Economix Blog: Bernanke Defends Stimulus as Necessary and Effective

The Federal Reserve’s chairman, Ben S. Bernanke, picked an unusual time to offer his most recent defense of the Fed’s campaign to stimulate the economy: 7 p.m. on a Friday night in San Francisco, 10 p.m. back home on the East Coast.

The basic message was the same as Mr. Bernanke delivered to Congress earlier this week: The Fed regards its current efforts as necessary and effective, and the risks, while real, are under control.

“Commentators have raised two broad concerns surrounding the outlook for long-term rates,” Mr. Bernanke told a conference at the Federal Reserve Bank of San Francisco. “To oversimplify, the first risk is that rates will remain low, and the second is that they will not.”

If rates remain low, it may drive investors to take excessive risks. If rates jump, investors could lose money – not least the Fed.

Regarding the first possibility, Mr. Bernanke said that the Fed was keeping a careful eye on financial markets. But he noted that rates were low in large part because the economy was weak, and that keeping rates low was the best way to encourage stronger growth. “Premature rate increases would carry a high risk of short-circuiting the recovery, possibly leading — ironically enough — to an even longer period of low long- term rates,” he said.

At the other extreme, Mr. Bernanke said the Fed could “mitigate” any jump in rates by prolonging its efforts to hold rates down, for example by keeping some of its investments in Treasury and mortgage-backed securities.

Three more highlights from the question-and-answer session after the speech.

1. Mr. Bernanke, asked about the outlook for the Washington Nationals, responded by accurately quoting the “Las Vegas odds” of a World Series appearance: 8/1.

2. Although the decision may be made under a future chairman, Mr. Bernanke said the Fed should continue to offer “forward guidance” — predicting its policies — even after it concludes its long effort to revive the economy.

“Providing information about the future path of policy could be useful, probably would be useful, under even normal circumstances,” he said in response to a question. “I think we need to keep providing information.”

3. Not surprisingly, Mr. Bernanke often is asked to reflect on the financial crisis. He offered something a little different than his normal response on Friday night.

“In many ways, in retrospect, the crisis was a normal crisis,” he said. “It’s just that the intuitional framework in which it occurred was much more complex.”

In other words, there was a panic, and a run, and a collapse – but rather than a run on bank deposits, the run was in the money markets. Improving the stability of those markets is something regulators have yet to accomplish.

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Euro Watch: Euro Zone Unemployment Rose to New Record in February

PARIS — The unemployment rate in the euro zone edged up in January to a new record, official data showed Friday, as the ailing European economy continued to weigh on the job market.

Unemployment in the 17-nation euro zone stood at 11.9 percent in January, up from 11.8 percent in December, and from 10.8 percent in January 2012, Eurostat, the statistical office of the European Union, reported from Luxembourg.

For the 27 nations of the European Union, the January jobless rate stood at 10.8 percent, up from 10.7 percent in December. All of the figures were seasonally adjusted.

A separate Eurostat report showed price pressures easing in February. In the euro zone, the annual inflation rate came in at 1.8 percent, down from 2.0 percent in January, and below the European Central Bank’s 2 percent target.

The jobless data “suggest that wage growth is set to weaken from already low rates” and further depress consumer spending, which has already been damped by government austerity measures, Jennifer McKeown, an economist at Capital Economics in London, wrote in a research note.

Ms. McKeown noted that the low inflation numbers and high joblessness “should leave the E.C.B.’s policy options open,” and she said it was possible the central bank “might discuss an interest rate cut or other unconventional policies” when its governing council meets on Thursday.

There was a small bit of bright news Friday. A survey of European purchasing managers by Markit, a data and research firm, showed German manufacturing output growing in February for second straight month, as new business levels improved. The composite German purchasing managers’ index improved to 50.3 in February — just above the level that signals growth — from 49.8 in January.

“German industry is clearly rebounding and taking advantage from better external traction,” Gilles Moëc, an economist at Deutsche Bank in London, wrote.

Employment is sometimes seen as a lagging indicator of economic growth, since companies try to avoid adding to their costs until they are convinced that a rebound is at hand. Despite the green sprouts in German industry, there are few signs that recovery is certain. Markit’s overall euro zone purchasing managers’ index was unchanged in February, at 47.9, a level that signals continued contraction.

European unemployment bottomed in early 2008, just as the financial crisis was getting in motion, and has been on a rising trend ever since. The January numbers were the highest since the creation of the euro.

In absolute terms, Eurostat estimated Friday, 19 million people in the euro zone and more than 26 million people in the overall European Union. were unemployed.

Spain’s unemployment rate in January was 26.2 percent, and Portugal’s was 17.6 percent. Austria, at just 4.9 percent, had the lowest rate, followed by Germany and Luxembourg, both of which stood at 5.3 percent.

Greece’s unemployment rate in November, the latest month for which Eurostat has figures for the country, was 27 percent.

France, the second-largest euro-zone economy after Germany, had a 10.6 percent jobless rate in January. In Britain, not a euro member, the jobless rate stood at 7.7 percent.

Those numbers compare with the United States, where the January unemployment rate stood at 7.9 percent. In Japan, 4.2 percent of the work force was counted as unemployed in December.

This article has been revised to reflect the following correction:

Correction: March 1, 2013

An earlier version of this article carried a headline that misstated the month of the data. The report was for January, not February.

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DealBook: In Europe, Risks and Opportunities

BERLIN – Is Europe a risk or an opportunity?

As its economies struggle, private equity managers offer differing views about the region.

Speaking at the SuperReturn conference in Berlin, Henry R. Kravis, co-founder of Kohlberg Kravis Roberts, said Europe was an attractive market, particularly the Continent’s southern countries, which have been hit by high unemployment and meager growth.

“I like Spain, they are doing a number of right things,” Mr. Kravis told a somewhat empty conference room early on Thursday morning after many private equity managers had attended late-night dinners the previous evening. “In Europe, there clearly are opportunities. I may be in the minority.”

Other private equity giants, including David M. Rubenstein of the Carlyle Group, are also scouting for opportunities from Italy to Ireland despite concerns that the Continent may fall back into recession.

Lionel Assant, European head of private equity at the Blackstone Group, liked Spain because of its close ties to fast-growing Latin American markets and efforts to revamp its local labor market.

Not every manager is so bullish, however.

J. Christopher Flowers, whose private equity firm bought an insurance broker from the struggling Belgian bank KBC for 240 million euros ($315 million) in 2011, said the future of the euro zone remained a major risk.

Europe’s recovery prospects were hurt again this week after Italian national elections on Monday failed to provide a definitive winner. The political impasse prompted significant losses in the Continent’s stock markets as investors fretted about the future of one of Europe’s largest economies.

For Mr. Flowers, there are still some potential investment opportunities, including the pending forced sale of bank branches in Britain from the nationalized Royal Bank of Scotland. The United States, however, still remains his preferred region in which to invest.

“If a major economy like Spain defaults, we would prefer to be in Germany,” Mr. Flowers said. “If I had to pick one region, I would pick the U.S.”

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This post has been revised to reflect the following correction:

Correction: February 28, 2013

An earlier version of this article contained an incorrect conversion of 240 million euros. It is the equivalent of $315 million, not $310.

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DealBook: Regulators Block Ryanair’s Latest Attempt to Buy Aer Lingus

BRUSSELS – The European Commission on Wednesday blocked the third attempt by Ryanair to acquire Aer Lingus, saying a union of the two Irish airlines would damage competition and raise prices on air routes to Ireland.

The decision was widely expected after Ryanair — the largest budget carrier in Europe — said earlier that the commission would prohibit the deal, worth about 700 million euros ($900 million).

“The Commission’s decision protects more than 11 million Irish and European passengers who travel each year to and from Dublin, Cork, Knock and Shannon,” the European Union competition commissioner, Joaquín Almunia, said in a statement before a news conference.

Proposals made by Ryanair “were simply inadequate to solve the very serious competition problems which this acquisition would have created on no less than 46 routes,” Mr. Almunia said.

Shares of Ryanair were down 6 euro cents, at 5.60 euros, in afternoon trading in Dublin; Aer Lingus stock was up 1 cent, at 1.25 euros.

Aer Lingus, which had rejected Ryanair’s offers, said on Wednesday that it welcomed the commission decision. Ryanair, which owns about 30 percent of Aer Lingus, reiterated that it would appeal the decision to the European Court of Justice.

Ryanair accused Mr. Almunia of protecting Aer Lingus, the Irish flag carrier, against a takeover by an upstart. The company also contends that the regulator applied a double standard because he approved the takeover by British Airways and Iberia of British Midland International last year under a simplified procedure.

“We regret that this prohibition is manifestly motivated by narrow political interests rather than competition concerns, and we believe that we have strong grounds for appealing and overturning this politically inspired prohibition,” said Robin Kiely, a spokesman for Ryanair.

Prolonged litigation could have wider ramifications, making it more difficult for the Irish government to sell its 25 percent stake in Aer Lingus. Ireland agreed to sell that stake under the terms of an international bailout finalized in November 2010, although that agreement did not set a deadline for the sale.

The deal is the fourth Mr. Almunia has blocked since he took over as the region’s antitrust chief in February 2010. Last month, the commission thwarted the attempt by U.P.S. to buy TNT Express.

The decision on Wednesday is the latest chapter in years of acrimony between the commission and Ryanair’s pugnacious chief executive, Michael K. O’Leary, who has repeatedly criticized commission officials for decisions that curtailed his ambitions.

The enmity between Mr. O’Leary and the commission developed last decade when the two sides began a running battle over whether Ryanair received illegal state subsidies that enabled the airline to open up routes to regional airports. Those airports were often some distance from major transport hubs, but still close enough to lure passengers away from more established carriers.

Last year, the commission announced new investigations into the effect of discounts Ryanair had received at Lübeck-Blankensee Airport in Germany and the Klagenfurt regional airport in Austria.

Mr. O’Leary has sharply criticized the commission for failing to do more to save money by booking its officials on low-cost airlines like his own. Ryanair also has said its arrangements with all European Union airports comply with the bloc’s competition rules.

The competition authority blocked Ryanair’s first bid for Aer Lingus in 2007 on the grounds that the combined airline would have had a monopoly on too many routes. At the time, Mr. O’Leary accused the commission of bowing to political pressure from the Irish government, which opposed the deal. The airline abandoned a second attempt in 2009 because of opposition from the Irish government.

On Wednesday, Ryanair accused the commission of holding it to a higher standard than other airlines seeking mergers after it had offered “historic and unprecedented” concessions.

Among other items, Ryanair had offered to allow two competitor airlines to serve Dublin, Cork and Shannon; give those airlines more than half of the short-distance business currently belonging to Aer Lingus; agree to transfer airport slots in Britain to allow British Airways to serve Ireland from both Gatwick and Heathrow. Ryanair also had offered Flybe, a competitor, 100 million euros in financing to make it “a commercially profitable and viable entity” in Ireland.

On Wednesday, the commission outlined the reasons behind its decision.

It said that both Ryanair and Aer Lingus had strengthened their positions in the Irish market since the commission refused the previous deal in 2007, and that the merger would have created an “outright monopoly” on 28 short-distance routes serving Ireland. The commission also said there were such high barriers to entry to the Irish market that any new competitors would face too many challenges.

The commission’s “market investigation showed that there was no prospect that any new carrier would enter the Irish market after the merger, in particular by the creation of a base at the relevant Irish airports, and challenge the new entity on a sufficient scale,” it said in a statement. “Higher prices for passengers would have been the likely outcome.”

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DealBook: Banks Fear Court Ruling in Argentina Bond Debt

A fierce battle between the government of Argentina and hedge funds and other investors led by a group of hedge funds has already led to the seizure of a naval ship and dragged in the United States Treasury. Now a federal appeals court is hearing the dispute, and how it rules could have a major impact on world debt markets.

The investors — including the hedge fund tycoon Paul E. Singer — sued Argentina seeking payment for $1.3 billion relating to bonds that the country defaulted on in 2001. On Wednesday, the case comes before the United States Court of Appeals for the Second Circuit, which has already sided with the hedge funds on their main arguments.

But the issue that the appeals court is still undecided about is perhaps the most important. It involves devising a method to pressure Argentina to pay up on the disputed bonds. And that has left the investors who hold a majority of Argentina’s foreign debt vulnerable, as well as the banks that process the payments to those investors.

While the hedge funds have grabbed the headlines — winning a temporary court order to seize an Argentine naval ship docked in Ghana, for example — most of the other holders of Argentina’s nearly $100 billion in defaulted debt agreed over the last decade to accept new bonds, taking big losses in the process. The country has since faithfully paid on the exchange bonds.

At the same time, Argentina has vehemently repeated that it will not pay the hedge funds and other holders of its old debt and has passed laws forbidding the government from paying anything to the bondholders who didn’t participate in the exchanges.

But last year, Judge Thomas P. Griesa of the Federal District Court in Manhattan ruled that if Argentina wanted to pay the holders of the restructured debt, it would have to pay the hedge funds and other holders of the defaulted debt, too. The judge included third-party banks in his injunction, and prohibited them from processing payments to holders of the exchange bonds unless all debt holders were paid.

Large banks, investors and the United States Treasury Department have objected to the judge’s order. In short, they say, using the sanction could cause financial losses for innocent bystanders and lead to unnecessary disruption in the bond markets.

“They are trying to block the payments system,” said Vladimir Werning, executive director for Latin American research at JPMorgan Chase. “This is unprecedented in the New York jurisdiction.”

In an e-mail, Kevin Heine, a spokesman for Bank of New York Mellon, which handles bond payments, said the ruling, “will create unrest in the credit markets and result in cascades of litigation, which is precisely the opposite effect that an injunction should have.”

A ruling in favor of the hedge funds would also have ripple effects throughout the debt markets.

“Any time you have something that can change of balance of power, it can matter beyond Argentina,” said Robert Kahn, a fellow at the Council on Foreign Relations.

Despite the legal worries, investors have so far been keen to hold higher-yielding emerging markets debt, given that interest rates are so low. Apart from Argentine bonds, debt issued by developing countries has performed strongly.

Unlike Argentina, some countries have held their noses and cut deals with holdouts in the past to get on with important economic overhauls, most recently Greece on certain smaller foreign-law bonds.

And in the years since Argentina’s default, most sovereign bonds have special clauses in them that make it much harder for holdouts to succeed. These are called collective action clauses, which state that if a certain majority of bondholders agree to take losses in a bond restructuring, those losses would be forced on all bondholders, even would-be holdouts who don’t agree.

But large amounts of bonds, those issued more than 10 years ago, do not have collective action clauses. And those that do have the clauses may not act as intended if the holdouts win their Argentina case, said Mr. Werning of JPMorgan.

Right now, a bond with a collective action clause might get restructured if 75 percent of the holders agree to it. If Judge Griesa’s ruling is upheld, more bondholders might be reluctant to enter a restructuring and the required majority might not be achieved. Bondholders might not enter the restructuring because they fear holdout litigation depriving them of payments later on.

“This could adversely affect the level of participation in a swap,” Mr. Werning said.

Still, others contend that the market for sovereign debt may be improved if the judge’s ruling is upheld, with the sanction on payments banks mostly intact. Countries like Argentina, they say, have taken advantage of the fact that there is no bankruptcy regime in the sovereign debt market to allow creditors to recoup money in a default. Indeed, Judge Griesa has said the Argentina case is partly about creating safeguards for creditors in the absence of bankruptcy regime.

But Anna Gelpern, a professor at the Washington College of Law at the American University, said that if the federal court’s rulings are upheld, it might just end up underscoring the limitations of the American courts’ power.

“What if Argentina still doesn’t settle? How does the court look then?” she said. “It can only isolate Argentina and Argentina seems content to be isolated.”

While there is a chance that the appellate court’s decision could be appealed to the United States Supreme Court, it is more likely that its ruling will be the final word on the lower court order.

According to that order, if a bank chose to channel payments from Argentina to the owners of the restructured debt, the bank would not be in compliance with his order. A payments bank, Bank of New York Mellon in the case of Argentine exchange bonds, would then decline to process the exchange bond payments, and the bonds could fall into default, inflicting big losses on their holders.

Some market specialists have raised the prospect that Argentina could keep paying the exchange bondholders by avoiding payments banks that operate in the United States. It could, for instance, swap the exchange bonds for new instruments registered under Argentine law that make payments through an Argentine entity.

But the court may decide that, in such a situation, the exchange bondholders themselves would be breaking its injunction. One of the things the appeals court is looking into is how to determine which third parties should sit outside the reach of the district court’s ruling.

It is not just hedge funds who are hoping to gain from an affirmation of the lower court ruling. This group also includes many individual investors, who are now feeling more optimistic about getting their money back as the case comes before the appeals court.

“We are hopeful the ruling will stay as issued,” said Horacio Vázquez, who helps lead a group in Buenos Aires that represents bondholders.

A version of this article appeared in print on 02/26/2013, on page B1 of the NewYork edition with the headline: Banks Fear Court Ruling In Argentina Bond Debt.

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DealBook: Barnes & Noble Founder Leonard Riggio to Bid for Bookstore's Retail Business

The founder of Barnes & Noble plans to bid for the retail business of the bookstore chain he started 40 years ago, as the company struggles to deal with the changing competitive landscape.

On Monday, Leonard Riggio told the company’s board that he will make an offer for Barnes & Noble Booksellers, barnesandnoble.com and other retail assets. The proposal would not include the e-book division, Nook Media.

Like many retailers, Barnes & Nobles is dealing with waning profit in its core business, as online players and other competitors gain marketshare. The company recently warned that earnings in the latest quarter would be weak, with losses rising in its Nook Media division.

Conceived as a serious competitor to Amazon.com’s Kindle, the Nook has instead become an also-ran in the race for digital book supremacy. The Kindle remains the top-selling dedicated e-reader, while the iPad consistently leads the competition among tablets.

Amazon’s Kindle app has also maintained a huge lead in popularity, limiting Barnes & Noble’s reach across the broader digital book-selling landscape.

Mr. Riggio, who owns nearly 30 percent of Barnes & Noble, plans to negotiate the price with the board, according to a regulatory filing. The proposal is expected to be mainly in cash.

It is the boldest move yet by Mr. Riggio to try and save the company he built into the nation’s biggest brick-and-mortar bookseller. He has fended off challenges from the likes of the billionaire Ronald Burkle, arguing in large part that the company was well-positioned in the future by betting on the Nook and digital books.

Others believed in the promise of the e-reader as well. Last April, Microsoft paid $300 million for a 17.6 percent stake in the Nook business, valuing it then at $1.7 billion. The technology titan also secured Barnes & Noble’s commitment to produce an e-reader app for its Windows 8 operating system.

And in December, the British publisher Pearson agreed to buy a 5 percent stake for $89.5 million.

Barnes & Noble said in a statement that it has formed a special board committee comprised of three directors — David G. Golden, David A. Wilson and Patricia L. Higgins — to consider Mr. Riggio’s proposal. The trio will be advised by Evercore Partners and the law firm Paul, Weiss, Rifkind, Wharton & Garrison.

The retailer’s board had already been weighing whether to spin off its Nook unit.

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Major Banks Aid in Payday Loans Banned by States

Major banks have quickly become behind-the-scenes allies of Internet-based payday lenders that offer short-term loans with interest rates sometimes exceeding 500 percent.

With 15 states banning payday loans, a growing number of the lenders have set up online operations in more hospitable states or far-flung locales like Belize, Malta and the West Indies to more easily evade statewide caps on interest rates.

While the banks, which include giants like JPMorgan Chase, Bank of America and Wells Fargo, do not make the loans, they are a critical link for the lenders, enabling the lenders to withdraw payments automatically from borrowers’ bank accounts, even in states where the loans are banned entirely. In some cases, the banks allow lenders to tap checking accounts even after the customers have begged them to stop the withdrawals.

“Without the assistance of the banks in processing and sending electronic funds, these lenders simply couldn’t operate,” said Josh Zinner, co-director of the Neighborhood Economic Development Advocacy Project, which works with community groups in New York.

The banking industry says it is simply serving customers who have authorized the lenders to withdraw money from their accounts. “The industry is not in a position to monitor customer accounts to see where their payments are going,” said Virginia O’Neill, senior counsel with the American Bankers Association.

But state and federal officials are taking aim at the banks’ role at a time when authorities are increasing their efforts to clamp down on payday lending and its practice of providing quick money to borrowers who need cash.

The Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau are examining banks’ roles in the online loans, according to several people with direct knowledge of the matter. Benjamin M. Lawsky, who heads New York State’s Department of Financial Services, is investigating how banks enable the online lenders to skirt New York law and make loans to residents of the state, where interest rates are capped at 25 percent.

For the banks, it can be a lucrative partnership. At first blush, processing automatic withdrawals hardly seems like a source of profit. But many customers are already on shaky financial footing. The withdrawals often set off a cascade of fees from problems like overdrafts. Roughly 27 percent of payday loan borrowers say that the loans caused them to overdraw their accounts, according to a report released this month by the Pew Charitable Trusts. That fee income is coveted, given that financial regulations limiting fees on debit and credit cards have cost banks billions of dollars.

Some state and federal authorities say the banks’ role in enabling the lenders has frustrated government efforts to shield people from predatory loans — an issue that gained urgency after reckless mortgage lending helped precipitate the 2008 financial crisis.

Lawmakers, led by Senator Jeff Merkley, Democrat of Oregon, introduced a bill in July aimed at reining in the lenders, in part, by forcing them to abide by the laws of the state where the borrower lives, rather than where the lender is. The legislation, pending in Congress, would also allow borrowers to cancel automatic withdrawals more easily. “Technology has taken a lot of these scams online, and it’s time to crack down,” Mr. Merkley said in a statement when the bill was introduced.

While the loans are simple to obtain — some online lenders promise approval in minutes with no credit check — they are tough to get rid of. Customers who want to repay their loan in full typically must contact the online lender at least three days before the next withdrawal. Otherwise, the lender automatically renews the loans at least monthly and withdraws only the interest owed. Under federal law, customers are allowed to stop authorized withdrawals from their account. Still, some borrowers say their banks do not heed requests to stop the loans.

Ivy Brodsky, 37, thought she had figured out a way to stop six payday lenders from taking money from her account when she visited her Chase branch in Brighton Beach in Brooklyn in March to close it. But Chase kept the account open and between April and May, the six Internet lenders tried to withdraw money from Ms. Brodsky’s account 55 times, according to bank records reviewed by The New York Times. Chase charged her $1,523 in fees — a combination of 44 insufficient fund fees, extended overdraft fees and service fees.

For Subrina Baptiste, 33, an educational assistant in Brooklyn, the overdraft fees levied by Chase cannibalized her child support income. She said she applied for a $400 loan from Loanshoponline.com and a $700 loan from Advancemetoday.com in 2011. The loans, with annual interest rates of 730 percent and 584 percent respectively, skirt New York law.

Ms. Baptiste said she asked Chase to revoke the automatic withdrawals in October 2011, but was told that she had to ask the lenders instead. In one month, her bank records show, the lenders tried to take money from her account at least six times. Chase charged her $812 in fees and deducted over $600 from her child-support payments to cover them.

“I don’t understand why my own bank just wouldn’t listen to me,” Ms. Baptiste said, adding that Chase ultimately closed her account last January, three months after she asked.

A spokeswoman for Bank of America said the bank always honored requests to stop automatic withdrawals. Wells Fargo declined to comment. Kristin Lemkau, a spokeswoman for Chase, said: “We are working with the customers to resolve these cases.” Online lenders say they work to abide by state laws.

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Many States Say Cuts Would Burden Fragile Recovery

States are increasingly alarmed that they could become collateral damage in Washington’s latest fiscal battle, fearing that the impasse could saddle them with across-the-board spending cuts that threaten to slow their fragile recoveries or thrust them back into recession.

Some states, like Maryland and Virginia, are vulnerable because their economies are heavily dependent on federal workers, federal contracts and military spending, which will face steep reductions if Congress allows the automatic cuts, known as sequestration, to begin next Friday. Others, including Illinois and South Dakota, are at risk because of their reliance on the types of federal grants that are scheduled to be cut. And many states simply fear that a heavy dose of federal austerity could weaken their economies, costing them jobs and much-needed tax revenue.

So as state officials begin to draw up their budgets for next year, some say that the biggest risk they see is not the weak housing market or the troubled European economy but the federal government. While the threat of big federal cuts to states has become something of a semiannual occurrence in recent years, state officials said in interviews that they fear that this time the federal government might not be crying wolf — and their hopes are dimming that a deal will be struck in Washington in time to avert the cuts.

The impact would be widespread as the cuts ripple across the nation over the next year.

Texas expects to see its education aid slashed hundreds of millions of dollars, which could force local school districts to fire teachers, if the cuts are not averted. Michigan officials say they are in no position to replace the lost federal dollars with state dollars, but worry about cuts to federal programs like the one that helps people heat their homes. Maryland is bracing not only for a blow to its economy, which depends on federal workers and contractors and the many private businesses that support them, but also for cuts in federal aid for schools, Head Start programs, a nutrition program for pregnant women, mothers and children, and job training programs, among others.

Gov. Bob McDonnell of Virginia, a Republican, warned in a letter to President Obama on Monday that the automatic spending cuts would have a “potentially devastating impact” and could force Virginia and other states into a recession, noting that the planned cuts to military spending would be especially damaging to areas like Hampton Roads that have a big Navy presence. And he noted that the whole idea of the proposed cuts was that they were supposed to be so unpalatable that they would force officials in Washington to come up with a compromise.

“As we all know, the defense, and other, cuts in the sequester were designed to be a hammer, not a real policy,” Mr. McDonnell wrote. “Unfortunately, inaction by you and Congress now leaves states and localities to adjust to the looming threat of this haphazard idea.”

The looming cuts come just as many states feel they are turning the corner after the prolonged slump caused by the recession. Gov. Martin O’Malley of Maryland, a Democrat, said he was moving to increase the state’s cash reserves and rainy day funds as a hedge against federal cuts.

“I’d rather be spending those dollars on things that improve our business climate, that accelerate our recovery, that get more people back to work, or on needed infrastructure — transportation, roads, bridges and the like,” he said, adding that Maryland has eliminated 5,600 positions in recent years and that its government was smaller, on a per capita basis, than it had been in four decades. “But I can’t do that. I can’t responsibly do that as long as I have this hara-kiri Congress threatening to drive a long knife through our recovery.”

Federal spending on salaries, wages and procurement makes up close to 20 percent of the economies of Maryland and Virginia, according to an analysis by the Pew Center on the States.

But states are in a delicate position. While they fear the impact of the automatic cuts, they also fear that any deal to avert them might be even worse for their bottom lines. That is because many of the planned cuts would go to military spending and not just domestic programs, and some of the most important federal programs for states, including Medicaid and federal highway funds, would be exempt from the cuts.

States will see a reduction of $5.8 billion this year in the federal grant programs subject to the automatic cuts, according to an analysis by Federal Funds Information for States, a group created by the National Governors Association and the National Conference of State Legislatures that tracks the impact of federal actions on states. California, New York and Texas stand to lose the most money from the automatic cuts, and Puerto Rico, which is already facing serious fiscal distress, is threatened with the loss of more than $126 million in federal grant money, the analysis found.

Even with the automatic cuts, the analysis found, states are still expected to get more federal aid over all this year than they did last year, because of growth in some of the biggest programs that are exempt from the cuts, including Medicaid.

But the cuts still pose a real risk to states, officials said. State budget officials from around the country held a conference call last week to discuss the threatened cuts. “In almost every case the folks at the state level, the budget offices, are pretty much telling the agencies and departments that they’re not going to backfill — they’re not going to make up for the budget cuts,” said Scott D. Pattison, the executive director of the National Association of State Budget Officers, which arranged the call. “They don’t have enough state funds to make up for federal cuts.”

The cuts would not hit all states equally, the Pew Center on the States found. While the federal grants subject to the cuts make up more than 10 percent of South Dakota’s revenue, it found, they make up less than 5 percent of Delaware’s revenue.

Many state officials find themselves frustrated year after year by the uncertainty of what they can expect from Washington, which provides states with roughly a third of their revenues. There were threats of cuts when Congress balked at raising the debt limit in 2011, when a so-called super-committee tried and failed to reach a budget deal, and late last year when the nation faced the “fiscal cliff.”

John E. Nixon, the director of Michigan’s budget office, said that all the uncertainty made the state’s planning more difficult. “If it’s going to happen,” he said, “at some point we need to rip off the Band-Aid.”

Fernanda Santos contributed reporting.

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Cost-Cutting Helped Air France-KLM Trim Operating Loss in 2012

PARIS — An aggressive cost-cutting effort at Air France-KLM showed the first faint signs of bearing fruit on Friday, as the airline said it had managed to trim its operating losses last year despite a weakening European economy and higher fuel prices.

Air France-KLM, Europe's third-largest airline by passengers, recorded an operating loss of 300 million euros, or about $400 million, for 2012, compared with a 353 million euro loss a year earlier, as efforts to rein in seat capacity led to higher average fares. Revenue for the year rose 5.2 percent to 25.6 billion euros, while net debt declined to 6 billion euros from 6.5 billion euros in 2011.

But one-time expenses associated with a deep restructuring begun last year widened the airline’s net loss to 1.19 billion euros from 809 million euros in 2011.

“They have made a good start, but it is an improvement that is still just barely visible,” said Yan Derocles, an airline analyst at Oddo Securities in Paris.

Air France-KLM unveiled plans last June to shave more than 2 billion euros in costs, reduce debt and return to profit by the end of 2015. Despite the modest improvements achieved in the plan’s first six months, Jean-Cyril Spinetta, the group’s chief executive, stressed Friday in a statement that the company had laid the ground work for a more significant recovery this year.

“In 2013, we will maintain strict discipline in terms of capacity management, investments and costs,” Mr. Spinetta said.

Air France-KLM said passenger traffic rose by 2.1 percent last year, while seat capacity increased by just 0.6 percent. But while revenues per available seat rose by 5.9 percent from a year earlier, cargo revenues continued to slide, falling by 6.3 percent despite a 3.5 percent drop in capacity, as the economic slowdown reduced goods shipments.

Despite intense pressure from the French government to avoid layoffs, Air France-KLM moved ahead with plans in 2012 to slash more than 5,100 jobs at its Air France unit by the end of this year — just over 10 percent of its work force of 49,000. Another 1,300 jobs are being eliminated at its smaller KLM unit.

Philippe Calavia, the group’s chief executive officer, said Friday that the group had reduced staff by around 2,000 in 2012 through early retirements and other voluntary departures. Restructuring costs linked to those job cuts amounted to 471 million euros in 2012.

Labor costs have been a major drain on profit at Air France-KLM for years — equivalent to more than 30 percent of the group’s total revenue and even exceeding its fuel bill, which amounts to around 26 percent. By contrast, labor costs as a share of revenue are less than 10 percent at its low-cost rival Ryanair and 12.4 percent at EasyJet, according to the Center for Aviation in Brussels.

Given the uncertain outlook for the European economy this year, Air France-KLM declined to provide a forecast for 2013, although Mr. Calavia maintained the company’s targets of reaching net profit within two years. Analysts said they expected a modest improvement in operating profit this year, although annual restructuring costs were also expected to rise, possibly above 500 million euros.

Air France-KLM continues to lag behind its larger rival, Lufthansa of Germany, in its efforts to return to profitability. Lufthansa, which announced its own painful restructuring last year that involved 3,500 job losses. Lufthansa this week reported a net 2012 profit of 990 million euros, bolstered by asset sales, compared with a loss of 13 million euros in 2011. The German carrier also suspended dividend payments to shareholders in order to make more cash available to finance its turnaround.

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DealBook: Office Supply Rivals' Merger Leaked by a Wayward Report

8:56 p.m. | Updated

It was a paragraph buried on Page 4 of an earnings release, under the heading of “other matters.” Yet what those four sentences revealed sent bankers and lawyers who had been working all night on a deal scrambling early Wednesday morning.

The earnings release, from the office supplies chain Office Depot, appeared shortly after 7 a.m. and inadvertently disclosed the terms of a long-awaited merger between the company and OfficeMax. The announcement disappeared from the company’s Web site quickly, but not before a gaggle of news outlets began running full-fledged reports about the deal.

At that time, bankers and lawyers for the two companies were still negotiating the final language of the merger agreement. The mistaken early publication of the release — since blamed on the data provider Thomson Reuters — prompted Office Depot’s chief executive, Neil R. Austrian, to call up his counterpart at OfficeMax, Ravi K. Saligram, and apologize.

More than two hours later, the companies formally announced their combination.

The episode recalls other times that major company news was published prematurely. Last fall, Google’s third-quarter earnings were published three hours early; the technology giant blamed R. R. Donnelley & Sons, its filings agent, for the mistake.

The chief executives played down the inadvertent disclosure as a harmless mistake, since the announcement was scheduled before the markets opened anyway.

“When two big Fortune 500 companies merge, occasionally mishaps happen,” Mr. Saligram said in an interview.

And Thomson Reuters apologized in a statement, saying it regretted the error and would take steps to prevent such a mistake from happening again.

But people involved in the deal privately bemoaned the unexpectedly bumpy ride, which knocked off kilter a carefully choreographed announcement meant to emphasize what they called a transformative merger of equals.

The union will combine two of the big retailers of staples and notepads, a major effort to combat years of losing sales to bigger, nimbler rivals. Both chief executives said that combining their companies could yield $400 million to $600 million in cost savings. It will probably lead to significant job cuts, as the companies seek to shrink their combined footprint of over 2,500 stores.

Both companies disclosed big drops in their sales for the fourth quarter on Wednesday: Office Depot’s revenue slipped 12 percent from the year-ago period, to $2.6 billion, while OfficeMax’s fell 7.4 percent, to $1.7 billion.

And both have also been under pressure from investors. Office Depot is fending off Starboard Value, an activist hedge fund that holds a 14.8 percent stake and has called for a major change in strategy. And OfficeMax has contended with Neuberger Berman, an investor with a 5 percent stake that has called for bigger payouts to shareholders.

“The whole industry and every analyst thought this made sense,” Mr. Austrian said in an interview. “The timing was right at this point in time.”

Shares of Office Depot fell 16.7 percent on Wednesday, to $4.18, while those of OfficeMax slid 7 percent, to $12.09. The decline wiped out some of the gains both stocks enjoyed after word of the deal talks emerged on Monday.

Negotiations have been held in earnest since at least last summer, people briefed on the matter said.

One important negotiating point that was resolved early on was ensuring that the deal could be presented as a “merger of equals.” Though Office Depot is paying a premium for OfficeMax — it is issuing 2.69 new shares for each share of the target, valuing the smaller retailer at about $1.2 billion as of Tuesday’s closing prices — neither company’s chief has a lock as the leader of the combined company.

Indeed, both Mr. Austrian and Mr. Saligram will remain in place while board members from each company run a search for a new chief executive, which could be either man. Also undecided: the new company’s name and whether it will have its headquarters in Office Depot’s home of Boca Raton, Fla., or OfficeMax’s base in Naperville, Ill.

People involved in the deal said that the compromise, which took about two months to complete, was important in bringing both companies to the negotiating table.

“We both put our egos aside,” Mr. Austrian of Office Depot said. “It’s not a win for one side and a loss for another.”

Both Office Depot and OfficeMax also wanted to emphasize that they would remain competitors until the deal was approved by shareholders and antitrust regulators. That is a nod to the collapse of a proposed merger of Office Depot and Staples more than a decade ago, which was blocked on anticompetitive grounds and left Office Depot reeling for years.

Mr. Saligram of OfficeMax argued on a call with analysts that the regulatory environment has shifted since. Both companies have lost ground not only to Staples, but also to online outlets like Amazon.com and bulk retailers like Target and Wal-Mart Stores.

“This industry has completely changed,” he said.

Should the deal fall apart because of antitrust concerns, neither company will be liable for a termination fee, executives said on the analyst call.

Company executives and advisers also spent significant amounts of time negotiating with BC Partners, an investment firm that owns the equivalent of 22 percent of Office Depot’s stock. Under the terms of Wednesday’s deal, BC Partners will own no more than 5 percent of the combined company’s voting shares and will have no representatives on its board.

A version of this article appeared in print on 02/21/2013, on page B5 of the NewYork edition with the headline: Office Supply Rivals’ Merger Leaked by a Wayward Report.

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DealBook: F.B.I. Said to Be Looking at Suspicious Heinz Trades

The Federal Bureau of Investigation has opened a criminal inquiry into suspicious trades placed ahead of the $23 billion acquisition of H.J. Heinz, a person briefed on the matter said on Tuesday.

The F.B.I.’s involvement adds to the scrutiny surrounding the deal and further highlights the temptation that major takeovers present to traders.

Last week, a day after the deal was announced, the Securities and Exchange Commission promptly froze a Swiss account linked to possible insider trading in the Heinz takeover.

Like the S.E.C., the F.B.I. is examining a series of well-timed options trades made just before Berkshire Hathaway and the investment firm 3G Capital announced that they had agreed to buy Heinz. News of the deal sent the company’s shares, and the value of the options contracts, soaring.

“The F.B.I. is consulting with the S.E.C. to see if a crime was committed,” an F.B.I. spokesman said. He added that the bureau’s New York office, a main player behind the government’s recent insider trading crackdown, was handling discussions with the S.E.C.

The S.E.C. has not identified the trader or traders who placed the suspicious bets. The F.B.I. declined to comment further.

Authorities did acknowledge that the investigation centers on an unusual spike in options trades involving Heinz. The trades involved 2,533 options bought last Wednesday through a Swiss account at Goldman Sachs, according to the S.E.C.

Using what is known as a call option, the trades placed a bullish bet on Heinz without actually buying the company’s shares. Instead, the trades grant the opportunity to buy the stock at a given price through June.

The move struck authorities as out of the ordinary. For months leading up to the deal, there had been scant activity in Heinz options.

“The timing, size and profitability of the defendants’ trades, as well as the lack of prior history of significant trading in Heinz” in the account, the commission said in the complaint, “makes these trades highly suspicious.”

The anonymous investors spent nearly $90,000 on the call options, a position that skyrocketed on paper to $1.8 million after the deal was announced on Thursday. At the time, Heinz’s stock rose to $72.50, up 20 percent from Wednesday, matching Berkshire’s offer price.

The trades were funneled through the Goldman account, identified as “GS & Co c/o Zurich Office.” The bank, which is not accused of wrongdoing, has said it is cooperating with the investigation.

The growing inquiry may cast a cloud over the Heinz deal. While the S.E.C. already raised concerns, the F.B.I.’s examination adds to the scrutiny and for the first time raises the prospect of criminal actions.

Once authorities identify the traders, the S.E.C. and F.B.I. will turn their focus to the limited universe of insiders who could have leaked details of the deal. Dozens of people — including executives at both the buyers and the seller — possessed confidential information about the deal.

As authorities pursue the Heinz case, they are building on a recent campaign to root out insider trading on Wall Street. The S.E.C. filed 58 such actions last year, and the F.B.I. helped bring criminal cases in a number of actions against hedge funds and corporate insiders.

A version of this article appeared in print on 02/20/2013, on page B3 of the NewYork edition with the headline: F.B.I. Said to Be Looking at Heinz Trades.

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European Parliament Approves Plan to Bolster Carbon Trading

LONDON — In a move to bolster the floundering European market for carbon offsets, the environmental committee of the European Parliament voted Tuesday to allow the European Commission to reduce the numbers of carbon permits that it auctions in the next three years.

Prices of carbon allowances, which permit companies to emit greenhouse gases, plunged below €3, or about $4, per ton last month, compared to around €30 per ton in 2008 and about €9 per ton a year ago.

Many analysts think that setting a hefty price on carbon will prove the most efficient way to reduce emissions. The European system is the world’s flagship program and its struggles could have negative implications for other countries that are considering similar efforts, including the United States.

The vote Tuesday, by an unexpectedly decisive 38 to 25 with two abstentions, is “a lifeline for the carbon market and for emissions trading as a policy tool for curbing emissions,” said Stig Schjoelset, head of carbon analysis at Reuters Point Carbon, a market research firm in Oslo. Mr. Schoelset added that if the vote had gone the other way, the system would have been “more or less dead.”

Although this vote is only a first step, politicians and analysts said it might allow the European Union program to begin recovering credibility with markets as a means to curb emissions.

“It is important that we get this right, and the sooner we get it right the better,” the E.U. climate action commissioner, Connie Hedegaard, said during an interview Monday.

Prices for carbon allowances on the Emissions Trading System, the world’s premier cap and trade program, fell to as low as €2.8 per metric ton last month. After the vote Tuesday prices were about €4.5 per ton, after closing at €5.13 per ton on Monday.

The proposal approved Tuesday would take 900 million carbon credits that were scheduled to be auctioned over 2013 to 2015 and “backload” them to 2019 and 2020 in order to put a floor under prices. It is estimated that there is now a surplus of 2 billion credits, so this move will not soak up all of the carbon allowance glut.

The changes will need to be approved later by the full Parliament and member states.

“It is really the first step in a long, long process,” said Kass Burchett, an analyst at IHS, an energy research firm.

The European Trading System was set up by the European Union to provide a signal to polluters like utilities and heavy manufacturers that they needed to reduce carbon emissions. Companies are either allocated or required to buy at auction enough credits to offset their annual emissions. The trouble is that with Europe’s dismal economy dampening industrial activity and energy use, there is now a huge surplus of allowances, or credits, depressing their price.

Industrialists and analysts say that single-digit prices do not provide the intended incentive for companies to switch to cleaner fuels and energy-efficient technology. Mr. Schoelset said that to encourage switching from coal to natural gas, a price of €30 to €40 per ton is needed, while an even higher level of perhaps €60 to €150 per ton is required for utilities to invest in expensive carbon–reducing technologies like carbon capture and storage.

“The vote signals the intention of the European Parliament to begin the process of restoring the most cost-effective approach to meeting Europe’s energy needs and reducing emissions over time,” David Hone, chief climate change adviser to the oil giant Royal Dutch Shell, said in a statement. “It will not immediately restore the system to good health, but it is a start.”

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Today's Economist: Nancy Folbre: Preschool Economics

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst. She recently edited and contributed to “For Love and Money: Care Provision in the United States.“

Even a 4-year-old can understand the case for early-childhood education. It’s fun, you learn things, you make it easier for Mom and Dad to earn a decent living, and when you grow up you will be better able to earn a decent living yourself. At that point, you will start paying taxes that return the favor, helping finance the retirement and health care of the generation that invested in your education.

President Obama’s proposal to help states develop and expand high-quality early-education programs has won verbal support from across the political spectrum, including David Brooks. More tangible evidence of political viability comes from Oklahoma and Georgia, two traditionally red states that now provide universal voluntary preschool for 4-year-olds.

Still, conservative opposition remains fierce. The loudest complaint is that public programs have not been shown to be cost-effective. But a wealth of research by highly respected economists shows that well-designed, high-quality early-childhood education programs offer a positive payback. At National Public Radio you can listen to the University of Chicago economist James Heckman reiterate this point – as he has been doing for many years.

Timothy Bartik of the Upjohn Institute offers great running commentary on debates over technical issues (such as whether small, demonstrably successful programs can be effectively scaled up) at his Investing in Kids blog.

Academics aren’t the only ones on board. The U.S. Chamber of Commerce published a report last year explaining “Why Business Should Support Early-Childhood Education.”

But the case for a public commitment to early-childhood education extends well beyond any cost-benefit analysis of child outcomes. It would help parents meet their child-care needs and reconcile the conflicting demands of wage employment and family care.

As a report published by the Center for American Progress emphasizes, preschool enrollment rates are already high among 4-year-olds in particular. But high costs mean that participation is highest among the poor, who qualify for Head Start, and the affluent, who can afford to pay out of pocket.

Even parents who currently rely on informal child-care arrangements would benefit from more dependable public provision. Many are just one family member, friend or neighbor away from a child-care crisis that could endanger their jobs. At Forbes, Bryce Covert makes a case for emphasizing the positive employment impact of the proposed policy.

Women’s labor-force participation rates in the United States were once relatively high by international standards. In 1990, we ranked sixth among 22 countries of the Organization for Economic Cooperation and Development. By 2010, our rank had fallen to 17th. Francine Blau and Lawrence Kahn of Cornell University estimate that about 29 percent of the decrease in women’s labor-force participation relative to other countries is attributable to those countries’ adoption of more “family friendly” public policies than those in the United States.

Improvements in children’s future productivity and greater opportunities for productive employment for everyone will shape the future of the United States economy. Conservatives enjoy their strongest support among older white voters, many of whom have already raised their children.

Both young parents and young children are far more ethnically diverse than the population over age 65.

But as the journalist Ronald Brownstein points out in an article memorably titled “The Gray and the Brown,” the very structure of our social programs makes the generations dependent on one another:

Today’s minority students will represent an increasing share of tomorrow’s workforce and thus pay more of the payroll taxes that will be required to fund Social Security and Medicare benefits for the mostly white Baby Boomers. Many analysts warn that if the U.S. doesn’t improve educational performance among African-American and Hispanic children, who now lag badly behind whites in both high school and college graduation rates, the nation will have difficulty producing enough high-paying jobs to generate the tax revenue to maintain a robust retirement safety net.

These are linkages that voters sorely need to understand. In coming months both Social Security and Medicare are likely to withstand the budgetary pressures imposed by the threat of sequestration. On the other hand, programs directed at children – including support for early-childhood education – are likely to come under the deficit-cutting knife.

In the long run, that knife will cut both ways, bleeding our system of intergenerational transfers.

Which is one more reason why it’s important for President Obama and his supporters to wrestle it out of conservative hands.

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Dismissed as Doomsayers, Advocates for Meteor Detection Feel Vindicated

For decades, scientists have been on the lookout for killer objects from outer space that could devastate the planet. But warnings that they lacked the tools to detect the most serious threats were largely ignored, even as skeptics mocked the worriers as Chicken Littles.

Jim Watson/Agence France-Presse — Getty Images

Dr. Edward Lu, a former NASA astronaut and Google executive, has warned about space threats.

No more. The meteor that rattled Siberia on Friday, injuring hundreds of people and traumatizing thousands, has suddenly brought new life to efforts to deploy adequate detection tools, in particular a space telescope that would scan the solar system for dangers.

A group of young Silicon Valley entrepreneurs who helped build thriving companies like eBay, Google and Facebook has already put millions of dollars into the effort and saw Friday’s shock wave as a turning point in raising hundreds of millions more.

“Wouldn’t it be silly if we got wiped out because we weren’t looking?” said Edward Lu, a former NASA astronaut and Google executive who leads the detection effort. “This is a wake-up call from space. We’ve got to pay attention to what’s out there.”

Astronomers know of no asteroids or comets that pose a major threat to the planet. But NASA estimates that fewer than 10 percent of the big dangers have been discovered.

Dr. Lu’s group, called the B612 Foundation after the imaginary asteroid on which the Little Prince lived, is one team of several pursuing ways to ward off extraterrestrial threats. NASA is another, and other private groups are emerging, like Planetary Resources, which wants not only to identify asteroids near Earth but also to mine them.

“Our job is to be the first line of defense, and we take that very seriously,” James Green, the director of planetary science at NASA headquarters, said in an interview Friday after the Russian strike. “No one living on this planet has ever before been hurt. That’s historic.”

Dr. Green added that the Russian episode was sure to energize the field and that an even analysis of the meteor’s remains could help reveal clues about future threats.

“Our scientists are excited,” he said. “Russian planetary scientists are already collecting meteorites from this event.”

The slow awakening to the danger began long ago, as scientists found hundreds of rocky scars indicating that cosmic intruders had periodically reshaped the planet.

The discoveries included not just obvious features like Meteor Crater in Arizona, but wide zones of upheaval. A crater more than a hundred miles wide beneath the Yucatán Peninsula in Mexico suggested that, 65 million years ago, a speeding rock from outer space had raised enough planetary mayhem to end the reign of the dinosaurs.

Some people remain skeptical of the cosmic threat and are glad for taxpayer money to go toward urgent problems on Earth rather than outer space. But many scientists who have examined the issues have become convinced that better precautions are warranted in much the same way that homeowners buy insurance for unlikely events that can result in severe damage to life and property.

Starting in the 1980s and 1990s, astronomers turned their telescopes on the sky with increasing vigor to look for killer rocks. The rationale was statistical. They knew about a number of near misses and calculated that many other rocky threats whirling about the solar system had gone undetected.

In 1996, with little fanfare, the Air Force also began scanning the skies for speeding rocks, giving credibility to an activity once seen as reserved for doomsday enthusiasts. It was the world’s first known government search.

The National Aeronautics and Space Administration took a lead role with what it called the Spaceguard Survey. In 2007, it issued a report estimating that 20,000 asteroids and comets orbited close enough to the planet to deliver blows that could destroy cities or even end all life. Today, with limited financing, NASA supports modest telescopes in the southwestern United States and in Hawaii that make more than 95 percent of the discoveries of the objects coming near the Earth.

Scientists lobbied hard for a space telescope that would get high above the distorting effects of the Earth’s atmosphere. It would orbit the Sun, peering across the solar system, and would have a much better chance of finding large space rocks.

But with the nation immersed in two wars and other earthly priorities, the government financing never materialized. Last year, Dr. Lu, who left the NASA astronaut corps in 2007 to work for Google, joined with veterans of the space program and Silicon Valley entrepreneurs to accelerate the asteroid hunt.

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Common Sense: High Taxes Are Not a Prime Reason for Relocation, Studies Say

Pool photo by Mikhail Klimentyev

Gerard Depardieu with Vladimir Putin in January. Russia granted Mr. Depardieu a passport after his spat with France over taxes.

Last month, Vladimir V. Putin hugged his newly minted fellow Russian citizen, the actor Gerard Depardieu, posing for cameras at the Black Sea port of Sochi. “I adore your country,” Mr. Depardieu gushed — especially its 13 percent flat tax on personal income.

Sochi may not be St. Tropez, but it does have winter temperatures in the 60s and even palm trees. Mr. Putin’s deputy prime minister confidently predicted a “mass migration of wealthy Europeans to Russia.”

Here in the United States, the three-time Masters champion Phil Mickelson recently walked off the 18th hole at Humana Challenge and said he might move from California because the state increased its top income tax rate to 13.3 percent from 10.3 percent.

“Hey Phil,” Gov. Rick Perry of Texas wrote in a Twitter message, “Texas is home to liberty and low taxes ... we would love to have you as well!!” Tiger Woods later said that he had left California for Florida for just that reason years ago. Mr. Mickelson can “vote with his Gulfstream,” a Wall Street Journal editorial noted, and warned California to “expect a continued migration.”

It’s an article of faith among low-tax advocates that income tax increases aimed at the rich simply drive them away. As Stuart Varney put it on Fox News: “Look at what happened in Britain. They raised the top tax rate to 50 percent, and two-thirds of the millionaires disappeared in the next tax year. Same things are happening in France. People are leaving where the top tax rate is 75 percent. Same thing happened in Maryland a few years ago. New millionaire’s tax, the millionaires disappeared. You’ve got exactly the same thing in California.”

That, at least, is what low-tax advocates want us to think, and on its face, it seems to make sense. But it’s not the case. It turns out that a large majority of people move for far more compelling reasons, like jobs, the cost of housing, family ties or a warmer climate. At least three recent academic studies have demonstrated that the number of people who move for tax reasons is negligible, even among the wealthy.

Cristobal Young, an assistant professor of sociology at Stanford, studied the effects of recent tax increases in New Jersey and California.

“It’s very clear that, over all, modest changes in top tax rates do not affect millionaire migration,” he told me this week. “Neither tax increases nor tax cuts on the rich have affected their migration rates.”

The notion of tax flight “is almost entirely bogus — it’s a myth,” said Jon Shure, director of state fiscal studies at the Center on Budget and Policy Priorities, a nonprofit research group in Washington. “The anecdotal coverage makes it seem like people are leaving in droves because of high taxes. They’re not. There are a lot of low-tax states, and you don’t see millionaires flocking there.”

Despite the allure of low taxes, Mr. Depardieu hasn’t been seen in Russia since picking up his passport and seems to be hedging his bets by maintaining a residence in Belgium. Meanwhile, Russian billionaires are snapping up trophy properties in high-tax London, New York and Beverly Hills, Calif.

“I don’t hear about many billionaires moving to Moscow,” said Robert Tannenwald, a lecturer in economic policy at Brandeis University and former Federal Reserve economist. Along with Nicholas Johnson, he and Mr. Shure are co-authors of “Tax Flight Is a Myth,” a 2011 research paper.

Of course, some people do move for tax reasons, especially wealthy retirees, athletes and other celebrities without strong ties to high-tax locations, like jobs and families. In renouncing his French citizenship, Mr. Depardieu follows other French celebrities, the chef Alain Ducasse, the singer Johnny Hallyday and Yannick Noah, a former tennis star. Several Paris hedge fund managers have decamped to London and the fashion mogul Bernard Arnault applied for Belgian citizenship, though not, he has said, for tax reasons.

Stars like Mr. Depardieu and Mr. Mickelson certainly have incentives to move. Mr. Depardieu complained that he paid 85 percent of his income in taxes in France last year and has paid 145 million euros over 45 years. France has a top rate of 41 percent as well as a wealth tax, and the Socialist president, François Hollande, is trying to impose a temporary surcharge of 75 percent on incomes over 1 million euros. Mr. Mickelson earned more than $60 million last year, Sports Illustrated estimates, which means the three-percentage-point California tax increase could add up to an additional $1.8 million in tax.

This article has been revised to reflect the following correction:

Correction: February 15, 2013

An earlier version of this column misstated Mr. Depardieu’s citizenship. He has applied for residency in Belgium; he is not a citizen of that nation. The earlier version also misidentified the golf tournament at which the golfer Phil Mickelson said he might move from California to escape its taxes. It was the Humana Challenge, not Pebble Beach.

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DealBook: Blackstone Keeps Most of Its Money With SAC

9:06 p.m. | Updated

The Blackstone Group, the largest outside investor in the hedge fund SAC Capital Advisors, said it would keep most of its $550 million with the hedge fund for three more months while it monitors developments in the government’s insider trading investigation.

Blackstone acted as SAC’s clients faced a regularly scheduled quarterly deadline on Thursday to decide whether to continue investing with the hedge fund giant run by Steven A. Cohen.

Despite posting one of the best investment records on Wall Street — returning 30 percent annually over the last two decades — SAC has been fighting to keep investors’ money as an investigation into criminal conduct at the fund has intensified. Since November, when prosecutors brought the most recent SAC-related case, against Mathew Martoma, a former SAC employee, clients have been weighing whether to continue their relationship with the fund. Mr. Martoma has denied the charges.

Large hedge fund investors like Blackstone rarely make public pronouncements about their intentions, but given the heightened interest in SAC, the investment firm issued a statement explaining the rationale for its decision.

Blackstone said the money it withdrew was in the normal course of business and was unrelated to any of SAC’s problems. Blackstone, which runs the world’s largest so-called fund of funds, placing nearly $50 billion with outside managers, is seen as a bellwether in the hedge fund industry.

“While we submitted redemptions for certain accounts as appropriate, BAAM successfully preserved flexibility for our clients by extending our decision timeline,” Peter Rose, a Blackstone spokesman, said in a statement, referring to Blackstone Alternative Asset Management, the segment that invests with hedge funds. “We will use this period of time to evaluate all additional information which becomes available.”

It was unclear how much money SAC’s clients redeemed Thursday. The fund, which is based in Stamford, Conn., had warned its employees that it expected it could face at least $1 billion of withdrawals. A Citigroup unit that manages money for wealthy families has disclosed that it was withdrawing its $187 million investment.

While several other former SAC employees have previously been charged with insider trading crimes, the Martoma prosecution has changed clients’ calculus because the trades at the center of the case involve Mr. Cohen. In addition, the Securities and Exchange Commission warned SAC that it might file a civil fraud lawsuit against the fund related to the trades. Mr. Cohen has not been charged and has said that he has acted appropriately at all times.

Federal prosecutors are also nearing a decision on whether to bring criminal charges against Michael Steinberg, a longtime SAC portfolio manager, related to trading in Dell and Nvidia stocks. A lawyer for Mr. Steinberg, Barry Berke, said in a statement that his client did nothing wrong.

Unlike other hedge funds that can be forced to shut down after a wave of client withdrawals, SAC is in an unusual situation. Only about 40 percent of the $14 billion managed by SAC, or about $6 billion, comes from outside clients. The rest belongs to Mr. Cohen and his well-paid staff.

In addition, SAC has policies that limit the amount of money a client may withdraw in any one quarter. Clients may withdraw only 25 percent of their investment every three months. That means if a client put in a so-called redemption request on Thursday, it would receive its money back in quarterly installments beginning March 31, and would get its last dollar out on Dec. 31.

Blackstone negotiated a way to buy itself time without delaying its ability to withdraw its investment from the fund. SAC agreed to a new redemption policy that it will extend to other clients, allowing them to keep their money with SAC for another quarter. After that, if clients decide to end their relationship with SAC, the fund will return their money in three installments.

Under the new policy, SAC is letting clients take a wait-and-see approach, monitoring the investigation for developments that could damage the fund. If they withdraw, they will still have all of their money returned by year-end.

SAC’s recent investment results have been solid, but have lagged the Standard & Poor’s 500-stock index. The fund returned about 13 percent in 2012 and 2.5 percent last month.

A version of this article appeared in print on 02/15/2013, on page B1 of the NewYork edition with the headline: Blackstone To Keep Bulk Of Its Stake In SAC Fund.

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Japanese Central Bank Defends Yen Policies

TOKYO — The recent monetary push by Japan does not amount to currency manipulation and is a legitimate and much-needed bid to lift its economy out of deflation, the country’s central banker said Thursday after new figures showed an unexpected economic contraction in the fourth quarter.

“Monetary policy seeks only to stabilize the economy,” Masaaki Shirakawa, the Bank of Japan governor, told reporters in Tokyo after the central bank decided to stand pat on policy moves for now, maintaining its benchmark rate target at a range of zero to 0.1 percent and holding off on expansion of an asset-buying program. “It does not seek to influence currencies.”

Earlier Thursday, gross domestic product numbers from the government showed the Japanese economy remained fragile, shrinking at an annualized rate of 0.4 percent in the October to December quarter, the third consecutive quarter of contraction.

Still, economists expect a Japanese economic recovery to gain steam later this year, as Prime Minister Shinzo Abe of Japan pursues fresh fiscal stimulus programs while keeping up pressure on the central bank to stick to near-zero interest rates and continue to flood the economy with money.

Markets have jumped since Mr. Abe began pushing his agenda in mid-November as part of a successful campaign that put his Liberal Democratic Party back in power for the first time since 2009. During the past three months, the Nikkei 225-share index has risen 30 percent, while the yen has weakened by 15 percent against the dollar.

Last month, the government and central bank promised to work together on monetary policies until Japan achieved 2 percent inflation, a lofty goal for Japan, which has been mired for more than a decade in deflation, a damaging decline in prices.

Mr. Shirakawa is due to end his four-year term next month, and Mr. Abe has signaled that he will appoint a successor who will be more aggressive in fighting deflation.

But increasing the Japanese monetary supply to end deflation would also cause the yen to weaken, which Japanese policy makers have openly welcomed as a boon to the country’s exporters. That has led to grumbling from officials in the European Union and elsewhere that Japan was manipulating its currency to give its exports an unfair edge.

On Tuesday, the Group of 7 advanced economies, which includes Japan, pledged to let markets determine the value of their currencies — a statement that brought relief in Japan because it was not singled out for criticism but that also signaled that the prospect of competitive currency devaluations would be up for debate at the meeting this week in Moscow of finance officials from the Group of 20 leading economies.

Finance Minister Taro Aso of Japan vowed to defend Japan against those claims at the Group of 20, saying Thursday on his Web site that “the world had been awed” by Japan’s recent economic policy moves, which were “the subject of global attention.”

“Other countries want to know how we have done this. It is absolutely not a result of us intervening in foreign exchange markets,” Mr. Aso said.

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DealBook: Big Investors Stiffen Their Resistance to Dell's Offer

12:29 p.m. | Updated

Michael S. Dell’s plan to take the computer maker private for $24.4 billion is the biggest leveraged buyout since the financial crisis.

It is also quickly becoming one of the biggest deals in years to face a shareholder uprising.

The opposition to Mr. Dell’s buyout effort now includes the mutual fund giant T. Rowe Price, which on Tuesday said that it opposed the offer at its current price of $13.65 a share.

“We believe the proposed buyout does not reflect the value of Dell and we do not intend to support the offer as put forward,” Brian C. Rogers, T. Rowe Price’s chief investment officer, said in a statement.

And Southeastern Asset Management, an investment firm, stepped up its campaign against the Dell takeover bid. The asset manager disclosed on Tuesday that it had hired D. F. King & Company, a proxy solicitation firm, in what may be the first step toward a fight against Dell’s board.

Southeastern has also hired a longtime mergers lawyer, Dennis Block of Greenberg Traurig, as an outside legal adviser, according to a person briefed on the matter. It has suggested that potential tactics could include a lawsuit or an intervention by a Delaware judge.

The moves by the two shareholders — the biggest holders of Dell stock outside of Mr. Dell himself — signal growing discontent with the transaction. While Dell’s founder controls about 16 percent of the PC maker’s stock, his offer requires the assent of a majority of shareholders excluding his stake.

Together, Southeastern and T. Rowe Price control nearly 13 percent of Dell’s shares.

“I’m glad to see more people going public with their thoughts,” said Richard S. Pzena, the founder of Pzena Investment Management. His firm’s 0.73 percent stake makes him the 21st-biggest shareholder, according to Bloomberg data.

“I hope it leads to a scuttling of the deal or a higher price,” he added.

With Pzena Investment and several smaller shareholders indicating resistance, roughly 19 percent of the shares that are independent are currently opposed to the buyout.

A Dell spokesman, David Frink, referred to a statement from last week reiterating that the offer was “in the best interests of stockholders” and offered “an attractive and immediate premium.”

Since the deal was announced, Dell’s shareholder base has changed significantly. Some 20 percent of company shares are now held by hedge funds betting on the buyout’s prospects, the investment bank Jefferies estimates. Some of these firms may now be wagering that Mr. Dell and his partners will be forced to sweeten their offer, though others are inclined to reap a quick payout.

Shares of Dell closed on Tuesday at $13.79, above the offer, suggesting that investors are expecting a bump in price.

Announced last week, Dell’s $24.4 billion offer was heralded as one of the biggest private equity deals in years, approaching heights not seen since mega-buyouts like the $26 billion takeover of Hilton Hotels in the summer of 2007. To pull off the bid, Mr. Dell has teamed up with the investment firm Silver Lake Partners and Microsoft, as well as four banks to line up more than $13 billion in financing.

But the outspokenness of Dell’s shareholders instead is more reminiscent of leveraged buyouts that nearly foundered after investor challenges. Bain Capital and THL Partners revised their takeover bid for Clear Channel Communications multiple times before shareholders accepted a roughly $27.5 billion bid.

And suitors for Biomet improved their offer to $11.4 billion after the opposition of a big investor, P. Schoenfeld Asset Management.

An analyst with Jefferies, Peter Misek, wrote in a research note on Tuesday that the buyer consortium might need to raise its offer to $15 a share to succeed.

“I think the bid, as it stands, will not succeed,” he said in a telephone interview. “At $15, you’ll be able to get a simple majority of shareholders.”

It is unclear yet whether the Dell offer will follow the same path as Clear Channel or Biomet; any shareholder vote to approve the deal is at least several months away. And the company contends that a special committee of its board exhausted every alternative to its founder’s bid.

That same committee has also hired an investment bank to supervise a 45-day “go shop” period intended to flush out potential rival bids. People involved in the deal pointed to a lack of interest from other suitors in the last several weeks as evidence that the $13.65-a-share bid was the best hope for the struggling company.

Other investors appear to disagree. Southeastern has argued that Dell is worth closer to $24 a share. Mr. Pzena said that he estimated the stock’s fair value at about $25 over the long term.

(Analysts have speculated that Southeastern may be motivated by the high average price the firm paid for its holdings, which some have estimated at over $20. A person briefed on the matter estimated that the mutual fund manager paid close to $16.90 a share on average.)

Mr. Misek noted that many mutual fund managers might be willing to risk the collapse of the management buyout. These investment executives have already locked in gains from last year, and may be wagering that Dell shares will not reach their previous depths of below $10.

One possibility that Southeastern and others have raised is a leveraged recapitalization, in which Dell would borrow billions of dollars to pay out a dividend or buy back shares.

“I don’t think there’s much downside risk in the stock price anymore,” Mr. Pzena said. “I think there will be a lot of pressure on the board to act.”

A version of this article appeared in print on 02/13/2013, on page B1 of the NewYork edition with the headline: Dell Faces Pressure To Raise His Offer.

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DealBook: S.E.C. Nominee Mary Jo White Discloses Law Firm Wealth

It is no secret that the partners at the white-shoe law firms Debevoise & Plimpton and Cravath, Swaine & Moore earn a decent living. The financial disclosure form of Mary Jo White, the Obama administration’s pick to become the next chairwoman of the Securities and Exchange Commission, reveals just how decent.

Ms. White and her husband, John White, have amassed at least $16 million, according to the filing. Ms. White, 65, heads the litigation department at Debevoise; Mr. White, 65, is co-chairman of the corporate governance practice at Cravath.

As part of her disclosures, Ms. White also explained how she would deal with potential conflicts of interest. In a surprise move, she wrote that her husband would convert his partnership at Cravath from equity to nonequity status.

While many large corporate law firms have nonequity partners, meaning they hold the title of partner but have no ownership stake, each of Cravath’s 87 partners has equity in the firm. As a nonequity partner, Mr. White will receive a fixed salary and an annual performance bonus, according to the filing.

Ms. White also said that, for the time she serves as the S.E.C.’s chairwoman, Mr. White would not communicate with the commission on behalf of Cravath or any client in connection with rules proposed by the S.E.C. Such a restriction is not immaterial for Cravath, as Mr. White has vast experience in securities law and deep connections to the S.E.C., having served as the director of the commission’s corporation finance unit from 2006 to 2008.

The disclosure form contained a number of other revelations. Mr. White has investments in three hedge funds, including a vehicle managed by Och-Ziff, a large publicly traded investment firm started by a former Goldman Sachs partner. He will divest his interest in all three funds upon her confirmation, according to the filing.

The couple also owns 40 acres of farmland and unsold crops in Pocahontas County, Iowa, that are valued at $100,000 to $250,000.

As for Ms. White, a former United States attorney in Manhattan, she received more than $2.4 million as a Debevoise partner last year, according to the filing. And she said that she planned to retire as a Debevoise partner upon becoming S.E.C. chairwoman, at which point she would enjoy the benefits of the firm’s lucrative retirement plan. The disclosure says that Ms. White will receive a monthly lifetime retirement payment of $42,500, amounting to $510,000 annually.

However, instead of making a monthly retirement payment for the next four years while she runs the commission, Debevoise will make a lump-sum payment within 60 days of her appointment, the filing disclosed.

The Whites’ net worth is most likely far greater than $16 million, which represents the low number in a range of possible amounts. Government officials are required to disclose their net worth only within broad ranges.

For instance, the Whites own seven different investments — including a Vanguard high yield bond fund and a Vanguard emerging markets fund — worth $1 million to $5 million. At the low end, those seven funds would be worth $7 million; but at the high end, they would be valued at $35 million.

Ms. White also said that she would avoid some matters for a period of time that involve her former clients, a list that includes JPMorgan Chase, Microsoft and UBS.

A version of this article appeared in print on 02/12/2013, on page B4 of the NewYork edition with the headline: Nominee to Lead S.E.C. Discloses Wealth.

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DealBook: S.E.C.'s Revolving Door Hurts Its Effectiveness, Report Says

Robert S. Khuzami took a step through Washington’s revolving door on Friday, departing his post as one of Wall Street’s top enforcers en route to the private sector, where he is expected to reap millions.

A new report suggests that Mr. Khuzami, like other Securities and Exchange Commission officials who pass between Washington and Wall Street, will be well worth the pay.

The Project on Government Oversight, or POGO, a nonprofit watchdog group long critical of the revolving door, is set to release a study on Monday highlighting a pattern of S.E.C. alumni going to bat for Wall Street firms — and winning. The report, similarly skeptical of Wall Street lawyers joining the S.E.C., cites recent enforcement cases and scuttled money market regulations to underscore its concerns.

“Former employees of the Securities and Exchange Commission routinely help corporations try to influence S.E.C. rule-making, counter the agency’s investigations of suspected wrongdoing, soften the blow of S.E.C. enforcement actions, block shareholder proposals and win exemptions from federal law,” the report says.

By way of example, it says that in three cases against UBS, after enforcement actions threatened to limit the giant Swiss bank’s ability to issue new securities, the bank hired former S.E.C. lawyers. Each time, the report says, the agency granted relief. (The S.E.C. has defended such decisions as being in the best interest of investors, who might suffer if an otherwise stable bank was suddenly unable to sell securities.)

The watchdog report provides only anecdotal evidence of bias and does concede that the S.E.C. adopted checks on influence peddling. Nonetheless, it raises questions about the rising consequences of the revolving door.

Even as Mr. Khuzami is leaving as the S.E.C.’s enforcement chief, President Obama recently named Mary Jo White as his choice to run the agency. Ms. White is a former federal prosecutor who built a lucrative legal practice defending Wall Street executives.

The POGO report’s findings were based on interviews with current and former S.E.C. officials and thousands of federal records obtained through the Freedom of Information Act. It is the second major report the group has issued on the topic, and it comes on the heels of other research yielding mixed conclusions about the importance of the revolving door.

The Government Accountability Office issued a report in 2011 chastising the S.E.C. for failing to keep track of ethics advice the agency gives past and current employees, which the report argued could minimize postemployment conflicts of interest. The study, which described the S.E.C.’s policies as being consistent with those of other agencies, did go on to note that the financial system might benefit from the agency hiring outsiders well versed in Wall Street minutiae.

In a study last year, a group of accounting experts concluded that, contrary to public concerns, the revolving door actually toughened enforcement results. S.E.C. lawyers enforce a hard line at the agency, that study said, partly to showcase their investigative prowess to future employers.

The accounting professors’ study lent support to the S.E.C.’s argument that it goes to great lengths to prevent conflicts of interest. Mr. Khuzami, who has not announced his next job, will face at least a one-year “cooling off” period preventing him from lobbying the S.E.C. on behalf of a client. For an additional year, he must file certain documentation with the S.E.C. before facing off with the agency.

S.E.C. officials have also argued that despite Mr. Khuzami’s Wall Street résumé — he served as a top lawyer for Deutsche Bank — he oversaw one of the most aggressive periods of prosecution in the agency’s history. He revamped the agency’s enforcement unit in the wake of the financial crisis, the officials noted, and took aim at Wall Street giants like Goldman Sachs.

“We follow governmentwide regulations and laws that deter conflicts and ensure impartiality,” John Nester, the agency’s spokesman, said in an e-mail. “We decide issues on their merits according to the rules and regulations governing the securities industry regardless of whether the requesters have an S.E.C. background or not.”

For decades, lawyers have passed through the revolving door on their way to government posts and back again.

The POGO report found that from 2001 through 2010, 419 alumni of the S.E.C. filed almost 2,000 disclosure forms saying they planned to represent an employer or client before the agency. William R. Baker III, a former associate director of enforcement and now a lawyer at Latham & Watkins, was the top filer, submitting 46 notices.

The report also found that former employees had helped companies avoid certain penalties and thwart regulatory initiatives, including an effort by Mary L. Schapiro, then its chairwoman, to reform money market funds, a sector central to the financial crisis. The report noted that former S.E.C. employees had lobbied to block the plan, and added that Luis Aguilar, an S.E.C. commissioner who previously was an executive at Invesco, a money management firm, played a role in “derailing” Ms. Schapiro’s effort.

The watchdog group was also critical of last year’s study by accounting researchers who found that S.E.C. actions were not harmed but strengthened by the revolving door.

That study, POGO said in its report, looked at “only a sliver” of the S.E.C.’s work. “They did not examine, for instance, how the revolving door affects the S.E.C.’s regulation of Wall Street, its granting of relief to specific companies, its handling of cases related to the financial crisis or its decisions to drop investigations without bringing charges.”

Shivaram Rajgopal of Emory University, the lead author of the accounting group’s study, defended its findings, saying it spanned 17 years. He added that while it did not include the financial crisis, it did look at investigations like the one into Enron, the energy company that filed for bankruptcy in 2001 amid an accounting scandal.

“Studies by definition are limited,” he added.

The new report from the watchdog group may be a topic at a New York City Bar Association panel on the revolving door scheduled for Tuesday in New York, a debate for which Mr. Khuzami was initially scheduled. On Friday, Mr. Khuzami caused a stir among some fellow panelists when he withdrew, citing a “conflict.”

Mr. Khuzami later clarified it was a scheduling conflict, not a conflict of interest.

A version of this article appeared in print on 02/11/2013, on page B1 of the NewYork edition with the headline: S.E.C.’s Revolving Door Hurts Its Effectiveness, Report Says.

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