DealBook: Buffett’s Annual Letter Plays Up Newspapers’ Value

Over the last half-century, Warren E. Buffett has built a reputation as a contrarian investor, betting against the crowd to amass a fortune estimated at $54 billion.

Mr. Buffett underscored that contrarian instinct in his annual letter to shareholders published on Friday. In a year when Mr. Buffett did not make any large acquisitions, he bought dozens of newspapers, a business others have shunned. His company, Berkshire Hathaway, has bought 28 dailies in the last 15 months.

“There is no substitute for a local newspaper that is doing its job,” he wrote.

Those purchases, which cost Mr. Buffett a total of $344 million, are relatively minor deals for Berkshire, and just a small part of the giant conglomerate. Mr. Buffett bemoaned his inability to do a major deal in 2012. “I pursued a couple of elephants, but came up empty-handed,” he said. “Our luck, however, changed earlier this year.”

Mr. Buffett was making a reference to one of his largest-ever deals. Last month, Berkshire, along with a Brazilian investment group, announced a $23.6 billion takeover,of the ketchup maker H. J. Heinz.

Written in accessible prose largely free of financial jargon, Berkshire’s annual letter holds appeal far beyond Wall Street. This year’s dispatch contained plenty of Mr. Buffett’s folksy observations about investing and business that his devotees relish.

“More than 50 years ago, Charlie told me that it was far better to buy a wonderful business at a fair price than to buy a fair business at a wonderful price,” Mr. Buffett wrote, referring to his longtime partner at Berkshire, Charlie Munger.

Mr. Buffett also struck a patriotic tone, directly appealing to his fellow chief executives “that opportunities abound in America.” He noted that the United States gross domestic product, on an inflation-adjusted basis, had more than quadrupled over the last six decades.

“Throughout that period, every tomorrow has been uncertain,” he wrote. “America’s destiny, however, has always been clear: ever-increasing abundance.”

The letter provides more than entertainment value and patriotic stirrings, delivering to Berkshire shareholders an update on the company’s vast collection of businesses. With a market capitalization of $250 billion, Berkshire ranks among the largest companies in the United States.

Its holdings vary, with big companies like the railroad operator Burlington Northern Santa Fe and the electric utility MidAmerican Energy, and smaller ones like the running-shoe outfit Brooks Sports and the chocolatier See’s Candies. All told, Berkshire employs about 288,000 people.

The letter, once again, did not answer a question that has vexed Berkshire shareholders and Buffett-ologists: Who will succeed Mr. Buffett, who is 82, as chief executive?

Last year, he acknowledged that he had chosen a successor, but he did not name the candidate.

He has said that upon his death, Berkshire will split his job in three, naming a chief executive, a nonexecutive chairman and several investment managers of its publicly traded holdings.

In 2010, he said that his son, Howard Buffett, would succeed him as nonexecutive chairman.

Berkshire’s share price recently traded at a record high, surpassing its prefinancial crisis peak reached in 2007 and rising about 22 percent over the last year.

The company reported net income last year of about $14.8 billion, up about 45 percent from 2011. Yet the company’s book value, or net worth — Mr. Buffett’s preferred performance measure — lagged the broader stock market, increasing 14.4 percent, compared with the market’s 16 percent return.

Mr. Buffett lamented that 2012 was only the ninth time in 48 years that Berkshire’s book value increase was less than the gain of the Standard & Poor’s 500-stock index. But he pointed out that in eight of those nine years, the S.& P. had a gain of 15 percent or more, suggesting that Berkshire proved to be a most valuable investment during bad market periods.

“We do better when the wind is in our face,” he wrote.

For Berkshire’s largest collection of assets, its insurance operations, the wind has been at its back. We “shot the lights out last year” in insurance, Mr. Buffett said.

He lavished praise on the auto insurer Geico, giving a special shout-out to the company’s mascot, the Gecko lizard.

Investors also keep a keen eye on changes in Berkshire’s roughly $87 billion stock portfolio. Its holdings include large positions in iconic companies like International Business Machines, Coca-Cola, American Express and Wells Fargo. He said Berkshire’s investment in each of those was likely to increase in the future.

“Mae West had it right: ‘Too much of a good thing can be wonderful,’ ” Mr. Buffett wrote.

He also complimented two relatively new hires, Todd Combs and Ted Weschler, who now each manage about $5 billion in stock portfolios for Berkshire. Both men ran unheralded, modest-size money management firms before Mr. Buffett plucked them out of obscurity and moved them to Omaha to work for him.

He called the men “a perfect cultural fit” and indicated that the two would manage Berkshire’s entire stock portfolio once he steps aside. “We hit the jackpot with these two,” Mr. Buffett said, noting that last year, each outperformed the S.& P. by double-digit margins.

Then, sheepishly, employing supertiny type, he wrote: “They left me in the dust as well.”

A former paperboy and member of the Newspaper Association of America’s carrier hall of fame, Mr. Buffett devoted nearly three out of 24 pages of his annual report to newspapers.

While Mr. Buffett has been a longtime owner of The Buffalo News and a stakeholder in The Washington Post Company, he told shareholders four years ago that he wouldn’t buy a newspaper at any price.

But his latest note reflects how much his opinion has turned. His buying spree started in November 2011, when he struck a deal to buy The Omaha World-Herald Company, this hometown paper, for a reported $200 million. By May 2012, he bought out the chain of newspapers owned by Media General, except for The Tampa Tribune. In recent months, he continued to express his interest in buying more papers “at appropriate prices — and that means a very low multiple of current earnings.”

“Papers delivering comprehensive and reliable information to tightly bound communities and having a sensible Internet strategy will remain viable for a long time,” wrote Mr. Buffett.

Mr. Buffett said in a telephone interview last month that he would consider buying The Morning Call of Allentown, Pa., a paper that the Tribune Company is considering selling. But Mr. Buffett said he had not contacted Tribune executives.

“It’s solely a question of the specifics of it and the price,” he said about the Allentown paper. “But it’s similar to the kinds of communities that we bought papers in.”

Mr. Buffett has plenty of cash to make more newspaper acquisitions. To cover his portion of the Heinz purchase, Mr. Buffett will deploy about $12 billion of Berkshire’s $42 billion cash hoard. That leaves a lot of money for Mr. Buffett to continue his shopping spree for newspapers — and more major deals like Heinz.

“Charlie and I have again donned our safari outfits,” Mr. Buffett wrote, “and resumed our search for elephants.”

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Detroit Car Sales Climb Again

General Motors reported a 7 percent gain in auto sales in the United States in February, beating several analyst estimates on the strength of its crossover models and pickup trucks, while Detroit rival Ford Motor Co. posted a slightly weaker-than-expected 9.0 percent gain.

G.M. sold 224,314 cars and trucks last month. Sales of its Chevrolet Silverado pickup trucks jumped nearly 30 percent, while its Chevrolet Equinox midsize crossover rose 16 percent.

G.M., the largest Detroit automaker, also predicted that the overall auto industry’s sales rate this month would be 15.5 million, better than the 15.1 million sales rate expected by economists polled by Thomson Reuters.

Ford said its American auto sales rose to 195,822 cars and trucks in February. The No. 2 automaker reported a 21 percent gain in sales of its crossover and sport-utility vehicles while its F-Series trucks saw a 15.3 percent gain.

But Ford’s car sales rose 6.4 percent, hurt by a 11 percent drop in the Focus compact car and a 9 percent drop in the Fiesta subcompact. Trucks overall, including the E-Series and heavy trucks, rose 3.6 percent during the month.

Chrysler Group, the third-largest Detroit automaker, said its United States sales rose 4 percent to 139,015 in February, slightly less than some analysts expected. Volkswagen’s American unit posted a 2.9 percent increase to 31,456 vehicle sales.

Auto sales each month are an early indicator of the consumer spending. Industry sales in February were expected to show a fourth straight month of seasonally adjusted annualized sales above 15 million vehicles, for the first time since early 2008, a sign of a sustained recovery after the recession.

Chrysler estimated the month will finish at 15.5 million, including medium and heavy trucks, which typically add 300,000 vehicles to the monthly sales rate.

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DealBook: As Losses Mount, R.B.S. Unveils Plan to Sell Assets

LONDON – The Royal Bank of Scotland, hammered by losses, announced plans on Thursday to sell assets and pare back its investment banking business, in an effort to appease regulators and its biggest shareholder, the British government.

R.B.S. said it planned to sell a stake in the Citizens Financial Group, the American lender it bought in 1988, through an initial public offering in two years. The bank will also continue to reduce its investment banking operations, with plans to cut risky assets and eliminate jobs.

The moves are designed to help bolster the bank’s capital levels and refocus its operations, part of a multiyear turnaround effort initiated by its chief executive, Stephen Hester. In the end, R.B.S. will emerge a much smaller bank, largely focused on Britain.

“R.B.S. is four years into its recovery plan,” Mr. Hester said in a statement, “and good progress has been made. We are a much smaller, more focused and stronger bank. Our target is for 2013 to be the last big year of restructuring.”

Like many rivals, R.B.S. is struggling with the legacy of the financial crisis and a spate of legal issues. On Thursday, it reported a bigger-than-expected loss, in part tied to its legal troubles.

The bank, in which the British government holds an 82 percent stake after a bailout in 2008, posted a net loss of £5.97 billion ($9 billion) in 2012, much larger than the £2 billion loss recorded in 2011. Analysts had been expecting a loss of £5.1 billion. For the last quarter of 2012, R.B.S. reported a £2.6 billion loss, up from a £1.8 billion loss in the period a year earlier.

The rising losses reflect the bank’s regulatory and legal problems.

R.B.S. said on Thursday that it had set aside an additional £1.1 billion to compensate clients to which it improperly sold insurance products, bringing the total provision to £2.2 billion. It also estimated it would have to pay £700 million to compensate small businesses to which it improperly sold some interest-rate hedging products.

The bank agreed this year to pay $612 million to British and American authorities to settle accusations of rate-rigging. Since then, Mr. Hester has promised to tighten controls at the bank to limit the risk of future rate manipulation.

The head of R.B.S.’s investment banking division, John Hourican, resigned at the beginning of February as a result of the scandal related to manipulating the London interbank offered rate, or Libor. The bank plans to pay its fine with money clawed back from bonuses.

‘‘Along with the rest of the banking industry we faced significant reputational challenges,’’ Mr. Hester said in the statement. ‘‘We are determined to overcome the cultural and reputational baggage of precrisis times with the same focus we have applied to the financial cleanup from that era.’’

Eager to get back some of the £45.5 billion it invested in R.B.S., the British government recently increased pressure on the bank’s management to speed up the reorganization.

Some analysts said the government could start selling parts of its investment in the bank, even at a loss, before the next general election, which is set for 2015. R.B.S.’s shares are still trading at about half what the government paid for them in 2008. Some lawmakers said they would favor handing out shares to the public instead of a possible sale of the stake on the open market.

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said there were signs that Mr. Hester’s efforts to turn around the bank had started to pay off, but that “the ongoing absence of a dividend and overhang of the government stake are negatives which need to be resolved.”

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DealBook: Obama’s Nominee for S.E.C. Tries to Allay Skepticism

Mary Jo White’s path to the Securities and Exchange Commission has reached a crucial juncture: the Congressional charm campaign.

Lawmakers are scrutinizing Ms. White ahead of her Senate confirmation hearing, raising questions about the former prosecutor’s lack of regulatory experience and the challenge of policing Wall Street firms she recently defended in private practice. But Ms. White is seeking to quell concerns about potential conflicts of interest.

She recently scheduled meetings with Senate Banking Committee members, who must clear her nomination, and answered a 20-page boilerplate questionnaire detailing her qualifications, according to a copy provided to The New York Times. The document sheds new light on her list of Wall Street clients, including little-known work performed for HSBC’s former chief executive. It also describes her ties to New York Democratic causes and laurels she earned both as a defense lawyer and federal prosecutor.

The questionnaire, created by the banking committee, focused significant attention on her movement through the revolving door between government service and private practice, a concern that has loomed since President Obama nominated Ms. White in January.

“As a government official, I believe I have an established track record and the reputation of being tough, but fair,” she said in the document.

Ms. White also offered a previously undisclosed concession, vowing “as far as can be foreseen,” never to return to Debevoise & Plimpton, where she had built a lucrative legal practice. To avert potential conflicts stemming from her work on behalf of Wall Street giants, Ms. White had already agreed to recuse herself for one year from most matters that involve former clients.

While Ms. White’s nomination is expected to sail through the committee before receiving full Senate approval, four Congressional officials who spoke anonymously warned that some Democrats have lingering reservations.

The Democrats note that her husband, John W. White, is co-chairman of the corporate governance practice at Cravath, Swaine & Moore, where he represents many of the companies that the S.E.C. regulates. They also question whether Ms. White’s recusals, even if well-intentioned, could cripple her ability to run the agency.

In a meeting on Tuesday with Senator Sherrod Brown, Democrat of Ohio, Ms. White did little to alleviate the fears.

“Senator Brown respects Ms. White’s credentials and experience, but is concerned with Washington’s long-held bias toward Wall Street,” his spokeswoman, Meghan Dubyak, said in a statement. “He pushed Ms. White,” to explain “whether her previous employment or her spouse’s current employment could cause her to recuse herself from key business facing the S.E.C.” The agency has already fallen behind in writing dozens of new rules for Wall Street.

Ms. White’s supporters counter that, before the White House announced the appointment, the Office of Government Ethics vetted her disclosures. The nonpartisan officials concluded that, even with her recusals, Ms. White could effectively run the agency.

Her supporters also trumpet her long tenure as a tenacious prosecutor. During stints as a federal prosecutor in Brooklyn and as the first woman United States attorney in Manhattan, she helped oversee the prosecution of the crime figure John Gotti and directed the case against those responsible for the 1993 World Trade Center bombing. The cases won her praise from several lawmakers.

Ms. White still has time to win over remaining skeptics. Her confirmation hearing is not expected until the week of March 11, Congressional officials briefed on the matter said.

Until then, Ms. White is blitzing through the halls of Congress, a routine practice for nominees. She began her charm offensive at the top of the banking committee’s roster, visiting this month with the Democratic chairman, Senator Tim Johnson, of South Dakota. A Congressional official briefed on the matter said Ms. White performed well at the gathering, and no major issues arose.

In the next round of meetings, she will face off with a more liberal arm of the committee known to scrutinize nominees. After meeting Mr. Brown, Ms. White is scheduled to see Senator Jeff Merkley, Democrat of Oregon. She also will meet Elizabeth Warren, the Massachusetts Democrat who is an outspoken critic of Wall Street, Ms. Warren’s office confirmed on Tuesday.

Even if Ms. White fails to satisfy lawmakers’ concerns, the meetings are an important step in clearing the way for her appointment.

“Senators will have a chance to size Mary Jo up, and I believe will come away with a great sense of comfort that she’s a candidate of true quality,” said Harvey Pitt, who passed through the confirmation process in 2001 to lead the S.E.C.

He noted that additional disclosures could bolster her candidacy. “I do think she will need to provide a level of comfort to the committee that she is aware of the issue, has a definitive plan for navigating through the potential conflict issues, and will be completely open about when she has a potential recusal issue, and how she has handled it,” he said.

Ms. White, a political independent, assured lawmakers in her questionnaire that she was “completely independent of political or personal influences.” She did disclose, however, $13,000 in campaign donations to Democratic candidates. She also served on the campaign committee of a Democrat who had run for New York attorney general.

Her ties to Debevoise — and its clients — are more significant; she represented JPMorgan Chase, UBS and Michael Geoghegan, the former head of HSBC.

Ms. White, 65, said this month said that she would retire from Debevoise after taking over the S.E.C. and would forgo the firm’s typical retirement perks: office space and a free BlackBerry. She also will sever financial ties to the firm during her term at the S.E.C., taking an upfront lump-sum retirement payment rather than collecting a monthly installment of $42,500.

Her husband has also offered concessions. He agreed to convert his partnership at Cravath, Swaine & Moore from equity to nonequity status and promised not to “communicate directly” with the S.E.C. about rule-making. Ms. White will not participate in a matter with a direct effect on his compensation.

In line with a standard move for federal appointees, Ms. White further agreed to recuse herself for one year from voting on enforcement cases involving Debevoise clients. There are limitations to the policy, though, in case it is “in the public interest” and a “reasonable” person would not object.

Some lawmakers dismiss questions about her potential conflicts, but still question her mastery of regulatory minutiae. While Ms. White is a skilled litigator, she lacks experience in financial rule-writing, unlike a predecessor, Mary Schapiro, a lifelong regulator who ran the S.E.C. for nearly four years.

In her questionnaire, Ms. White highlighted her role as a director of the Nasdaq exchange and other experiences that she said gave her “a firm grounding” in securities laws.

She also, inadvertently, drew a connection to Ms. Schapiro. Like Ms. Schapiro, Ms. White is an animal lover, currently serving as a board member of the American Society for the Prevention of Cruelty to Animals.

She agreed to step down from the board once she is sworn in at the S.E.C.

A version of this article appeared in print on 02/27/2013, on page B1 of the NewYork edition with the headline: Nominee For S.E.C. Tries to Allay Skepticism.

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British Government Seeks to Limit Disclosure in Litvinenko Case

The British government sought on Tuesday to limit the information it is ready disclose at a planned inquest into the death of Alexander V. Litvinenko, a former officer in the K.G.B. who died of radiation poisoning in London more than six years ago, and the coroner hearing the case said it may now be postponed.

“Due to the complexity of the investigation which necessarily precedes the hearings” Sir Robert Owen, the coroner said, the planned May 1 start date for the hearings could represent “a timetable to which it may not be possible to adhere.”

The inquest would be the first — and likely the only — public forum at which witnesses would testify under oath about the killing, which strained Britain’s relationship with the Kremlin and kindled memories of the cold war.

The prospect of a postponement brought charges from Ben Emmerson, a lawyer representing Mr. Litvinenko’s widow, Marina Litvinenko, that the British government was trying to gag the inquiry in order to protect lucrative trade deals with Russia.

Referring to Prime Minister David Cameron, Mr. Emmerson said on Tuesday that “the British government, like the Russian government, is conspiring to get this inquest closed down in exchange for substantial trade interests which we know Mr. Cameron is pursuing."

He added: "One has to ask what is going on at the highest level of Her Majesty’s Government, particularly when the highest levels are building bridges with the Kremlin."

The British government, he said, had “no right to say to an independent judiciary, ’you may not investigate these issues’. That happens in Russia, for sure.”

“This has all the hallmarks of a situation which is shaping up to be a stain on British justice,” the lawyer said.

Sir Robert, the coroner, said he would rule on Wednesday on the government’s application for a so-called Public Interest Immunity Certificate, usually issued on the grounds of national security, which would prevent the inquest from hearing information on topics without explaining what those issues were.

British analysts say they believe Britain is keen to avoid disclosing any information that might link Mr. Litvinenko to the British security services.

Last December, Mr. Emmerson, the lawyer, told a preparatory hearing that that Mr. Litvinenko was a “registered and paid agent and employee of MI6,” as the British Secret Intelligence Service is known. Mr. Litvinenko also worked for the Spanish intelligence service, Mr. Emmerson said, and both the British and Spanish spy agencies made payments into a joint account with his wife. The lawyer added that the inquest should consider whether MI6 failed in its duty to protect the onetime KGB officer against a “real and immediate risk to life.”

Mr. Litvinenko, who fled Russia in 2000 and styled himself a whistle-blower and foe of the Kremlin, died in November 2006, aged 43, weeks after he secured British citizenship. He had ingested polonium 210 — a rare radioactive isotope — at the Pine Bar of the Millennium Hotel in London’ central Grosvenor Square.

Britain’s Crown Prosecution Service is seeking the extradition from Russia of Andrei K. Lugovoi, another former K.G.B. officer, to face trial on murder charges. Mr. Lugovoi denies the accusation and Russia says its Constitution forbids it from sending its citizens to other countries to face trial.

The coroner has said in previous hearings that he will examine what was known about threats to Mr. Litvinenko and would also seek to determine whether the Russian state bore responsibility. In a deathbed statement, Mr. Litvinenko directly blamed President Vladimir V. Putin, who dismissed the accusation. Mr. Emmerson, the lawyer, complained on Tuesday that the preparations for the inquest were becoming “bogged down” by “the government’s attempt to keep a lid on the truth.”

“It is the government’s secret files that are delaying this inquest.”

British media outlets including the BBC and The Guardian newspaper are opposing the government’s effort to restrict evidence. The Guardian said that “the public and media are faced with a situation where a public inquest into a death may have large amounts of highly relevant evidence excluded from consideration by the inquest. Such a prospect is deeply troubling.”

But the Foreign Office said the authorities had made their application in line with their “duty to protect national security” and the coroner would rule according to “the overall public interest.”

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Many Cruise Ship Lack Backup Power Systems, Vexing Regulators

Denis Poroy/Associated Press

The Carnival Splendor cruise ship was towed into San Diego Bay in 2010, after a fire destroyed its electrical systems.

It is becoming a familiar tale: When the cruise ship was towed into port, the endless hours for passengers of sleeping on deck and going without electricity or toilets were finally over.

“It was really hell,” said Bernice Spreckman, who is 77 and lives in Yonkers, N.Y. “I used my life jacket, which was flashing with a little light on it, to find a bathroom it was so dark.”

Ms. Spreckman was not among the 4,200 people aboard the Carnival Triumph who this month endured five days of sewage-soaked carpets and ketchup sandwiches. Her trial at sea came in 2010, on another ship run by Carnival Cruises, called the Splendor, which carried 4,500 passengers.

On both ships, fires broke out below decks, destroying the electrical systems and leaving them helpless. A preliminary Coast Guard inquiry into the Splendor found glaring deficiencies in its firefighting operations, including manuals that called for crew members to “pull” valves that were designed to turn.

But more than two years after the episode, the final report about what happened on the Splendor has yet to appear, a reflection of what critics say is a pattern of international regulatory roulette that governs cruise ship safety.

While the Splendor was based in the United States, the ship was legally registered in Panama, meaning the Panamanian Maritime Authority had the right to lead the investigation. But after the 2010 fire, Panamanian regulators chose to have the Coast Guard take over the inquiry. Then, officials in both countries apparently spent months trading drafts of their reports.

One official in Panama said the authority had completed its review of the Splendor report in October 2012. But a Coast Guard spokeswoman, Lisa Novak, said it still had not “finalized” the report. In the case of the Carnival Triumph, the regulatory scene will shift to the Bahamas, where that ship was registered.

In a recent letter to Coast Guard officials, Senator Jay Rockefeller, Democrat of West Virginia, said that cruise ships seemed to have two separate lives. Only during days near port are they closely monitored.

“Once they are beyond three nautical miles from shore, the world is theirs,” said the letter from Senator Rockefeller, who has headed recent inquiries into cruise ship safety.

Cruise industry officials point out that seaborne vacations are extremely safe and that some 20 million people go on cruises annually, with few problems. The most glaring exception to that record occurred last year when a vessel operated by a subsidiary of Carnival, the Costa Concordia, ran aground off the coast of Italy, resulting in 32 deaths.

In the Triumph’s case, the Coast Guard has said that the ship’s safety equipment failed to contain the blaze. And both the Triumph and the Splendor returned from their aborted voyages without serious injuries to passengers or crew.

But those successes also underscore what most travelers do not realize when they book cruises: nearly all ships lack backup systems to help them return to port should power fail because to install them would have cost operators more money.

The results are repeated episodes involving dead ships, with all the discomforts and potential dangers such situations can bring. In another case, in late 2012, the Costa Allegra cruise ship, a sister ship of the Concordia, lost power after a fire in the generator room and it had to be towed under guard from its location in the Indian Ocean.

In many ways, passengers aboard boats like the Triumph and Splendor were lucky because their ships were disabled in calm weather, when instead they could have been knocked out during storms, or when they were far out at sea or in pirate-infested waters, experts said.

“Anything that knocks a ship dead in the water is serious,” said Mark Gaouette, a safety expert and former Navy officer.

This article has been revised to reflect the following correction:

Correction: February 25, 2013

A caption with an earlier version of this article misstated the number of passengers on the Carnival Splendor when it was disabled at sea. There were 4,500 aboard, not 14,500.

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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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Room for Debate: Should Companies Tell Us When They Get Hacked?

A National Priority and a Business Priority

Lauren Gelman, BlurryEdge Strategies

Like pollution, an insecure infrastructure is bad for everyone. Disclosing security breaches reintroduces the public's collective interest.

Disclosure Plays Into Hackers’ Hands

Alexander Tabb, partner, research and consulting firm

By requiring companies to disclose security breaches, we would be requiring them to telegraph their weaknesses to the world.

Investors Need to Know

Jacob Olcott, Good Harbor Security Risk Management

It’s not that the events aren’t happening. It’s that you're not being told about them -- despite the S.E.C.'s instructions.

We Need Better Notification Laws

Lee Tien, Electronic Frontier Foundation

Existing laws focus mainly on whether a breach exposed information, not why it happened. Yet the reason can be critical.

More Disclosure Is Not Always Better

Baruch Fischhoff, decision sciences, Carnegie Mellon

People may exaggerate the risk of hacking if they suddenly start hearing about a lot of it. Or they may get used to frequent reports and underestimate the risks.

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Euro Watch: Manufacturers Survey Points to New Downturn in Euro Zone

LONDON — Hopes the euro zone might emerge from recession soon were dealt a blow on Thursday, as surveys showed the downturn in the region’s businesses worsened unexpectedly this month — especially in France.

The data came a day before the European Commission is due to announce interim economic forecasts for the 27-nation bloc, including which countries did not meet E.U. budget deficit targets.

European stock indexes were lower, following sharp declines in Asian benchmarks, and the euro slipped against the dollar. Analysts attributed the declines to nervousness about economic growth, especially following indications Wednesday that the U.S. Federal Reserve is divided on maintaining stimulus measures.

Economists had expected that the Markit Flash Eurozone Services PMI, a business survey and one of the earliest monthly indicators of economic activity, would add to tentative signs that a recovery is in the offing.

But the indicator fell in February to 47.3 from 48.6, marking a year below the 50 threshold for growth and confounding expectations for a rise to 49.0 from more than 30 analysts polled by Reuters, none of whom forecast such a poor reading.

Markit said the schism between Germany and France — the two biggest economies in the euro zone — was now at its widest since the survey started in 1998.

While companies in Germany sustained a healthy rate of growth, French services companies are in the midst of their worst slump since early 2009, when the financial crisis and subsequent recession were doing their worst.

“If it wasn’t for Germany, these would be really dire readings,” said Chris Williamson, chief economist at Markit. “At least the German economy is still helping to keep the euro zone afloat in some respects.”

He said the latest survey pointed to the euro zone economy shrinking 0.2 percent to 0.3 percent in the first quarter, following an estimated 0.4 percent contraction at the end of last year.

A Reuters poll of economists last week suggested the economy would merely stagnate this quarter.

By far the most worrying aspect of the data released Thursday was the dismal performance of French companies.

Mr. Williamson said the data for France were more befitting a struggling “peripheral” euro zone economy like Spain or Italy, rather than the “core” status that France traditionally shares with Germany.

By contrast, Germany has enjoyed a good start to the year. German investor morale soared to its highest level in nearly three years this month, according to the ZEW research institute, while the federal statistics office said on Tuesday that employment hit its highest level in the fourth quarter since reunification.

Still, there are limits to what German prosperity can do for the rest of the region, blighted by harsh budget austerity and rising joblessness.

The latest Markit survey suggests that the “positive contagion” noted by the European Central Bank president, Mario Draghi, in January may be more in hope than expectation.

New orders at euro zone service sector companies — which include banks, information technology companies, hotels and restaurants — declined at a faster rate this month, with the index sinking sharply to 46.0 from 48.4 in January.

The survey also dashed optimism that the slump in euro zone factories would ease further in February, as the manufacturing index barely moved, to 47.8 from 47.9 in January.

Output fell at a faster rate, although new export orders brought at least a glimmer of hope, as the index rose to 51.7 in February from 49.5 - its first above-50 reading since June 2006.

The composite index, which combines both the services and manufacturing surveys, fell to 47.3 in February from 48.6 in January.

Companies cut more jobs, although not as quickly as in January, when layoffs rose at the fastest pace in more than three years.

In afternoon trading in Europe the Euro Stoxx 50, a barometer of euro zone blue chips, was down 1.75 percent. National benchmarks were down by more than 1 percent, with the MIB in Milan down 2.42 percent.

In Asia, the Nikkei 225-stock index closed down 1.39 percent, and the Hang Seng index in Hong Kong fell 1.72 percent.

The euro was at $1.3207, down from $1.3340 late Wednesday in New York.

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DealBook: Office Depot and OfficeMax Announce Plans to Merge, After Erroneous Release

10:21 a.m. | Updated

Office Depot and OfficeMax announced plans to merge on Wednesday, just hours after an erroneous news release about the deal surfaced briefly.

Under the terms of the deal, Office Depot said it would issue 2.69 new shares of common stock for each share of OfficeMax. At that level, the transaction would value OfficeMax at $13.50, or roughly $1.19 billion, a premium of more than 25 percent to the company’s closing price last week.

The deal has been anticipated, as the companies face an increasingly difficult competitive environment. Both companies, which are burdened with big real estate footprints, have struggled against lower-priced rivals like Amazon.com and Costco. By uniting, the two companies should be able to reduce costs and better negotiate prices.

“In the past decade, with the growth of the Internet, our industry has changed dramatically,” Neil R. Austrian, chairman and chief executive of Office Depot, said in a statement. “Combining our two companies will enhance our ability to serve customers around the world, offer new opportunities for our employees, make us a more attractive partner to our vendors and increase stockholder value.”

While the deal has been years in the making, it was initially announced prematurely. A news release announcing the merger of the companies was posted on Office Depot’s Web site early on Wednesday morning, but it quickly disappeared.

Several news organizations reported the terms disclosed in the errant news release for Office Depot’s earnings. The details were buried on page four of the release, under the header “Other Matters.”

As the details filtered through the market, shares of the companies jumped. In premarket trading, Office Depot’s stock rose more than 7 percent, while OfficeMax shares were up more than 8 percent.

The episode is reminiscent of other times that companies’ earnings releases were published prematurely. Last fall, Google’s third-quarter earnings were published three hours early, which the technology giant blamed on a mistake by R.R. Donnelley & Sons, the company’s printer.

Representatives for Office Depot and OfficeMax were not immediately available for comment on the erroneous release.

Strategically, the deal makes sense, as the companies face a changing competitive environment.

Combined, the companies reported about $4.4 billion in revenue for their third quarter of 2012; in comparison, Staples disclosed $6.4 billion in revenue for the same period.

Office Depot has also been under pressure from an activist hedge fund, Starboard Value, which sent a letter to the retailer’s board last fall. In it, Starboard called for more cost cuts and a greater focus on higher-margin businesses like copy and print services. With a 14.8 percent stake, Starboard is the company’s biggest investor.

In announcing the deal, the two companies emphasized their new financial heft.

With the merger, the retailers expect to generate $400 million to $600 million in annual cost savings. The combined entity would also have $1 billion in cash, providing additional firepower to invest in the business.

“We are excited to bring together two companies intent on accelerating innovation for our customers and better differentiating us for success in a dynamic and highly competitive global industry,” Ravi K. Saligram, chief executive of OfficeMax, said in a statement. “We are confident that there will be exciting new opportunities for employees as part of a truly global business.”

Each company will have an equal number of directors on the board of the combined retailer. Before the deal closes, OfficeMax will pay a special dividend of $1.50 a share to its shareholders.

OfficeMax was advised by JPMorgan Chase and the law firms Skadden, Arps, Slate, Meagher & Flom and Dechert. Office Depot was counseled by Simpson Thacher & Bartlett, while its board was advised by the Peter J. Solomon Company, Morgan Stanley and Kirkland & Ellis. Perella Weinberg Partners provided financial advice to the board’s transaction committee.

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Homebuilder Confidence Dips

LOS ANGELES (AP) — Confidence among U.S. homebuilders slipped this month from the 6½ year high it reached in January, with many builders reporting less traffic by prospective customers before the critical spring home-buying season.

The National Association of Home Builders/Wells Fargo builder sentiment index released Tuesday dipped to 46 from 47 in January. It was the first monthly decline in the index since April.

Readings below 50 suggest negative sentiment about the housing market. The last time the index was at 50 or higher was in April 2006, when it was 51. It began trending higher in October 2011, when it was 17.

The latest index, based on responses from 402 builders, comes as the U.S. housing market is strengthening after stagnating for roughly five years after the housing boom collapsed.

Steady job gains and near-record-low mortgage rates have encouraged more people to buy homes. Prices have been rising. In part, that's because the supply of previously occupied homes for sale has thinned to the lowest level in more than a decade. And the pace of foreclosures, while still rising in some states, has slowed sharply on a national basis.

The trends have led homebuilders to increase construction. Last year, builders broke ground on the most new homes in four years.

All told, sales of new homes jumped nearly 20 percent last year to 367,000, the most since 2009. Still, many economists don't foresee a full housing recovery before 2015 at the earliest.

"The index remains near its highest level since May of 2006, and we expect homebuilding to continue on a modest rising trajectory this year," said David Crowe, the NAHB's chief economist.

Even so, builders remain concerned about the sturdiness of the U.S. economy and unemployment, which ticked up to 7.9 percent last month from 7.8 percent in December.

Many builders are facing higher costs for building materials and having trouble obtaining financing for construction. Some also are facing a shortage of workers in markets where residential construction has picked up sharply, such as Texas and Arizona.

An index that measures current sales conditions fell one point to 51. And a gauge of traffic by prospective buyers declined four points to 32 from 36 in January.

But builders' outlook for sales in the next six months improved one point to 50.

Though new homes represent only a fraction of the housing market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to NAHB statistics.

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Disruptions: Disruptions: 3-D Printing Is on the Fast Track

Will the future be printed in 3-D?

At first glance, looking at past predictions about the future of technology, prognosticators got a whole lot wrong. The Web is a garbage dump of inaccurate guesses about the year 2000, 2010 and beyond. Flying cars, robotic maids and jet packs still are nowhere near a reality.

Yet the prediction that 3-D printers will become a part of our daily lives is happening much sooner than anyone anticipated. These printers can produce objects, even rather intricate ones, by printing thin layer after layer of plastic, metal, ceramics or other materials. And the products they make can be highly customized.

Last week, President Obama cited this nascent technology during his State of the Union address — as if everyone already knew what the technology was.

He expressed hope that it was a way to rejuvenate American manufacturing. “A once-shuttered warehouse is now a state-of-the art lab where new workers are mastering the 3-D printing that has the potential to revolutionize the way we make almost everything,” Mr. Obama said. He has pushed new technologies before, like solar and wind power, as remedies for our nation’s problems, and those attempts have only revived the debate about the limitations of government industrial policy.

But this one shows more promise. The question is, can the United States get a foothold in manufacturing one 3-D printer at a time?

Hod Lipson, an associate professor and the director of the Creative Machines Lab at Cornell, said “3-D printing is worming its way into almost every industry, from entertainment, to food, to bio- and medical-applications.”

It won’t necessarily directly create manufacturing jobs, except perhaps for the printers themselves. Dr. Lipson, the co-author of “Fabricated: The New World of 3D Printing,” said that the technology “is not going to simply replace existing manufacturing anytime soon.” But he said he believed that it would give rise to new businesses. “The bigger opportunity in the U.S. is that it opens and creates new business models that are based on this idea of customization.”

In addition to the lab that the president mentioned, a federally financed manufacturing innovation institute in Youngstown, Ohio, schools are embracing the technology. The University of Virginia has been working to introduce 3-D printers into some programs from kindergarten through 12th grade in Charlottesville to prepare students for a new future in manufacturing.

“We have 3-D printers in classrooms, and in one example, we’re teaching kids how to design and print catapults that they then analyze for efficiency,” said Glen L. Bull, professor and co-director of the Center for Technology and Teacher Education. “We believe that every school in America could have a 3-D printer in the classroom in the next few years.”

The education system may want to speed things up. The time between predictions for 3-D printers and the reality of what they can accomplish is compressing rapidly.

For example, in 2010, researchers at the University of Southern California said that another decade would pass before we could build a home using a 3-D printer. Yet last week, Softkill Design, a London architecture collective, announced that it planned to make the first such home — which it will assemble in a single day — later this year. The home isn’t that pretty, and will look more like a calcified spider web than a cozy house, but it will show it can be done. The price of 3-D printers has also dropped sharply over the last two years, with machines that once cost $20,000, now at $1,000 or less. That’s partly because Chinese companies are driving down prices. Yes, China sees the opportunity in these things, even though the technology may undermine some of its manufacturing advantages.

“When it costs you the same amount of manufacturing effort to make advanced robotic parts as it does to manufacture a paperweight, that really changes things in a profound way,” Dr. Lipson said.

This leaves us with one more question about the future: When will these 3-D printers be able to make us flying cars, robotic maids and jet packs?

E-mail: bilton@nytimes.com

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A First Step on Continent for Google on Use of Content

PARIS — Publishers in France say they have struck an innovative agreement with Google on the use of their content online. Their counterparts elsewhere in Europe, however, say the French gave in too easily to the Internet giant.

The deal was signed this month by President François Hollande of France and Eric E. Schmidt, the executive chairman of Google, who called it a breakthrough in the tense relationship between publishers and Google, and as a possible model for other countries to follow.

Under the deal, Google agreed to set up a fund, worth €60 million, or $80 million, over three years, to help publishers develop their digital units. The two sides also pledged to deepen business ties, using Google’s online tools, in an effort to generate more online revenue for the publishers, who have struggled to counteract dwindling print revenue.

But the French group, representing newspaper and magazine publishers with an online presence, as well as a variety of other news-oriented Web sites, yielded on its most important demand: that Google and other search engines and “aggregators” of news should start paying for links to their content.

Google, which insists that its links provide a service to publishers by directing traffic to their sites, had fiercely resisted any change in the principle of free linking.

The agreement dismayed members of the European Publishers Council, a lobbying group in Brussels, which has been pushing for a fundamental change in the relationship between publishers and Google. The group criticized the French publishers for breaking ranks and striking a separate business agreement that has no statutory standing.

The deal “does not address the continuing problem of unauthorized reuse and monetization of content, and so does not provide the online press with the financial certainty or mechanisms for legal redress which it needs to build sustainable business models and ensure its continued investment in high-quality content,” Angela Mills Wade, executive director of the publishers council, said in a statement.

German publishers were also scornful, with Anja Pasquay, a spokeswoman for the German Newspaper Publishers’ Association, saying: “Obviously the French position isn’t one that we would favor. This is not the solution for Germany.”

Germany has been in the forefront of the push to get Google to share with online news publishers some of the billions of euros that the company earns from the sale of advertising. A proposed law, endorsed by the government of Chancellor Angela Merkel and working its way through the federal legislature, would grant a new form of copyright to digital publishers. If enacted, it could allow publishers to charge search engines or aggregators for displaying even snippets of news articles alongside links to other Web sites.

Mr. Hollande had vowed to introduce similar legislation this winter if Google and the publishers did not come to terms. It appears that Google, which had threatened to stop indexing French Web sites’ content if it had to pay for links, has sidelined the threat of legislation, at least for now; the agreement will be reviewed after three years, Mr. Hollande has said.

Under the deal, Google says it will help the publishers use several of its digital advertising services, including AdSense, AdMob and Ad Exchange, more effectively.

Publishers are already free to use these services, and it was not immediately clear how they would be able to generate more revenue from them; this part of the accord remains confidential, both sides say, because they are still negotiating the fine print.

“This agreement can help accelerate the move toward greater advertising revenues in the digital world,” said Marc Schwartz of Mazars, a consulting firm, who is serving as an independent mediator in the talks. “I’m not saying we have done everything, but it’s a first step in the right direction.”

More has been said about the planned innovation fund. Publishers will submit proposals to the fund, which will select ideas to finance and develop, with the involvement of Google engineers.

“The idea is that it would inject innovation into the sector in France,” said Simon Morrison, copyright policy manager at Google.

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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: Confidence on Upswing, Mergers Make Comeback

The mega-merger is back.

For the corporate takeover business, the last half-decade was a fallow period. Wall Street deal makers and chief executives, brought low by the global financial crisis, lacked the confidence to strike the audacious multibillion-dollar acquisitions that had defined previous market booms.

Cycles, however, turn, and in the opening weeks of 2013, merger activity has suddenly roared back to life. On Thursday, Berkshire Hathaway, the conglomerate run by Warren E. Buffett, said it had teamed up with Brazilian investors to buy the ketchup maker H. J. Heinz for about $23 billion. And American Airlines and US Airways agreed to merge in a deal valued at $11 billion.

Those transactions come a week after a planned $24 billion buyout of the computer company Dell by its founder, Michael S. Dell, and private equity backers. And Liberty Global, the company controlled by the billionaire media magnate John C. Malone, struck a $16 billion deal to buy the British cable business Virgin Media.

“Since the crisis, one by one, the stars came into alignment, and it was only a matter of time before you had a week like we just had,” said James B. Lee Jr., the vice chairman of JPMorgan Chase.

Still, bankers and lawyers remain circumspect, warning that it is still too early to declare a mergers-and-acquisitions boom like those during the junk bond craze of 1989, the dot-com bubble of 1999 and the leveraged buyout bonanza of 2007. They also say that it is important to pay heed to the excesses that developed during these moments of merger mania, which all ended badly.

A confluence of factors has driven the recent deals. Most visibly, the stock market has been on a tear, with the Standard & Poor’s 500-stock index this week briefly hitting its highest levels since November 2007. Higher share prices have buoyed the confidence of chief executives, who now, instead of retrenching, are looking for ways to expand their businesses.

A number of clouds that hovered over the markets last year have also been removed, eliminating the uncertainty that hampered deal making. Mergers and acquisitions activity in 2012 remained tepid as companies took a wait-and-see approach over the outcome of the presidential election and negotiations over the fiscal cliff. The problems in Europe, which began in earnest in 2011, shut down a lot of potential transactions, but the region has since stabilized.

“When we talk to our corporate clients as well as the bankers, we keep hearing them talk about increased confidence,” said John A. Bick, a partner at the law firm Davis Polk & Wardwell, who advised Heinz on its acquisition by Mr. Buffett and his partners.

Mr. Bick said that mega-mergers had a psychological component, meaning that once transactions start happening, chief executives do not want to be left behind. “In the same way that success breeds success, deals breed more deals,” he said.

A central reason for the return of big transactions is the mountain of cash on corporate balance sheets. After the financial crisis, companies hunkered down, laying off employees and cutting costs. As a result, they generated savings. Today, corporations in the S.& P. 500 are sitting on more than $1 trillion in cash. With interest rates near zero, that money is earning very little in bank accounts, so executives are looking to put it to work by acquiring businesses.

The private equity deal-making machine is also revving up again. The world’s largest buyout firms have hundreds of billions of dollars of “dry powder” — money allotted to deals in Wall Street parlance — and they are on the hunt. The proposed leveraged buyout of Dell, led by Mr. Dell and the investment firm Silver Lake Partners, was the largest private equity transaction since July 2007, when the Blackstone Group acquired the hotel chain Hilton Worldwide for $26 billion just as the credit markets were seizing up.

But perhaps the single biggest factor driving the return of corporate takeovers is the banking system’s renewed health. Corporations often rely on bank loans for financing acquisitions, and the ability of private equity firms to strike multibillion-dollar transactions depends on the willingness of banks to lend them money.

For years, banks, saddled by the toxic mortgage assets weighing on their balance sheets, turned off the lending spigot. But with the housing crisis in the rearview mirror and economic conditions slowly improving, banks are again lining up to provide corporate loans at record-low interest rates to finance acquisitions.

The banks, of course, are major beneficiaries of megadeals, earning big fees from both advising on the transactions and lending money to finance them. Mergers and acquisitions in the United States total $158.7 billion so far this year, according to Thomson Reuters data, more than double the amount in the same period last year. JPMorgan, for example, has benefited from the surge, advising on four big deals in recent weeks, including the Dell bid and Comcast’s $16.7 billion offer for the rest of NBCUniversal that it did not already own.

Mr. Buffett, in a television interview last month, declared that the banks had repaired their businesses and no longer posed a threat to the economy. “The capital ratios are huge, the excesses on the asset aside have been largely cleared out,” said Mr. Buffett, whose acquisition of Heinz will be his second-largest acquisition, behind his $35.9 billion purchase of a majority stake in the railroad company Burlington Northern Santa Fe in 2009.

While Wall Street has an air of giddiness over the year’s start, most deal makers temper their comments about the current environment with warnings about undisciplined behavior like overpaying for deals and borrowing too much to pay for them.

Though private equity firms were battered by the financial crisis, they made it through the downturn on relatively solid ground. Many of their megadeals, like Hilton, looked destined for bankruptcy after the markets collapsed, but they have since recovered. The deals have benefited from an improving economy, as well as robust lending markets that allowed companies to push back the large amounts of debt that were to have come due in the next few years.

But there are still plenty of cautionary tales about the consequences of overpriced, overleveraged takeovers. Consider Energy Future Holdings, the biggest private equity deal in history. Struck at the peak of the merger boom in October 2007, the company has suffered from low natural gas prices and too much debt, and could be forced to restructure this year. Its owners, a group led by Kohlberg Kravis Roberts and TPG, are likely to lose billions.

Even Mr. Buffett made a mistake on Energy Future Holdings, having invested $2 billion in the company’s bonds. He admitted to shareholders last year that the investment was a blunder and would most likely be wiped out.

“In tennis parlance,” Mr. Buffett wrote, “this was a major unforced error.”

Michael J. de la Merced contributed reporting.

A version of this article appeared in print on 02/15/2013, on page A1 of the NewYork edition with the headline: Confidence on Upswing, Mergers Make Comeback.

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DealBook: Berkshire and 3G Capital to Buy Heinz for $23 Billion

10:12 a.m. | Updated

Warren E. Buffett has found another American icon worth buying: H. J. Heinz.

Berkshire Hathaway, the giant conglomerate that Mr. Buffett runs, said on Thursday that it would buy the food giant for about $23 billion, adding Heinz ketchup to its stable of prominent brands.

The proposed acquisition, coming fast on the heels of a planned $24 billion buyout of the computer maker Dell and a number of smaller deals, heralds a possible reemergence in merger activity.  The number of deals and the prices being paid for companies are still a far cry from the lofty heights of the boom before the financial crisis.  But an improving stock market, growing confidence among business executives and mounting piles of cash held by corporations and private equity funds all favor a return to deal-making. 

Mr. Buffett is teaming up with 3G Capital Management, a Brazilian-backed investment firm that owns a majority stake in a company whose business is complementary to Heinz’s: Burger King.

Under the terms of the deal, Berkshire and 3G will pay $72.50 a share, about 20 percent above Heinz’s closing price on Wednesday. Including debt, the transaction is valued at $28 billion.

“This is my kind of deal and my kind of partner,” Mr. Buffett told CNBC on Thursday. “Heinz is our kind of company with fantastic brands.”

In many ways, Heinz fits Mr. Buffett’s deal criteria almost to a T. It has broad brand recognition – besides ketchup, it owns Ore-Ida and Lea & Perrins Worcestershire sauce – and has performed well. Over the last 12 months, its stock has risen nearly 17 percent.

Mr. Buffett told CNBC that he had a file on Heinz dating back to 1980. But the genesis of Thursday’s deal actually lies with 3G, an investment firm backed by several wealthy Brazilian families, according to a person with direct knowledge of the matter.

One of the firm’s principal backers, Jorge Paulo Lemann, brought the idea of buying Heinz to Berkshire about two months ago, this person said. Mr. Buffett agreed, and the two sides approached Heinz’s chief executive, William R. Johnson, about buying the company.

“We look forward to partnering with Berkshire Hathaway and 3G Capital, both greatly respected investors, in what will be an exciting new chapter in the history of Heinz,” Mr. Johnson said in a statement.

Berkshire and 3G will each contribute about $4 billion in cash to pay for the deal, with Berkshire also paying $8 billion for preferred shares. The rest of the cost will be covered by debt financing raised by JPMorgan Chase and Wells Fargo.

Mr. Buffett told CNBC that 3G would be the primary supervisor of Heinz’s operations, saying, “Heinz will be 3G’s baby.”

The food company’s headquarters will remain in Pittsburgh, Heinz’s home for over 120 years.

Heinz’s stock was up nearly 20 percent in morning trading, at $72.51, closely mirroring the offered price. Berkshire’s class A stock was also up slightly, rising 0.64 percent to $148,691 a share.

Heinz was advised by Centerview Partners, Bank of America Merrill Lynch and the law firm Davis Polk & Wardwell. A transaction committee of the company’s board was advised by Moelis & Company and Wachtell, Lipton, Rosen & Katz.

Berkshire’s and 3G’s lead adviser was Lazard, with JPMorgan and Wells Fargo providing additional advice. Kirkland & Ellis provided legal advice to 3G, while Berkshire relied on its usual law firm, Munger, Tolles & Olson.

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DealBook: Big Banks Are Told to Review Their Own Foreclosures

Washington is seeking help from an unlikely group in its effort to distribute billions of dollars to struggling homeowners in foreclosure: the same banks accused of abusing homeowners with shoddy foreclosure practices.

In doing so, the regulators are trying to speed the process after a flawed, independent foreclosure review delayed relief for millions of borrowers, according to people briefed on the matter. But housing advocates worry that the banks, eager to end the costly process, could take shortcuts as they comb through loan files for potential errors, in some cases diverting aid from the neediest homeowners.

Regulators say they will check the work. And banks have already agreed to pay a fixed amount to troubled homeowners, creating another backstop.

According to officials involved in the process, who spoke anonymously because the matter is not public, the regulators had few alternatives.

Last month, the Office of the Comptroller of the Currency scuttled the foreclosure review by independent consultants because it was marred by delays and inefficiency. Instead, the regulator struck a multibillion-dollar settlement directly with the nation’s largest banks, a deal that includes $3.6 billion in payments to aggrieved homeowners.

To accelerate the payments, the comptroller’s office decided to cut out the middlemen, the consultants, from the reviews. In a conference call last week, the government outlined a plan to use the lenders instead, according to people with direct knowledge of the discussion. Banks will now have to assess each loan for potential errors, which will help determine the size of the payments to homeowners.

The decision to tap the banks for support is the latest twist in the review of more than four million foreclosures, a process that has incensed lawmakers and ensnared the nation’s largest lenders. Regulators are eager to make the payments to homeowners, who have languished for more than a year.

In 2012, housing advocates, regulators and some bank executives suggested the government release an initial round of payments to homeowners, people briefed on the matter said. Such a move might have quelled suspicions among homeowners that the independent review was an empty promise, or worse, a fraud. But the effort went nowhere.

Now, the first payments to homeowners are not expected until late March.

For Judie Lee, 51, a paralegal who is battling to save her three-bedroom home in Lynn, Mass., it might not come in time. Ms. Lee says she submitted a request for aid more than six months ago after a series of botched loan modifications.

“We are in trouble,” said Ms. Lee, who said that she fell behind on her loan payments after losing a job in 2007.

Under the plan outlined last week, the banks will pore over loan files like Ms. Lee’s to identify the worst possible errors. Military personnel illegally foreclosed on, for example, will rank highest on the list. Borrowers who might be current on their loan payments — and therefore did not warrant a foreclosure — will be next.

Regulators will then decide how much money to pay each category of borrower. The worse the errors, the bigger the payout.

The plan, regulators say, offers a more equitable way to divide the money than paying the same amount to each homeowner.

The strategy, though, presents potential conflicts of interests. The banks, in haste to meet tight deadlines, could fail to provide an accurate portrayal of what went wrong. The loan files are also in disarray, officials say, complicating the task for banks.

“The whole process has been a slap in the face to homeowners and a slap on the wrist to banks,” said Isaac Simon Hodes, an organizer with the community group Lynn United for Change. “The latest development shows how there has been no accountability.”

Regulators say the lenders have no incentive to manipulate the reviews. Under the settlement, the banks committed to dole out a set amount. Bank of America must distribute $1.1 billion to homeowners. Wells Fargo owes more than $700 million. The costs will not change, regardless of what the banks find in the loan files in the coming weeks.

The Office of the Comptroller of the Currency, which is running the review, also said it would perform regular checks on the banks’ work and make sure they adopt controls to prevent errors.

“Regulators will verify and test the work of servicers to slot borrowers into broad categories and then regulators will determine the amount of payment for each category,” explained Morris Morgan, the deputy comptroller in charge of supervising large banks.

By relying on the banks, regulators can part ways with the consultants.

Despite billing for roughly $2 billion in fees in the 14-month review, consultants examined only a sliver of the 500,000 complaints filed by homeowners, people involved in the matter said. Their efforts were stymied, in part, because regulators urged consultants to first scrutinize a random sample of the four million foreclosures before digging into specific homeowner complaints, the people involved said. The decision, the people said, may have undercut the scope of the settlement and potentially deprived homeowners of additional relief.

Consultants were also criticized for a faulty review process.

Some consulting firms, including the Promontory Financial Group, farmed out much of the work to contract employees. Others faced questions about their objectivity. The consultants, critics note, were paid billions of dollars by the same banks they were expected to police.

Some consultants say they sounded repeated alarms about the process. Last spring, a group of consulting firm executives met with comptroller officials in Washington to voice concerns that the reviews were too narrow, according to people with direct knowledge of the meetings.

Other people close to the review say consultants were only partly to blame for the problem. The review process, with its narrow focus, was created by the comptroller’s office in 2011, under previous leadership.

Now, some consultants feel spurned by the regulators’ decision to hand off the review.

“Why did you not trust the banks a month ago?” asked one consultant who spoke anonymously for fear of offending regulators. “And why do you solely rely on them now?”

A version of this article appeared in print on 02/13/2013, on page B1 of the NewYork edition with the headline: Banks Told To Review Their Own Foreclosures.

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Group of 7 Says It Will Let Market Decide Currency Values

BRUSSELS — Seven major developed countries including the United States and Germany pledged on Tuesday to let foreign exchange markets determine the value of their currencies.

The statement by the Group of 7 prompted relief in Japan, where policy makers have been under fire from some officials in Europe and the United States who say they are unfairly seeking to give their economy a shot in the arm by bringing down the value of the yen.

The statement “properly recognizes that steps we are taking to beat deflation are not aimed at influencing currency markets,” said Taro Aso, the Japanese finance minister.

In a statement, the G-7 powers said they would consult closely to avoid moves that could hurt stability. But they restated a commitment to market-determined exchange rates.

“We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates,” the G-7 said in the statement, which was posted on the Web site of the Bank of England.

Concerns had been mounting in recent weeks about the effects of an ultraloose monetary policy in Japan that has pushed the yen lower against major currencies. The yen’s weakness also had prompted talk of a so-called currency war if other parts of the world followed suit in a competitive devaluation.

The euro’s rise in value has become a particular concern in the euro zone, since it could make exports more expensive and dent growth if demand for European products falls. Those concerns had prompted France to call for some kind of exchange-rate policy.

On Monday, Pierre Moscovici, the French finance minister, said he wanted the Europeans to present a common plan later this week during a meeting of finance ministers and central bankers of the Group of 20 nations to be held in Moscow.

But the head of the German Bundesbank, Jens Weidmann, said Monday that the French initiative was a poor substitute for policy overhauls that, if implemented, would do more for growth.

On Tuesday in Brussels, following a regular monthly meeting of E.U. finance ministers, Wolfgang Schäuble, the German finance minister, said there was “no foreign exchange problem in Europe” and that such issues should be discussed at the G-20 meeting in Moscow.

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