day, the mayorshipin Seoul, trailed in pre-election sur-veys, and went on to lose to an in-dependent candidate.

Some analysts say the crisis rep-resents a more fundamental chal-lenge to the GNP and the tradi-tional political party system,dominated by older men who oper-ate in top-down fashion by choos-ing candidates and assigning themto races.

The whole mood, not only in

Korea but Japan and other coun-tries, is that people are losing faithin the two-party system or politicsin the old sense, said Mo Jong-ryn,international-relations professor atYonsei University.

In South Korea, that change hasbeen seen in the rising influence ofAhn Chul-soo, a successful doctorand businessman who providedcrucial support for the independentcandidate who won the Seoul may-oral race.

Some surveys in recent monthshave shown that Mr. Ahn could de-feat the GNPs long-presumed nom-inee, Park Geun-hye, in the 2012presidential election. Mr. Ahn lastweek said he wasnt interested increating a new political party butdidnt rule out a run in the presi-dential election, which is in Decem-ber 2012.

Soo-ah Shincontributed to this article.

BY EVANRAMSTAD

Hong Joon-pyo, chairman of the Grand National Party, says he may dissolve and re-start the party under a new name.

Reuters/News1Korea

Seoul Tries Again to Lift HousingMarketSEOULThe South Korean gov-

ernment issued its sixth plan of theyear on Wednesday to boost the ail-ing property market, aiming to spurinvestments for homes and prop updomestic demand.

A key component of the plan isa permanent tax cut on capitalgains from home sales for ownersof multiple properties. Taxes onsuch sales will be fixed between 6%and 35%, compared with rates of asmuch as 60% that sellers had beenscheduled to start paying in 2013.

The government also will ex-pand its loan program for first-timehomeowners, which it said couldsupport about 15,000 householdsnext year. And to help renters, forwhom housing supply remains

tight, the government aims to in-crease rental properties for lower-income people, provide cheaperloans and allow for more construc-tion of rental property within cities.

Koreas property market has

been slumping since the 2008 fi-nancial crisis, weighing on domes-

tic demand. That is increasingly aconcern as the uncertain globaleconomic outlook dims the pros-pects for Korean exporters, whohave been driving economicgrowth. The authorities have tried

multiple measures to aid struggling

builders and heavily indebted Ko-rean households, which would behurt by weaker prices of theirhomes, typically their cornerstoneasset.

Previous government steps haveincluded the creation of a so-calledbad bank to buy lenders bad prop-erty-related loans and allowingreal-estate investment trusts andfunds to buy homes for rental pur-poses. But recent data indicate thatefforts so far havent been able tonurse the property market back tohealth.

Prices of homes in the Seoulmetropolitan area rose by only 0.6%from January to November com-pared with the end of 2010, whileconstruction-related investmentshave fallen from the second quarter

of 2010 to the third quarter of thisyear.On Wednesday, the Bank of Ko-

rea said mortgage lending growthslowed to 1.5 trillion won ($1.3 bil-lion) from a 2.4 trillion won rise in

October because of reduced bor-

rowing related to down paymentsfor apartments.

Korea Investment, a brokeragefirm, said in a report that the latestgovernment plan will support homeprices and eventually boost thebuying appetite of those seekingcapital gains and companies in theproperty rental businesses.

But a turnaround in the housingand construction sectors is far fromcertain.

The easing of policy is unlikelyto reverse the sluggish constructionmarket onto a recovery path due touncertainties in overseas markets,said Yoo Deok-sang, an analyst atDongbu Securities. But at least itmay stimulate new home purchasesdue to tax cuts in the short term.

In its latest plan, the govern-

ment said it might also establishanother firm to take on distressedproperty market debt related toproject-financing projects next year.

In-Soo Nam and Kyong-Ae Choicontributed to this article.

BY SE YOUNG LEE

Home Price DeclineMonthly change in home sale prices

in Seoul Metropolitan Area

112010

Source: Kookmin Bank

-0.2

-0.1

0

0.1

0.2%

Japan to GetHit if EuropeWoesWiden,

BOJ SaysTOKYOBank of Japan policy

board member Koji Ishida saidWednesday Japan wouldnt escapedamage from the gyrations marketswould face if the European debt cri-sis deepens, and said there is noguarantee that yields on Japanesegovernment bonds will remain low.

If deepening European debtproblems leads to turmoil in globalfinancial market, Japan will not beimmune, Mr. Ishida told businessexecutives in Shizuoka, in centralJapan.

There is no guarantee that lowinterest rate levels [on Japanesebonds] will continue in the future,he said, adding that yields have

stayed low despite Japans hugedebt because of the countrys cur-rent-account surplus and the factthat its bond s are mostly held do-mestically.

The comments come after the In-ternational Monetary Fund warnedin a recent report that market con-cerns over fiscal sustainability couldtrigger a sudden spike in Japanesegovernment bond yields that couldquickly render the nations debtwhich stands at around 200% of an-nual gross domestic productun-sustainable.

The IMF report was seen as asignal to Tokyo policy makers thatthe international community is al-ready worried about fallout from Ja-pans potential fiscal problems, afterdebt problems in some Europeaneconomies evolved into a Continent-wide crisis.

Wednesday afternoon in Tokyo,the benchmark 10-year governmentbond yield was at 1.040%.

Mr. Ishida also said a solution tothe European debt crisis will likelytake time, and expressed concernthat slowing global growth as a re-sult of the crisis could have a nega-tive impact on Japanese exports.Moreover, the strong yen, consid-ered a safe-haven investment, willlikely cut corporate profits andweaken sentiment among companiesand households, he said.

Mr. Ishida stressed that Euro-pean leaders have no option otherthan cooperation to solve the crisis.If policy makers can win the mar-kets confidence, that could preventthe crisis from worsening, Mr.

Ishida said.Markets are focused on the out-

come of a European Union summitThursday and Friday, where policymakers are expected to lay out plansto enforce stricter budget rules.

BY TATSUO ITO

BOJ board member Koji Ishida.

Reuters


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6 * * T H E WA L L S T R E E T J O U R N A L . Thursday, December 8, 2011

WORLD NEWS: EUROPE

GeithnerSaysEuroEffort WillSucceedU.S. Treasury Secretary Meets With French Officials to Discuss Crisis Plan as European Summit Approaches

PARISU.S. Treasury SecretaryTimothy Geithner said on Wednes-day he was confident that the ef-forts made by European govern-ments to tackle the sovereign-debtcrisis and economic slowdown willbe successful.

Were encouraged by the prog-ress [Europeans] are making, not

just to put in place economic re-forms across Europe to create theconditions for stronger growth in

the future, but to try to build astronger architecture for a fiscalunion...and try to make sure theresa sufficiently strong firewall inplace to support those efforts, Mr.Geithner said after meeting withFrench Finance Minister FranoisBaroin.

I am confident they will suc-ceed, Mr. Geithner said, adding hehas a lot of confidence in what thepresident of France and what the[finance] minister are doing, work-ing with Germany trying to build astronger Europe.

Speaking at the same briefing,Mr. Baroin said European govern-ments are committed to doing ev-

erything they can to ensure that thefinancial crisis ends and that thereis a real economic recovery.

Mr. Geithner is on a three-daytrip to Europe appealing for stron-ger action as European leaders pre-pare to meet on Thursday and Fri-day.

He met with French PresidentNicolas Sarkozy later Wednesdaymorning.

In Paris, Mr. Geithner and Mr.Baroin discussed some of the issuesthat will be on the table at a Euro-pean Union summit on Friday inBrussels, including the shift in gov-ernance from the European Finan-cial Stability Facility and its trans-formation into the EuropeanStability Mechanism, as well as theremoval of private-sector involve-

ment in future debt restructuringsin Europe, Mr. Baroin said.Both issues will be part of a joint

proposal to modify the EU treatyand improve economic governancein the currency bloc that Mr.Sarkozy and German Chancellor An-gela Merkel are submitting to Euro-pean partners this week.

The two officials also discussedhow to deploy resources at the In-ternational Monetary Fund, Mr.Baroin said, as well as ways of mul-tiplying [their] joint efforts to endthe financial crisis and minimize itsimpact on the real economy.

BY GABRIELEPARUSSINI

AND SUDEEPREDDY

U.S. Treasury Secretary Timothy Geithner, at left, with French Finance and Economy Minister Franois Baroin, center, andFrench President Nicolas Sarkozy at the lyse Palace in Paris after a meeting on Wednesday.

Reuters

Sarkozy, Merkel PressFor More Integration

currency blocs strengthened struc-ture will hinge upon regular sum-mits of euro-zone leaders with apermanent president, to be held atleast twice a year. Still, during thecrisis, the Eurosummit should meeton a monthly basis, they said, andeach meeting should focus on a pre-cise agenda regarding governanceand policies to foster growth.

This framework will be fullyconsistent with the EU institutionalarchitecture, the letter said, addingthat the Commission, the Parliamentand national parliaments will be in-volved in the process.

Ms. Merkel and Mr. Sarkozy saidthe EU should enhance coordination,surveillance and enforcement inbudgetary matters, notably propos-ing the adoption by each euro-zonestate of rules on a balanced budgettranslating the objectives and re-quirements of the Stability andGrowth Pact into national legisla-tion at constitutional or equivalentlevel.

Earlier on Wednesday, a seniorGerman government official saidGermany had all but given up hopeof persuading all 27 EU nations torally behind a Franco-German pro-posal for limited treaty changes tosafeguard the euro and help stemthe euro-zone debt crisis.

I am more pessimistic than Iwas last week on the chances of to-

tal agreement, the official said. Amore-likely scenario, the officialsaid in comments echoed by Ms.Merkel and Mr. Sarkozy, is that the17 euro-zone countries, togetherwith four or five other EU coun-

Continued from first page tries, would separately agree to far-reaching coordination of economicpolicies, supervision of their bud-gets through European officials andstrict limits on debts and deficits.

In the many discussions over thepast weeks, it has become clear thatmany people still dont recognizethe gravity of the situation, theGerman official said. We need totake decisive steps in restructuringthe euro zone. We cannot achieveour goals by taking small, individualsteps.

The official also confirmed thatGermany has backed down on itsprevious demands for special lan-

guage in the treaty to require theprivate sector to participate in anyrestructuring of sovereign debt in-volving the European StabilityMechanism, the euro zones perma-nent bailout fund.

Meanwhile, Germanys latest five-year federal note auction proved tobe a significantly smoother salethan feared by many market partici-pants, with bids sharply exceedingthe amount on offer, indicating thatthe safety of German debt is still indemand.

The 5 billion ($6.7 billion) auc-tion of the 1.25% October 2016-dated federal note, or bobl, wasmore closely scrutinized than usualfor a German auction, following thecountrys disappointing 10-yearbund sale two weeks ago. Germany

sold 4.09 billion of the October2016 bobl against 8.67 billion inbids.

Emese Barthaand Neelabh Chaturvedi

contributed to this article.

Japan Says It Wont ForsakeEuropeDespiteDowngradeRisk

TOKYOJapan will consider fur-ther investment in Europes bailoutfund, a senior Japanese FinanceMinistry official said on Wednesday,despite a warning that the fundcould lose its triple-A rating.

The official also said Japansstance toward the fund, the Euro-pean Financial Stability Facility,wont change even if its bonds aredowngraded, as long as Germanyand France continue to guaranteepayments. Such support will growmore significant as the euro zone,struggling to resolve its debt prob-

lems, looks for larger contributions.There is no change in our policy

that we will consider additional pur-chases while watching efforts by Eu-ropean nations to resolve their sov-ereign problems, the official said inan interview. EFSF bonds are guar-anteed by the most credible coun-triesFrance and Germany. As longas that mechanism remains in place,we believe there will be no prob-lems regarding the safeness of EFSFsecurities.

Other factors will influence Ja-pans decision, he said, including theavailability of euros in its foreignreserves and any conditions at-tached to future EFSF bonds. Japanhas used euros from its $1.3 trillionreservesthe worlds second-larg-est, after Chinasto invest 2.98

billion in EFSF debt so far, accord-ing to Japans Ministry of Finance.That is small compared with the

hundreds of billions of euros Euro-pean leaders are trying to secure tocontain the debt problems. But Jap-

anese support must be more impor-tant to them than before, as the Eu-ropean situation has deteriorated,said Koji Fukaya, chief currencystrategist at Credit Suisse. Euro-pean nations have already reached apoint where they need to look formoney from the International Mone-tary Fund, and this means that helpfrom other countries is important tothem.

The ratings firm Standard &Poors warned Tuesday that it couldstrip the euro zones bailout vehicleof its triple-A rating if any of thetriple-A countries that guaranteethe fund are also downgraded. S&Phad warned late Monday that thecurrency blocs triple-A countriesare in danger of that if policy mea-

sures to resolve the sovereign-debtcrisis arent reached at the Euro-pean Union summit on Friday.

There has been speculation Ja-pan might rethink its investmentpolicy if the EFSF loses its triple-A

status. But the Japanese officialscomments suggest that private-sec-tor firms ratings may not mattermuch as long as policy makers feelcomfortable holding a particular as-set or see the need for it in their re-serves.

When S&P removed the triple-Arating the U.S. had held for 70 yearsin August, the Japanese governmentquickly declared its continued confi-dence in U.S. Treasury bonds, whichare believed to account for much ofJapans foreign reserves.

At the latest auction of EFSFdebt in November, Tokyo boughtsome 10% of the securities sold, fi-

nance ministry officials sayaboutthe same amount China bought, saidpeople familiar with the matter. Itwas only about the half of the shareJapan had purchased in the previousthree auctions.

That cutback isnt likely to meanTokyo would walk out on Europe.One Japanese government officialhas said in an interview that Japansintent was to pressure Europe intoaccelerating work to contain the cri-sis, while others have cited technicalreasons for the reduction, such aslimited euro liquidity in the re-serves.

The Japanese government hasgood reasons for helping, analystssay. Europes woes have been chill-ing global growth, threatening Ja-pans export-led economy. And con-

cerns over the debt crisis and theworld economic outlook have led in-vestors to sell the dollar and theeuro for the yen, adding to the ex-port-denting upward pressure onthe Japanese currency.

BY TAKASHI NAKAMICHI

Source: Japans Ministry of Finance

25 January

15 June

22 June

7 November

BuyingLessAt the last auction of EFSF debt in

November, Tokyo bought only 10%

of the securities sold. Share ofsecurities bought by Japan at

each auction in 2011:

20.5%

22.0

18.3

10.0

Mr. Baroin said he and Mr.Geithner discussed ways ofmultiplying joint efforts to

end the financial crisis.


8/37

Thursday, December 8, 2011 T H E WA L L S T R E E T J O U R N A L . * * 7

WORLD NEWS

Afghans Ask Questions, MournKABULAfghan President Hamid

Karzai said he would ask Pakistan toexplain why it provides sanctuary

for an extremist group suspected ofkilling dozens in two suicide bomb-ings in Afghanistan that are likely toexacerbate strains between the twoneighbors.

Mr. Karzai, who visited survivorsat a Kabul hospital, pledged to seek

justice with a thorough investiga-tion into Tuesdays attacks, whichtargeted Shiite gatherings in Kabuland the northern city of Mazar-e-Sharif.

Afghanistan takes this very seri-ously. It is the issue of the life of thepeople which we will fully follow upwith Pakistan, he said. We cantlet go and ignore the blood of ourchildren.

A Pakistan-based militant groupnotorious for attacks on Shiites,Lashkar-e-Jhangvi, took responsibil-

ity for the attacks. Afghan officialssaid Wednesday that 56 people werekilled in the Kabul blast, a down-ward revision from Tuesday whenthey said 59 died in the attack. Fourothers were killed in Mazar-e-Sharif.

The U.S. Embassy said one Amer-ican was killed in the Kabul attack,and it was investigating reports thata second U.S. citizen may have beenamong the dead.

Citing the Lashkar-e-Jhangviclaim, Mr. Karzai said he would askPakistan to explain why it allowssuch groups to operate within itsborders. Tuesdays explosions, someof the worst since the war began 10years ago, followed a dramatic dete-rioration in Pakistans ties withKabul.

In September, Afghan officialsaccused Pakistans Inter-Services In-telligence Directorate spy agency ofinvolvement in the assassination offormer Afghan President Burhanud-din Rabbani, the countrys mainpeace negotiator, by a purportedTaliban emissary who arrived fromPakistan. Pakistan denied those ac-cusations.

Last month, ties were furtherstrained as a joint U.S.-Afghan pa-trol called an airstrike that mistak-enly killed 24 Pakistani troopsposted along the border.

Islamabad responded to the air-strike by shutting the border to co-alition supplies bound for Afghani-stan, and ousting the U.S. from anair base on its soil.

Other Afghan officials have gonefurther than Mr. Karzai, openly ac-cusing the ISI of orchestrating Tues-

days bombings. ISI is directly in-volved in the attack, a senior

Afghan security official said. Themain purpose is to spark sectarianviolence among Afghans. The mili-tants have used every single tacticin the war, but have failedand nowthis was their new tactic and theysuccessfully carried it out.

An ISI spokesman denied thisand challenged Afghan officials toprove their claims. Can you askthem to show the proof? he said.

Some Pakistani analysts alsoscorned the Afghan assertions. Itsa piece of sheer ignorance on thepart of Afghan intelligence if theythink Lashkar-e-Jhangvi is backedby the ISI, said Imtiaz Gul, directorof the Islamabad-based Center forResearch and Security Studies, athink tank.

Lashkar-e-Jhangvi has turned onthe Pakistan state since beingbanned a decade ago, and was in-volved in attempts to kill formerPresident Pervez Musharraf andother political leaders. Their cam-paign against Shiites in Baluchistanprovince also has caused significantsecurity problems for the govern-ment there.

Critics say Pakistan has been re-luctant to crack down on the organi-

zation for fear of a backlash.The Afghan security official,

along with a senior official with theU.S.-led military coalition, said therewere indications that the Haqqaninetwork, the Afghan militant groupresponsible for most of the recenthigh-profile attacks in Kabul, hadhelped facilitate Tuesdays blasts.

The Haqqanis are part of the Tal-iban movement and recognize theauthority of Taliban leader MullahOmar, though the group operates onits own. The Taliban condemnedTuesdays bombings as inhumanand un-Islamic, denying any in-volvement.

On Wednesday, another deadlyblast killed 19 Afghan civilians whena packed van hit a hidden explosivein Helmand Provinces Sangin Dis-trict, a volatile area of southern Af-ghanistan that remains a focus ofthe military effort to drive Talibaninsurgents out of their longtimestrongholds.

In Kabul, as Afghan Shiites bur-ied their dead, one Shiite clericurged mourners not to let the at-tacks create a dangerous rift be-tween Afghanistans majority Sunniand minority Shiite populations thatcould drag the country back into abrutal civil war.

Our people must think sensiblyand realize that the real enemies of

Afghanistan and Afghans want todestroy the unity between Shiiteand Sunnis in Afghanistan, saidMohammad Baqer Nateqi, a clericspeaking to 700 people gathered forthe burial of five victims of theKabul blast. Shiites account forsome 20% of Afghanistans Sunni-majority population.

The mourners directed their furyat Pakistan. It is Pakistan that killsour people, said Rafiq, who lost a25-year-old cousin. Soon, tolerancewill be finished.

At a Kabul hospital, Karima, a22-year-old mother of four, recov-ered from the explosion, which tookthe lives of 10 of her relatives. Stilldisoriented from the blast, whichravaged the right side of her body,Karima hadnt been told that threeof her four children were among thedead. I dont know who is dead andwho is alive, she said.

Her husband, Zabih, buried thethree children and seven other rela-tives Wednesday morning andturned his attention to looking aftertheir surviving child. I am sitting inmy house, alone, with my daughter,as a single man, he said.

Ziaulhaq Sultani in Kabul

and Tom Wright in New Delhicontributed to this article.

BY DIONNISSENBAUM

AND HABIBKHAN TOTAKHIL

President Karzai, at a Kabul hospital Wednesday, talks to wounded survivors of Tuesdays bombing in the capital.Associated

Press

Turkey MovesTo EstablishTrade RoutesAvoiding Syria

TURKISH-SYRIAN BORDERTur-key said on Wednesday that thisweek it would start bypassing Syriato ship goods to the Middle East viaIraq and the Mediterranean Sea, inresponse to a Syrian blockade thathas left hundreds of Turkish vehi-cles stranded at the border.

The escalating trade disputecame as relations between the twoneighbors plumbed new depths.Syrias state news organs accusedTurkey of being run by Jews, of pre-paring a Western invasion and ofharboring insurgents who staged anattack across the border.

E co no my M in ist er Z af erCaglayan told Turkeys CNBC-e tele-vision channel that Ankara would onThursday begin to truck goods

across Iraq and ship them by seafrom the southern port of Mersin toAlexandria, Egypt, avoiding Syria.

Ankaras decision to reroutetransit freight was forced by Syriasdecision to block traffic at Turkeysborders, Mr. Caglayan said. He saidthe blockade, in turn, was retalia-tion for Turkeys decision last weekto impose sanctions against the re-gime of President Bashar al-Assad,but that it punished mainly the Syr-ian people.

It is very easy for us to bypassSyria but we preferred not to dothis, said Mr. Caglayan. But theywanted it this way. I say again,whatever they do they will suffermore than Turkey every time. Totrade with the Middle East and theGulf we do not have to go throughSyria. Our A, B and C plans are al-ready ready.

Ankara and Damascus were closeregional allies until this summer,when Turkish officials said Presi-dent Assads refusal to end a bloodycrackdown against opponents forceda shift. Ankara last week joined theArab League in imposing sanctionson regime officials, but it is neigh-boring Turkey that has borne thebrunt of anger in Damascus.

Mr. Caglayans announcementcame a day after Syrias state SANAnews agency reported that 35 ter-rorists had crossed the borderfrom Turkey and were driven backin a gunfight, with several woundedbeing taken away in Turkish mili-tary vehicles.

A spokesman for Turkeys for-eign ministry on Tuesday said An-

kara doesnt send armed persons toany other country.

On Wednesday, the Free SyrianArmy, whose leadership is based inTurkey, confirmed that one of itsunits did stage an attack on a Syrianpolice station close to the borderand that wounded rebels hadcrossed the border to seek treat-ment, Reuters reported. However,the spokesman said the unit wasntfrom Turkey, but rather was basedinside Syria.

In further signs of Syrian anger,the state-run Tashir newspaper onTuesday ran an Op-ed article thatsaid: Turkey today is ruled byJews. Its foreign minister, [Ah-met] Davutoglu, and those walkinghis walk are all related.

Mr. Davutoglu is Muslim and

Turkey has taken a particularlytough line against Israel. The articlecalled that stance a sham.

Nour Malas in Dubaiand Joe Parkinson in Istanbul

contributed to this article.

BYMARCCHAMPION

Killings in Iraq Fuel Fear of Ethnic, Sectarian Conflict

BAGHDADThe deaths of threemen in separate incidents onWednesday extended a resurgenceof attacks aimed at inflaming ethnicand sectarian tensions in Iraq.

The development comes as theU.S. troop pullout and the threat ofcivil war in neighboring Syria arestirring up doubts about the abilityof the Iraqi government and secu-rity forces to control the situation.

The latest spasm of violence be-

gan more than a month ago, afterU.S. President Barack Obama an-nounced he would bring all troopshome by the end of the year.

Attacks have hit a variety of ar-eas and targets across the country,

with some of the most worrisomestrikes in provinces with a volatileethnic and sectarian mix and a long-running dispute over land and re-sources, such as Kirkuk and Diyala,both north of Baghdad.

On Wednesday, the head of thelocal rail authority, Dulair Khodr, aKurd, was killed when a sticky bombattached to his vehicle exploded onthe southern side of Kirkuk city, ac-cording to security officials.

Earlier in the day an Arab con-tractor was killed in a similar man-

ner next to the headquarters of theNorth Gas Company west of Kirkuk.Also, gunmen assassinated an of-ficer with the Kurdistan regionsarmed forces, known as the Pesh-merga, in a drive-by shooting south-

east of the city, the officials said.The days violence came after at

least four people were killed overthe previous 10 days in attacks tar-geting members of the Shiite Turk-men community in and aroundKirkuk, according to local police.

A police official said pamphletswere found in some parts of Kirkukthat were intended to instigate at-tacks against Turkmen, Shiites andKurds to foment discord in Kirkuk.

The pamphlets were signed by amilitant group suspected of main-

taining ties to al Qaeda in Iraq.In Diyala, a province south ofKirkuk and home to a similar ethnicand sectarian patchwork, a bombingat a vegetable market in a Shiitetown that killed 13 and the execu-

tion of seven people in a Sunni vil-lage within the span of less than 24hours last week were blamed onmilitants linked to al Qaeda.

The U.S. military, which pulledout of Kirkuk last month in prepara-tion for full withdrawal by the endof the month, has warned that ex-tremists would seek to exploit eth-nic and sectarian rifts in Iraq.

The U.S. maintains a diplomaticpresence in Kirkuk and a small teamof military liaison officers to coordi-nate with the Iraqi and Kurdish

forces securing the area.Both the region and the centralgovernment claim a disputed swathof oil-rich territory stretching fromDiyala through Kirkuk to areas onthe Syrian border in the northwest.

BY SAMDAGHER


9/37


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ByCatherine Bolgar

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PETERANDMARIAHOEY

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ISSUES MIGHT ARISE AND YOU WANT TO TRADE.

EXCHANGE-TRADED FUNDS


10/37


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PORTFOLIO RELIEFSimilarly, investors arelooking

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Its very tough, however, formost individuals to investin

commodities. Its nearlyimpossibleto investin physicalcommoditiesit means takingdeliveryof barrelsof oil, bushelsofwheat orbarsof gold. Andinvesting in commodity futuresis a full-timejobyou have tosell beforethe futures come due,orelseyou willend uptakingpossession of thatcommodity.Hence,futures contracts havetobe rolled whenever they getclose tothe dateon whichthecommodity is to be delivered.

CommodityEFs take care ofthefuss.EFs track a benchmark,suchas a stock orbondindex ora commodity price. raditional,or plain vanilla EFs do that byphysically holding the underly-ing securities, whether stocks,bonds,gold or whatever.SyntheticEFs mirrorthebenchmark by holdingderiva-tives,from futures or optionstocomplex swaps.

OPTIONS FOR INDIVIDUALSSoan individual can buy a

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EFs that usefutures contractsto track thebenchmarkprice.

Its a loteasierthan doingfutures on your own, Dr.Meziani says.

Currencies are very importantforinvestorswho have multina-tionalportfolios andwho needto hedge risks of exchange-rateuctuations.In addition, thecurrency market is huge, saysDr. Meziani. Mostmarkets aredwarfedby thecurrency market,so liquidity is good.

Tereare EFsto belongorshort for various currenciesthat is,to expect a certaincurrency to appreciate orweaken against others. Othersare designedto holda mixoflong andshort futures positionsamong several currencies.

Investors shouldbeware of

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Synthetic EFsalso havemore counterpartyrisk thanphysically backed EFs, howeversome use an overcollateralizedstructure to mitigate that.

Another subset of syntheticEFs areinverse andleveragedEFs, bestleft to institutions andhigh-net-worth individuals withprofessionalsconstantlymonitoring their portfolios.InverseEFsattempt to performexactly theopposite of theunderlying index. LeveragedEFs promiseto multiply themove of thebenchmark. So if

theindex rises 1%,it delivers 2%,or, for inverse leveraged EFs,minus 2%.

ONE DAY ONLYIn times of uncertainty,

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are not meant tobe heldmorethan oneday. Teywere createdto serve a purpose, butthatpurposeis often overlookedsincetheyare also beingused bythe wrongcrowd.

Stephen Horan, head of privatewealth at the CFA Institutes inCharlottesville,Virginia, studiedtwo real-estate leveraged EFs,one two times long and one twotimes short.

Both were highlyspeculativevehicles. I looked at the perfor-mance in thenancial crisisduring a period in which real

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therightcallthatreal estatewouldfall in thenancial crisis andgotinto theshort fund, youwouldhave still lost money, he says.

Due to thecompoundingeffect, daily-rebalancedleveragedEFsarenotsuitableforbuy-and-holdinvestors in a highly volatilemarket, says Hongfei ang,assistant professorof nanceattheStillmanSchool of Businessat Seton HallUniversity.

Te most important thinginvestors cando to protectthemselves and their portfoliosis to read theprospectus, says

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11/37


WORLD NEWS: U.S.

Obama Takes Partisan Tone to Defend Middle Class

Adopting a partisan and populisttone, President Barack Obama onTuesday painted a picture of theAmerican middle class under siegefrom wealthy interests, drawing acomparison to the industrial mo-nopolies of an earlier era.

In a gamble, Mr. Obama largelyput aside optimism about the U.S., atone he struck at his State of theUnion address in January, and in-stead worked to embrace the angerand skepticism emanating frommuch of the electorate.

Too many children can no longer

expect to join the middle class, thepresident said, no matter if theywork hard and play by the rules.Thats inexcusable. Its wrong. Itflies in the face of everything westand for, he said in a speech at aKansas high school.

His language, borrowing fromTheodore Roosevelt, was unsparing,blaming the breathtaking greed ofa few for the financial crisis andderiding huge bets, and huge bo-nuses, made with other peoplesmoney on the line. Republicans andtheir policies, he suggested, enabledirresponsibility.

Republicans responded that Mr.Obama should be held responsiblefor the economic bad times. FormerMinnesota Gov. Tim Pawlenty saidMr. Obama had his hands on the

economic throat of the country andlikened the president to JimmyCarter, who lost re-election amid asteep economic downturn, ratherthan Mr. Roosevelt.

The presidents tone sets the

stage for the themes of his re-elec-tion campaign, and the likely GOPresponse. The speech will escalatecharges the president is engaging inclass warfare, a complaint heardfrom business executives he hasbeen trying to court as well as Re-publicans.

The White House viewed thespeech as a chance to set out a con-trast in visions heading into 2012and to deflect blame for the econ-omy to a swath of sources. It marksa shift from the summer, when hetried and failed to cut a deficit dealwith Republicans. Since then, Mr.

Obama has taken a more partisantone culminating in Tuesdays re-marks. Referring to Republicans, Mr.Obama said, they want to go backto the same policies that stacked thedeck against middle-class Americans

for way too many years. And theirphilosophy is simple: We are betteroff when everybody is left to fendfor themselves and play by theirown rules. I am here to say they arewrong.

The president spoke in Osawat-omie, Kan., the same town where, in1910, Mr. Roosevelt, a Republican onhis way to becoming an indepen-dent, delivered his New National-ism speech. There, Roosevelt calledfor the government to do more tocounter concentrated wealth.

Mr. Obama cited health-insur-ance companies, mortgage lenders

and financial firms. For too manyAmericans, he said, hard work nolonger pays off, while those at thevery top have grown wealthierthan ever before. The president hasperiodically bashed Wall Street be-

fore, but Tuesdays speech was moresweeping and went beyond any oneindustry to say that the middle classas a whole was being left behind inpart because of corporate greed andwrongdoing.

A Wall Street Journal/NBC Newspoll last month found three in fourAmericans say the nations currenteconomic structure is out of bal-ance and favors a very small pro-portion of the rich over the rest ofthe country.

Tad Devine, a Democratic strate-gist who has advised several presi-dential campaigns, said that becauseeveryone knows the economy is ter-

rible, it is smart for the president toacknowledge it upfront. Its a shortroute to connecting with voters, hesaid.

It is a risk, however, to embraceeconomic woe, rather than riseabove it, given voters tendency topunish incumbents who preside overbad times. Mr. Obama prepares tostand for re-election amid persistentunemployment and anemic eco-nomic growth that have put particu-lar burdens on the middle class.

House Majority Leader Eric Can-tor (R., Va.) said he agreed withmuch of Mr. Obamas diagnosis ofthe problems in the American econ-omy, but not with his remedies,such as increasing taxes on wealth-ier Americans. Where we ought tobe focused is increasing income mo-

bility, he said. You dont accom-plish that by taking away fromthose who have been successful.

Mr. Obama has tried several dif-ferent tacks this year. At the outset,the White House talked mostly

about winning the future with aState of the Union speech focusedon innovation. During the summer,the president portrayed himself asthe adult in the room, bidding torise above the bickering in Congressover the debt ceiling to push a big,bipartisan deal.

As part of the latest strategy, Mr.Obama and his Democratic allies inthe Senate have forced a string ofvotes that wouldnt pass but thatput Republicans on the record tak-ing positions that can be used in fu-ture campaigns. Recent examples in-clude votes on extending a payroll-tax cut by increasing taxes on

millionaires and a push to confirmthe head of the consumer-financial-protection agency.

Republicans have vowed to blockany nominee until the new agency isrestructured. Hes setting up a votehe knows will fail so he can show upafterward and say hes shocked,Senate Minority Leader Mitch Mc-Connell (R., Ky.) said on the Senatefloor.

In one case, White House pres-sure seems to be gaining in Con-gress. GOP leaders say they are will-ing to extend the payroll-tax cut,and the parties are now debatingthe details, mostly how to offset lostrevenue.

I think there certainly is ampleevidence that the Democrats arewinning this debate, Sen. John Mc-

Cain (R., Ariz.), told reporters Tues-day. Republicans, he said, are beingpicked apart.

Naftali Bendavid and Jonathan

Weisman contributed

to this article.

BY LAURAMECKLER

U.S. President Barack Obama suggested GOP policies enabled irresponsibility.

Reuters

It sounds like a

great story: TheFederal Reservelent the banks $7.7trillion during thefinancial crisis.

And Congress wasnt told.But it isnt true. Even if Jon

Stewart says otherwise.The Fed and the taxpayers did

bail out the banks, including somethat occasionally pretendotherwise today. The Fed lentenormoussums: $1.6 trillion inemergency loans and individualbailouts at the December 2008peak. The Fed has been toosecretive in the past. The Feddeserves some blame for notpreventing the crisis. The Fedexecuted some aggressive playsduring the crisis that demand

postgame scrutiny.But lending against collateralto solvent, but cash-short, banksduring a panic isnt among theFeds more controversial moves.Thats what central banks havedone since 19th-century England.And the Fed didnt lend anywherenear $7.7 trillion. Nor did it keepthe size of its lending secret,though it did unsuccessfully try tokeep the borrowers identitiessecret.

How did this get started?Blame the law of large numbers(large ones crowd out smaller,more meaningful ones) and thedelight we all take in revealingand learning secrets (even if they

arent really so secret). Why doesit matter? Because widespreadmisunderstanding of what the Feddoes and actually did can crippleit in taking steps to protect theeconomy in a future crisis. Thats

why Fed Chairman Ben Bernankeprotested Tuesday what hedescribed as egregious errors insome reports, and released a staffmemo with details. (Fulldisclosure: My 2009 book, In FedWe Trust, recounted the Fedshandling of the crisis favorably.)

Since the onset of the financialcrisis, reporters have been tryingto add the components of thebailoutloans, guarantees, stockpurchasesto come up with agrand total. In December 2008,when the crisis was stillunfolding, this newspaper wrote:Using the most expansivecounting possible, the U.S. haspledged to spend, invest or loanas much as $10 trillion....Yet thefinal tab is likely to be much,

much smaller.Bloomberg did a similarexercise in March 2009, tallyingwhat it said the government hadspent, lent or committed. Bythat metric, the government totalwas pushed to $12.8 trillion andthe Feds share to $7.7 trillion.

In fact, the Fed never cameclose to committing to lend thatmuch. The total reflects not whatthe Fed had actually laid out northe sum of its promises. Rather, itadds the ceilings set on a numberof emergency programs, some ofwhich were more hype thanreality. It counted, for instance,$900 billion for something calledTALF (for Term Asset-Backed

Securities Loan Facility), based onTreasury statements that theprogram might someday reach

that size. In fact, the Fed boardauthorized as much as $200billion in loans and actually lent$71 billion. At first, the $7.7trillion got only a bit of attention.Then the Fed, its hand forced byCongress and the courts, revealedwhat it had wanted to keep secret:Which banks borrowed how muchand when.

In July 2011, the GeneralAccountability Office took the Feddata and listed the biggestborrowers: Bank of America andCitigroup were at the top. Amonth later, Bloomberg publishedthe fruits of its own numbercrunching, an extensive bank-by-bank tally of what it labeled

secret loans. Last monthlongafter the Fed had shut itsemergency lending window

Bloomberg recycled that work in astory that included this sentence:Add up guarantees and lendinglimits, and the Fed had committed$7.77 trillion as of March 2009 torescuing the financial system,more than half the value ofeverything produced in the U.S.that year.

This time the figure gotattention. Jon Stewart on TheDaily Show: We ultimately sentthe banks $7.7 trillion...ThatsTARP, the worst program in U.S.history times 11. CNN: For thefirst time we have details now onhow much money the U.S. FederalReserve doled out to U.S. banks.And the number? $7.7 trillion.

The New York Times: Among allthe rescue programs set up by theFed, $7.77 trillion in commitmentswere outstanding as of March2009, Bloomberg said.

Actually, at the end of March

2009, the Fed had $1.3 trillion inloans outstanding, bothemergency-liquidity loans andthose made in the rescues of BearStearns, American InternationalGroup and others. And that wasno secret: It was posted on theFed website.

After Mr. Bernankes letter wasreleased Tuesday, Bloombergspokesman Ty Trippet said, Wehave met with the Fed numeroustimes on this issue and not oncehas the Fed ever told us ourreporting on this issue isinaccurate. The amount, $7.77trillion, was never characterizedby Bloomberg as money lentbythe Fed, Bloomberg said. However,other news outlets havemistakenly done so.

Fault the Fed for failing tohead off the worst crisis since theGreat Depression. Ask if the Fedshould have let Bear Stearns gounder or could have savedLehman Brothers from bankruptcysix months later. Ask why it paidAIGs counterparties onderivatives contracts 100 cents onthe dollar. Ask if the Fed failed topush Congress enough to preventbanks from growing too big tofail. Ask if the Fed is doing toolittle now to sustain the economyor so much that it is sowing theseeds of inflation. Theres plentyto argue about, without turning toinflated numbers. The actual factsare stark enough.

Separating Fact From Fiction on Fed LoansBY DAVIDWESSEL

The Feds Portfolio

The Federal Reserves lending to financial institutions peaked at $1.6 trillion inDecember 2008, but it subsequently expanded its holdings by purchasingTreasury and mortgage-related debt securities.

Source: Federal Reserve

$3.0

0

0.5

1.0

1.5

2.0

2.5

trillion

'08 '09 '10 '112007

Securities

held outright,

other assets

Emergency

loans,

support for

specific

institutions

[ Capital ]


12/37

THURSDAY, DECEMBER 8, 2011

LIFE STYLEasia.WSJ.com

Holiday-Wine Case, SolvedA DOZEN BOTTLES FOR CHRISTMAS CHEER12

Hoping to get Americans to eat more oftheir chocolate, Godiva marketers decidedthe answer wasnt inside the 85-year-oldbrands signature gold box.

With the box, people tend to deliberatelychoose a single piece, the company says.What Godiva needed were new forms ofchocolate for consumers to munch lessmindfully, and new places to buy them.

We want to get more Godiva into peo-

ples mouths more often, said Lauri KienKotcher, chief marketing officer for Godivaand senior vice president of global branddevelopment. Its all about chocolatesnacks, little chocolate treats. When thosethings come, you just keep eating.

High-end chocolatiers want to be every-where shoppers arewhether in an upscaledepartment store with chocolate-coveredpretzels or at the coffee shop with choco-late-covered espresso beans. Godiva is ven-turing into supermarkets with jumbo candybars and taking cupcakes and brownies on-line. And it is adding new products likechocolate-covered Oreos at its boutiques.

The U.S. chocolate market has been get-ting especially competitive in supermarketsand drugstores, with European brands likeCadbury, Toblerone and Ferrero Rocher,fancy mass-marketer offerings like Her-sheys Symphony bars, and familiar boxesfrom Whitmans and Russell Stovernot tomention niche products with cult followingssuch as Trader Joes peanut-butter cups.

Premium-priced chocolates are rising inpopularity following widely publicized stud-ies pointing to health benefits of dark choc-olate. Godiva says overall sales of premiumchocolate rose 7.5% for a recent 52-weekperiod, to roughly $1.4 billion, in food, drugand mass retailers (excluding Wal-Mart). In2010 U.S. shoppers on spent on average$58.92 each on chocolate candy, about 5%more than in 2009, according to the Na-tional Confectioners Association. Manufac-turers chocolate shipments grew onlyabout 1.2%suggesting shoppers are payingmore on average, a spokeswoman said.

Fancy chocolate weathered the recessionbetter than many other luxuriesthetheory being that even an expensive choco-late is a relatively inexpensive indulgence.

A good way to sell more chocolate is to

sell it in more locations. LaTanya Tinsley, aRaleigh, N.C., masters student, usually hasa few squares of milk chocolate as an after-noon snack. She used to buy a bar aboutonce a month at the Godiva store a half-hour from her home. Now I can go to thegrocery store thats five minutes away andits in the candy aisle, she said. I boughttwo bars day before yesterday.

Godivas grocery-store packaginga stiffgold paper bagis a lot like that for Lindttruffles and Ghirardelli squares, high-endchocolates that global heavyweight Choco-ladefabriken Lindt & Sprngli AG, of Swit-zerland sells in U.S. supermarkets.

Godivas chief executive Jim Goldman isa veteran of Campbell Soup Co., which soldGodiva Chocolatier Inc. in 2008 to Turkishconglomerate Yildiz Holding. Mr. Goldmanstudied expansion stories of brands suchas Burberry, with its reach beyond the rain-

coat, and Starbucks, which added frappu-cino to the menu and turbo-charged thebrand, he says. And now of course theyreselling coffee beans in grocery stores, Mr.Goldman says. The focus is in addition, hesays. Not instead of. In addition.

Godiva says sales are up more than 13%this year, and it expects total 2011 sales totop $650 million, nearly a third from items

developed in the prior 18 months.There are three basic reasons people buy

premium chocolate, Godiva says: as a gift,for a group and to eat by oneself. The giftcategory long has been Godivas strong suit.

Boxed chocolate for holidays, Mr. Gold-man says. We were boring. So the com-pany is looking to appeal to a wider audi-ence of gift givers. Its holiday catalog readslike a shopping list, suggesting various newproductsa box of brownies? a chocolate-fondue basket?for babysitters, neighbors,teachers and clients.

Godiva stores, once awash in gold boxes,now also stock small chocolate truffle bars($2.95), sleeves of chocolate-covered al-monds ($12) and boxes of chocolate-cov-ered cookies ($25 for 36). Its a completechocolate experience, Mr. Goldman says.

For sharing and self-treating, as Go-diva calls it, more-casual formats are re-

quired. Sharing often involves a candydishsuitable for individually wrapped can-dies but not delicate truffles. Self-treatingbegs for a snack-able form like a candy bar,along with new flavors and textures.

For grocery-chain and drugstore shop-

pers, Godiva has large candy bars and indi-vidually wrapped Godiva Gems, includingchocolate truffles and caramel-filled choco-

late squaresthough squares of solid choc-olate are being phased out of the Gem line.

They lack sex appeal, Mr. Goldman says.These products were created for choco-

late emergencies. Those are the thingsthat are very much about, I want chocolatenow, Mr. Goldman says. He dismissed therisk of diluting the brand by taking it to thegrocery store: If Im going to be a leader,Ive got to be there for them.

Even so, Godiva is doubling down oncomplex fillings and flavors at the high end.Among the new offerings in Godiva storesare Ultimate Dessert Truffles (boxes of four,$10), with flavors mimicking desserts suchas red velvet cake and tiramisu. ParfaitChocolates are slightly smaller, lighterpieces, with layers of filling in flavors likeStrawberry Cream Trifle. Consumers lovethe idea of something that they can under-

stand translated into a piece of chocolate,Ms. Kien Kotcher says.

BY ELIZABETHHOLMES

Taking Chocolate Lovers Upmarket

Godivas individually wrapped truffles compete with Ghirardelli and Lindt in the supermarket aisle.

F.MartinRaminforTheWallStreetJournal,StyledbyA

nneCardenas

1 Competition is fierce in U.S. drugstores,

where consumers face shelves of options,

from Toblerone triangles to Godiva bars.

2, 4 Godiva is making more-complex fillings

for its higher-priced Parfait Chocolates (2) and

Dessert Truffles (4), which it hopes will take

the place of a weekday dessert.

3, 6 Baked goods are another spot Godivafound to introduce its chocolate. Godiva sells

cupcakes (3) online only and chocolate-covered biscuits (6) in wider distribution.

5 Individually wrapped chocolates from Lindt,

Ghirardelli and Godiva are for a reception desk

display or to stash in a drawer.

7, 10, 13 Pretzels (7), truffle bars (10), andchocolate-covered nuts (13) are designed as

snacks for groups to share.

8, 9 Some self-treating itemschocolate-

covered Oreos (8), chocolate bark (9)are

only in Godiva stores and online.

11 Godiva has store employees dip chocolates

to create drama, hoping shoppers will splurge

at the mall.

12 Classic truffles are boxed for formal gift-

giving rather than the communal candy bowl.

Resistance Is Futile

iStockphoto(2)


13/37


LIFE STYLE

Uncorking a Classic Case of Christmas Cheer

With the holidays quickly

approaching, we look for-ward to a gastronomicwhirlwind of parties, familyreunions and celebratorydrinks. Choosing which

wines to accompany the festive season iseither an absolute delight or a stressfulpanic. This year, I have done the hard workfor yousipping, slurping and tasting myway through hundreds of wines to find acase full of interesting examples for every

occasion and budget.If there is one date in the calendar when

you can justify the expense of that reallyspecial bottle, it is Christmas Day, so forevery course, I have recommended an out-

standing wine for the discerning oenophile.And while there are great sparkling winesoutside of France, many of which have beenfeatured in this column throughout theyear, it is to the wines from the cool slopesof Champagne, where the grapes struggle

to ripen fully, that I frequently return whenlooking for something sparkling.

But holiday drinking isnt just aboutrare or expensive vintages; a good wineshould reflect a sense of place and terroir,

and lend a sense of occasion, no matterwhat the price.

With food a central part of any Christmascelebrations I have tried to pick wines thatmatch well with a variety of dishes anddont overpower the palate. From Austria to

New Zealand, I have scoured the map for ex-amples of easy-drinking bottles that will pairwell with whatever you serve, whether it isturkey, ham, wild game or fish, or simply toround off a memorable day. Happy drinking.

Brut NV

Bouvet-Ladubay, Saumur,Loire ValleyAlcohol:12.5%Price:$16The Saumur region inFrances Loire Valley hasbeen involved in the winetrade since the seventhcentury. Perhaps morefamous for its red wines,the area has sparkling

wines that offer appealingvalue for money. Bouvet-Ladubay is one of themore distinguished housesand this has exceptionalfruit on the nose, withstrong aromatics ofhoneysuckle, acacia andwildflowers.

Blanc de Blancs Grand Cru

Clos Cazals, Champagne,FranceVintage: 2000Alcohol:12%Price:$95Nothing lifts the mood

quite like a glass ofChampagne. While thereare many famous grandesmarques and prestigeblends on the market, thesmart buyer should lookto individual growers andvineyards. Clos Cazalsis a good exampleof why; coming froma 3.7-hectare, walledvineyard, it displayssuperb power and depth.A wine of real character.

S Blanc de Blancs Brut,Le MesnilSalon, Champagne, FranceVintage: 1997Alcohol:12%Price:$300Salon is undoubtedly oneof the worlds greatestwines. Made from 40-year-old vines, it is astudy in perfection. Afirst sip reveals theextraordinary power anddepth of this Champagne,sourced from Salonsgrand cru vineyard in theheart of the Ctes duBlanc. The 1997 hasnotes of brioche andgreen apple, with anincredible length of flavor.

Simply stunning.

Grner Veltliner

Estoras, Burgenland,AustriaVintage: 2010Alcohol:12%Price:$16Grner Veltliner is a grapevariety growing inpopularity. Its a wonderfulwine to serve by the glass,or as an aperitif with smalleats. This example is dry

but has an immediatelyappealing nose, with adistinctive nutty character.Try it at your holiday party;your guests may not haveheard of it, but they willbe pleasantly surprised.

Convergence

Sauvignon Blanc

Two Rivers of Marlborough,Marlborough, New ZealandVintage: 2010Alcohol:13.5%Price:About $17There is so much goodSauvignon Blanc comingout of Marlborough thatit can be a littleoverwhelming. But onoccasion, you come acrossa wine that reminds you

just how good this regioncan be. The nose on theTwo Rivers version is alivewith all the flavors oneexpects from Marlborough,while on the palate there isa tangy minerality thatadds an appealing depth.

Chassagne-Montrachet,Les MasuresJean-Nol Gagnard,Burgundy, FranceVintage: 2009Alcohol:13.5%Price:$47Classic white Burgundy isthe hedonists dream. Jean-Nol Gagnard produces afleshy, plump interpretationof Chardonnay, with atrademark creaminess andbuttery zest. Still quiteyoung, it could probablydo with decanting, but itsobvious quality means itcan accompany a varietyof dishes, or be sippedand enjoyed on its own.

Conte des Garrigues

Domaine La Prade Mari,Minervois, FranceVintage: 2008Alcohol:14.5%Price:$22New World-stylewinemaking in an OldWorld country: TheMinervois AOC in FrancesLanguedoc region isproducing wines of

sensational quality, oftenfor outstanding value.This wine is a blend ofSyrah and Grenache, andoffers a rich, ripe stylewith dark, red fruits. Forthe price, it displays realelegance with a silkinessand polished edge.

Zinfandel

Heitz Cellar,Napa Valley, Calif.Vintage: 2007Alcohol:14.5%Price:$31Its not often that Irecommend a Zinfandelas a Christmas wine, astoo often it can be a littleoverpowering, leaving thepalate fatigued. But thisexample from CaliforniasHeitz estate impresseswith its graceful elegance.Packed full of ripe mulberryand cracked black pepper,it will stand up towhatever game birdyou are serving this year.

Chteau Grand-Puy-LacostePauillac, Bordeaux, FranceVintage: 1996Alcohol:13%Price:$195A classic red Bordeaux froman underappreciated estatein the regions celebratedPauillac commune. The 1996Cabernet Sauvignon vintagein Bordeauxs Medoc was agreat one, and this blend of75% Cabernet Sauvignonand 25% Merlot really standsout. Drunk now (though itwill last for a few decadesmore), this wine exhibits afresh, pure, mentholcharacter that is fresh anda pleasure to drink.

Brauneberger

Juffer-Sonnenuhr

Riesling Sptlese

Weingut Schloss Lieser,Lieser, GermanyVintage: 2008Alcohol:7%Price:$22The festive season can tryeven the most experiencedtasters with its myriad ofwines and food. What

better way to refresh thepalate than with this light,taut Riesling fromGermanys Mosel Valley?With attractive fruitsand notes of limeand blossom, coupled withits low alcohol level, thewine is one you couldhappily sip all night.

Noble Late Harvest

SemillonNelson Creek Wine Estate,Paarl, South AfricaVintage: 2009Alcohol:11%Price:$17

To stand up to the spicesof a Christmas or plumpudding, a wine needsto pack a little punch.This late-harvestedSemillon from Paarl inSouth Africa displays plentyof unctuous fruit, such aspineapple and honey, on thenose. But its real quality isthe freshness and tinglingacidity it possesses on thepalate, leaving the drinkerhankering for a second sip.

Croft Vintage PortDouro Valley, PortugalVintage: 1977Alcohol:20%Price:$85Vintage port is one of themost underrated wines.One reason is theperception that it shouldonly be served withcheese at the end of ameal. Sure, it goes wellthere, but try sipping porton its own to enjoy its fullcharacter. Croft isnt themost fashionable house,but the 77 has a creamy,soft, appealing characterthat is sublime.

[ Wine ]

BYWILL LYONS

APERITIFS CHRISTMAS LUNCHFESTIVE STARTERS DESSERT

EVERYDAYDRINKING

SOMETHIN

GSPECIAL

ATREATFROM

THECELLAR

Lefttorightfromtop

,Bouvet-Ladubay;FromVineyardsDirect;BellaWines;Mekido;RichardsWalford

&Company;LeaandSandeman;HeitzCellar/Justerini&Brooks;CorneyandBarrow(2);Justerini&Brooks;BerryBrothers&Rudd;CroftPort


14/37


OPINION: REVIEW OUTLOOK

Standard & Poors Monday night putnearly every country in the eurozone on notice for a possible credit

downgrade. The glorious exceptions wereCyprus, which was already on Credit-Watch, and Greece, which is alreadyrated junk. European officials denouncedthe announcement as counterproductiveand somehow politically motivated, butthe rating agencies are merely catchingup to the reality that sovereign debt isnta risk-free asset.

This same realization may even bedawning at last on the internationalbanking regulators in Basel, Switzer-land. Business Week reports that the au-thors of the Basel standards, which setcapital and liquidity requirements forlarge international banks, are reconsid-ering rules that all but require banks tohold large amounts of sovereign debt.

Unfortunately, the rules under reviewconcern only the new liquidity buffers

that banks will need to hold under theforthcoming Basel III standards. Underthis new requirement, banks are sup-posed to have a 30-day supply of fundsavailable in case lending markets seizeup as they did in the fall of 2008, and60% of that supply is supposed to be inhigh-quality, highlyliquid assets, such as,believe it or not, gov-ernment bonds.

As Peter Wallisonhas written on thesepages, the Basel rules have been push-ing banks into government bonds foryears on the assumption that they rep-resent a risk-free asset. Under Baselsrisk-weightings, government debt ofyour home country is assigned a zerorisk under both the old rules and thenew.

The rationale is that a governmentcan always tax more or print more

money to pay off its debts, at least nom-inally. So a country that issues debt inits own currency should in theory neverbe forced into actual default, even if ithas to resort to inflationary moneyprinting to avoid it.

On this, the Basel gnomes have apoint, even if its takeneveryone too long to re-alize that this optionwasnt open to the likesof Greece and Italy. Buteven when correctly ap-

plied, those rules create systemic riskby nudging large banks toward holdingsimilar assets. This reduces diversity inthe system, increasing the odds that ifone bank is in trouble, all or most ofthem will also be in trouble.

A normal market has a balance ofbuyers and sellers, longs and shorts,bulls and bears. But risk-weightings puta thumb on the scale. Recall that the Ba-

sel rules also assigned a very low risk-weighting to triple-A-rated mortgage-backed securities, which helps explainwhy sleepy banks in Dusseldorf loadedup on the stuff during the housing bub-ble and lost billions during the panic.

And now here we are doing it againwith sovereign debt. In a paper commis-sioned by the European Parliament in2010, former Commerzbank ChairmanAchim Kassow notes dryly that Theregulatory incentive which results fromthe 0% risk weight is apparent: banks inMember States are effectively encour-aged to place their most liquid assetsinto the worst possible governmentdebt, maximizing the yield with a regu-latory capital requirement of zero.

Its encouraging that the Basel rulemakers are considering even a limitedclimb-down from pushing banks intogovernment bonds, but the whole policyneeds revision.

On the same day U.S. Secretary ofState Hillary Cl

WSJA FLP FranklinTempleton 081211 China

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