23 julio, 2008

India

India's government survives

A nuclear co-operation deal between America and India survives too

AFTER a rancorous two-day debate on its most contentious policy, a nuclear co-operation agreement with America, India’s government won a parliamentary vote of confidence on Tuesday July 22nd. This does not guarantee the survival of the vexed agreement struck by America’s George Bush and India’s prime minister, Manmohan Singh, in 2005. The deal needs approving by several foreign bodies, including the UN’s International Atomic Energy Agency (IAEA). But the government’s victory, by 275 votes to 256, with 10 abstentions, has probably fireproofed it against opponents in India.

The life of the government has also been prolonged, at least for a bit. The coalition led by Mr Singh’s Congress party was reduced to a parliamentary minority earlier this month, when it was deserted by a group of Communist parties. They had provided vital support to the government while remaining outside it, but they objected to the nuclear deal, which would enable India to purchase nuclear fuel and technology despite its refusal to sign the nuclear Non-Proliferation Treaty.

That would be a helpful thing for energy-strapped India. But the Communists are implacably against the idea of closer ties with America and vowed to bring the government down in order to scupper the deal. The government volunteered to face a confidence vote, in an impromptu parliamentary session, to forestall this threat.

The outcome was a particular triumph for Mr Singh, who has waged a lonely campaign on behalf of the nuclear agreement. The indifference exhibited by many in Congress towards it has been almost as problematic as the Communists’ opposition. Free of these trials, the deal—or, more precisely, a safeguards agreement required by it—is now expected to go before the IAEA’s board of directors on August 1st. If the board approves, the 45-member Nuclear Suppliers Group will be asked to rewrite its rules to accommodate the deal. America’s Congress would then be asked to give a final blessing to the arrangement.

It is uncertain how long Mr Singh’s government will enjoy its reprieve. With inflation at a 13-year high, the government is reluctant to face the voters before its term ends in May 2009. To survive the confidence vote, it cobbled together a fresh parliamentary majority by recruiting a new ally, the Samajwadi Party (SP). In India’s fractious polity, and an election season to boot, the chances of a another split are high.

Much depends on the SP, a party based in northern Uttar Pradesh (UP) state and notorious for the corrupt governments it has led there. It is certainly open to negotiations on any imaginable government initiative: until this month, the SP was fervently against the nuclear deal and America. But its support comes at a price. It is alleged to be contingent, first, upon the government pursuing corruption allegations against UP’s current chief minister, Mayawati. A champion of low-caste Hindus, she leads the Bahujan Samaj Party, which trounced the SP in a state election in UP last year, and threatens to do so in the general one. The SP is also seeking favourable terms in an electoral alliance with Congress in UP.

Reuters

Congress could probably live with both demands. A lacklustre police investigation into the source of Mayawati’s impressive wealth has already been resuscitated. And a tie-up with the SP in India’s most populous state, UP, could improve Congress’s own fortunes there—even if it would be an embarrassing admission of how dismal they have recently become.

Its dalliance with the SP carries a wider reputational risk. To shore up its parliamentary majority, the government and its new allies are alleged to have bribed many independents and dissidents for their vote. Shortly before the confidence vote, a Communist’s angry speech was disrupted by three members of the main-opposition Bharatiya Janata Party (BJP), exhibiting fat wads of rupees. They claimed that this was the first instalment a 90m-rupee bribe ($2.1m) given by the government’s camp, and that they could prove it.

Yahoo! and Carl Icahn

Icahn't

Yahoo! solves one problem and is left with all the others

SUDDENLY, they all find pleasant things to say about each other. Until the weekend, Carl Icahn, an activist investor who had taken a stake in Yahoo!, a beleaguered internet company, was hurling public abuse at Jerry Yang, its boss and co-founder, and proposing to fire the entire board at a shareholder meeting on August 1st. Yahoo! was pitching the invective back—even using its own home-page—and mocking Mr Icahn’s ignorance in matters techie. He has no plan, said Yahoo!, besides selling out to Microsoft. That is what you should have done long ago, retorted Mr Icahn, who started negotiations with Microsoft himself. This “odd-couple collaboration” will “destroy stockholder value,” Yahoo! screamed.

Then, at the weekend, a tense truce. Yes, Yahoo!’s shareholders may be livid that Mr Yang did not take Microsoft’s offer of $33 a share while it stood (the share price is now about $21). But they also recognised that Mr Icahn did lack an alternative strategy, and that he had, by saying as much, frittered away any remaining bargaining clout with Microsoft. Bill Miller, a fund manager at Legg Mason, Yahoo!’s second-largest institutional investor, said that Yahoo!’s existing board had shown enough “care and diligence” for him to vote to retain it. Mr Icahn, unable to get the other large investors on his side, had to seek a rapprochement with Mr Yang.

A compromise was reached. Mr Yang remains the boss for now and all of the other directors keep their jobs, except for one who volunteered to go. In turn, Mr Icahn will join the board, as will two new directors to his liking, raising the board’s membership from nine to eleven. One of the new recruits is likely to be Jonathan Miller, who was once the boss of AOL, an internet portal often considered to be similar to Yahoo! and owned by Time Warner, a media giant. AOL, as it happens, is the only company that might be a viable alternative to Microsoft as a merger candidate, but whether Mr Miller’s presence would help the negotiations is questionable, since he was in effect ousted.

Where does that leave Yahoo!? In even more of a mess than when Microsoft first offered to buy it, on February 1st. A steady dribble of top managers and engineers who were leaving the company has turned into something of a gush. The economy is getting worse, and is likely to hit display (or “banner”) advertising in particular, the mainstay of Yahoo!’s business. On Tuesday July 22nd Yahoo! announced that its quarterly profits had again fallen. This follows Microsoft’s announcement last week that it saw hard times ahead in online advertising. Even Google disappointed Wall Street, although its economist claims that in a downturn search-related advertising—based on the keywords that consumers type into their search engine—will fare better than display ads.

Mr Yang increasingly sees his job as putting on a brave face no matter what the news. “This eliminates the distractions”, he said the day after the compromise with Mr Icahn was announced. Now Yahoo! can focus on its strategy, formed last year when Mr Yang became boss again.

Which begs the question whether that strategy is worth pursuing, even without distractions. Yahoo! fell from grace—with advertisers and consumers—because Google passed, then lapped, it in web technology. Mr Yang’s main response to Microsoft was to do a deal with Google to outsource much of Yahoo!’s search-advertising business to its rival—a potential fillip to Yahoo!’s bottom line but a strategic dead end. That deal, moreover, would leave Google with so much clout in the online advertising market that antitrust regulators have taken an intense interest.

Obama Chooses a Symbol of War as Berlin Backdrop: Amity Shlaes

Commentary by Amity Shlaes

July 23 (Bloomberg) -- Sometimes it is the words that get the politicians in trouble. Sometimes it is the images. In Berlin, a single picture of Barack Obama is likely to paint a thousand words about the limits of his foreign policy.

Consider the Obama plan. The likely Democratic presidential nominee will arrive in Berlin after a tour of the Middle East. Tomorrow, he's scheduled to speak to Berliners and the rest of the world in a televised address at the Victory Column, in the center of the German capital. The euphoria will emanate to every living room. Berliners can be matched in the intensity of their Obama-mania only by Wesleyan undergraduates.

So far, so much good news for Barack. Berlin, after all, is the world's greatest foreign-policy success story, a divided city now united, peaceably, as one.

You can understand, too, why Obama campaigners settled on the Victory Column venue. Neither the U.S. State Department nor German leaders were pleased with earlier ideas that they deemed too presidential for a man not even officially nominated. One was to have Obama make like President John F. Kennedy and give an ``Ich bin ein Berliner'' speech.

Another was to have the Illinois senator speak at the Brandenburg Gate, where Ronald Reagan looked east to the city's communist half and cried ``Mr. Gorbachev, tear down this wall!''

The Victory Column, a gold-edged pillar topped by a winged figure, seemed the next best thing for 2008. Photographers can tell themselves the column is the German version of our obelisks, recalling the Washington Monument.

`Wings of Desire'

At the Victory Column, there's a traffic circle, space for the World Cup-scale mega-crowd that's sure to come to hear Obama. If you angle your camera right you can fit the Brandenburg Gate and Victory Column into the same frame.

Finally, for the artsy crowd, the Victory Column is something of a cultural reference point, having been featured in Wim Wenders' iconic ``Wings of Desire.''

Still, the Victory Column is hardly Obama-esque. His candidacy, whether he makes it explicit or not, isn't about attacking abroad. It is about defense at the most, and America turning inward. In Obama terms, American identity is about improving ourselves through domestic reform. The change of which he so often speaks starts at home.

All About War

The Victory Column is about the opposite: offensive war, even defining yourself as a nation through war. Otto von Bismarck and Wilhelm of Prussia led German bayonets into France. Their 1871 victory was so resounding that the Prussian leaders marched to the Hall of Mirrors at Versailles and proclaimed the new German empire -- there, and not at home.

The purpose of the Victory Column, erected soon after in Berlin, was to glorify the new Reich and to humiliate the rest of Europe. The angel is a vengeful angel. Closure is what Obama seeks in Iraq. As he puts it, ``when I am Commander-in-Chief, I will set a new goal on day one: I will end this war.''

But Prussia succeeded specifically because it never gave its enemy the promise of closure. As war historian Max Boot notes, Prussia's decisive victory at Koeniggratz, the one that put the generals on the path to Paris, came out of what it learned in a string of defeats.

Prussians never gave up. They always fought. Other countries, it was said of the Europe of the 19th century, had armies. In Prussia, the army had a country.

Blood and Iron

Bismarck, modern Germany's founder, is known for his social- insurance plans, including health insurance for workers. But Bismarck's Germany was also the Germany of Blood and Iron, the one that fought World War I and then created the Nazis. Through the wars, the lexicon remained the same. In German, the column is ``Siegessaeule'' -- literally, ``column of victory.'' One of the Nazi greetings was ``sieg heil'' -- hail victory.

The column was such a symbol of martial power that the French, on a high in 1946, demanded it be blown up. In the end, the Allies let it stand while they protected Berlin for an indeterminate conflict, which endured for almost half a century, the Cold War.

At many points in this frustrating period, the U.S. defense budget was a larger share of the economy than it is today. The Allies, including the West Germans, persevered, even though their work was at times deeply unpopular in Europe and the U.S. Reagan's ``Tear down this wall'' speech was right. But it wasn't greeted with the adulation that Obama's words will receive.

`But Why?'

Even now, many Germans view the Victory Column with ambivalence or embarrassment. When, earlier this week, it became clear the Obama campaign had selected it as the site for the speech, the German weekly Die Zeit asked ``wieso bloss?'' -- ``but why?'' Noting the above-mentioned camera advantage, the newspaper concluded nonetheless, ``as background for a peace message to the peoples of the world, it doesn't exactly recommend itself.''

To be clear: Obama is so popular in Germany that German crowds probably won't care where he stands, even if it is on his head, when he addresses them. TV commentators will class the Victory Column choice as ``interesting irony'' and leave it at that.

But what the Berlin cityscape reminds us is that you sometimes encounter war even when you don't want to. And that wars don't always fit into timetables. That unpopular policies can be the wisest. These are realities relevant to the military challenges confronting the next president. If Obama is to make a coherent foreign policy -- let alone a good one -- he has to fit these elements, too, into his picture.

Obama, in Israel, Says a Nuclear-Armed Iran Poses Grave Threat

July 23 (Bloomberg) -- Democratic presidential candidate Barack Obama said that as president he would protect Israel's security and would ``take no options off the table'' to prevent Iran from obtaining a nuclear weapon.

``A nuclear Iran would pose a grave threat,'' Obama told reporters today in Sderot, Israel. ``The world must prevent Iran from obtaining a nuclear weapon.''

Obama's Middle East tour is part of an effort to bolster his support among Jewish voters uneasy about his talk of taking a more diplomatic approach to U.S. dealings with adversaries, including Iran, whose leaders have repeatedly threatened Israel and questioned its right to exist.

Obama said today he would bring ``big sticks and big carrots'' to negotiations to persuade the Iranians to end their nuclear ambitions. ``A nuclear Iran would be a game-changing situation not just in the Mideast but around the world,'' he said.

Obama also said he won't pressure Israel to accept concessions in peace talks with the Palestinians that put the nation's security at risk.

``My job and my team's job is not to dictate to either of the parties what this deal should be,'' Obama said at a press conference. His goal, he said, is to facilitate a meaningful, pragmatic deal between Israel and the Palestinians.

Jewish Voters

Obama is using his visit to Israel to reassure Israel's leaders and Jewish voters in the U.S. that his policies aren't unduly pro-Palestinian.

Sderot borders the Gaza Strip and was the main target of thousands of Palestinian rockets before Israel and Hamas struck a truce last month.

Obama, 46, arrived in Israel late yesterday after talks with political and military leaders in Afghanistan, Iraq and Jordan. The Illinois senator, on the fifth day of his tour, also met with Israeli Defense Minister Ehud Barak and Benjamin Netanyahu, the leader of the opposition Likud Party, before touring the Yad Vashem holocaust memorial.

``The main focal point of our discussions was the need to stop Iran from developing nuclear weapons,'' Netanyahu told reporters after the talks. ``He said he would never seek in any way to compromise Israel's security and this would be sacrosanct in his approach to political negotiations.''

The U.S. and its European allies accuse Iran of pursuing a nuclear weapons program; Iran insists its activities are peaceful and legal under the nuclear Non-Proliferation Treaty.

Destroyed

Iranian President Mahmoud Ahmadinejad, who has said he wants to see Israel destroyed, said today that Iran will resist pressure from world powers to halt its nuclear program.

``They said Iran has surrendered. They are mistaken,'' the Iranian president said in a speech broadcast live on state television. ``If the great powers think they can sit down and discuss Iran's rights and pressurize Iranians, such a thing won't happen in 100 years.''

At a town hall meeting in Wilkes-Barre, Pennsylvania, Republican presidential candidate John McCain this morning praised President George W. Bush's diplomatic efforts with Iran.

``I am concerned about the Iranian nuclear buildup,'' McCain told supporters.

``I believe we can resolve this by putting significant pressure on the Iranians, diplomatically and every other way,'' McCain said. ``I once said and will say again that we will never allow a second Holocaust.''

Right to Exist

Obama, as well as expressing his commitment to Israel's security, has rejected the Palestinians' demand for the right of those who left Israel to return. He has said the U.S. shouldn't negotiate with Hamas, the Islamic Palestinian group that the U.S. and the European Union consider a terrorist organization, unless it recognizes Israel's right to exist. Obama also backs a plan that has angered Palestinians to move the U.S. Embassy to Jerusalem from Tel Aviv, though he says the matter should be part of negotiations with the Palestinians.

That issue is among the most contentious in Israeli- Palestinian negotiations and may derail President George W. Bush's goal of laying the foundations for a Palestinian state with a peace agreement before he leaves office in January.

``There's a lot of suspicion about Obama in Israel, a feeling he may be more sympathetic to the Palestinians than the current administration,'' said Gadi Wolfsfeld, a political scientist at Hebrew University in Jerusalem. ``They're looking for reassurances that U.S. foreign policy isn't going to change. People in Israel like George W. Bush.''

West Bank

Obama visited Ramallah in the West Bank this afternoon to meet with Palestinian Authority President Mahmoud Abbas and Prime Minister Salam Fayyad. He is to have dinner at Prime Minister Ehud Olmert's official residence in Jerusalem.

Obama will ``experience personally Israel's challenges and its promise in its 60th year,'' Susan Rice, Obama's senior foreign-policy adviser, told reporters in Jerusalem today.

At a joint press briefing with Peres, Obama praised the president's involvement in Israel's 60-year history, describing the country as ``that miracle that has blossomed.''

Peres returned the compliment, saying his greatest wish was for Obama to ``be a great president of the United States.''

Obama's visit to the Middle East coincides with political turmoil in Israel. Olmert faces a widening corruption probe and his political opponents have lashed out after he gave up five Lebanese prisoners to Hezbollah in exchange for the bodies of two Israeli soldiers.

Obama is making his fourth stop on a seven-country tour that will take him later this week to Germany, France and Britain. While in Berlin, he is scheduled to give what his campaign aides called a ``substantive speech'' on strengthening the transatlantic relationship.

Earlier today, Obama said the pace of his Middle East tour was beginning to take its toll.

``I could fall asleep standing up,'' he said.

China Lets Child Workers Die Digging in Congo Mines for Copper

July 23 (Bloomberg) -- Adon Kalenga works seven days a week collecting minerals from the ground with his bare hands.

He is 13 years old and lives in Katanga province in the Democratic Republic of Congo. He has no home and can't afford the $6 a month it costs to attend public school in this central African country of 62 million. Sometimes he sleeps in the streets; other nights he spends in an orphanage.

Mostly, he works, earning about $3 per day. He's one of 67,000 people in Katanga who earn a living collecting stones infused with two minerals that are in demand worldwide: copper and cobalt. Reddish-brown copper is used to make the electrical wires needed to light the world's cities. Cobalt, a silver-gray metal, is used to make jet engines, ink and mobile phone batteries.

Katanga, a region of green rolling hills that's bigger than California, is home to 5.5 million people. The province in the south of Congo contains 4 percent of the world's copper and a third of its cobalt reserves, according to the U.S. Geological Survey.

The minerals Adon and children like him wrest from the red, hard earth find their way to smoky smelters on the edge of impoverished towns near the mines. Most of these rusting, hand-fed furnaces are owned by companies based in a faraway country, one that was founded on an ideology that exalts the rights of workers: the People's Republic of China.

``My life is hard,'' says Adon, wearing black rubber boots, a hooded sweatshirt and ripped jeans that sag on his skinny frame.

`I Don't Know Why'

Adon's left shin is scarred from a fall during a mine landslide three years ago that killed workers, including four young friends. He spends the day around unstable, hand-dug mineshafts, using his bare hands to fill sacks with ore.

He then hauls the rocks down a steep trail. At the end of the path, he works knee-deep in a stream, the kind that has spread a cholera epidemic throughout much of Katanga. The boy's hands are raw from washing rocks in a metal screen.

``The Chinese buy the ore,'' Adon says. ``I don't know why.''

Adon toils alongside about 200 other boys and men and a handful of women in the Kamatanda mine, a 1-square-mile (2.5- square-kilometer) area pockmarked by holes as deep as 80 feet (25 meters).

On paper, the mine, 3 miles (5 kilometers) northeast of the town of Likasi, is owned by Congo's state mining company, Lubumbashi-based La Generale des Carrieres et des Mines, or Gecamines.

Chaotic Capitalism

In reality, Adon and his peers practice a chaotic form of capitalism, with little supervision from either the company or the state. The hand diggers aren't employees; they're freelancers who sell what they've dug and cleaned to brokers such as Patrick Nsumba.

The middleman pays Adon to wash the copper ore, which the man sells to a smelter in Lubumbashi, Katanga's capital. The plant is run by a unit of Tongxiang, China-based Zhejiang Huayou Cobalt Co., which processes Katangan copper and cobalt. With wads of Congolese francs on hand, Zhejiang Huayou's representatives buy ore from people like 29-year-old Nsumba.

``This is one of the worst forms of child labor,'' says Joost Kooijmans, a legal officer at the Geneva-based International Labor Organization, a United Nations agency. ``If they're buying ore processed by children, they're involved in violating the rights of the children.''

Chinese smelters buy cobalt and copper from mines across Katanga that use child labor, says Patricia Feeney, who campaigns for the rights of Congo's miners.

`No Regard for Health'

``The Chinese smelters have no regard for the health and safety of their workers or the children who dig the ore,'' says Feeney, executive director of Oxford, England-based Rights and Accountability in Development.

In Tongxiang, the Chinese city 80 miles from Shanghai where Zhejiang Huayou is based, marketing manager Zhai Yang says his company sells processed cobalt via intermediaries he declines to name to companies such as Sony Corp., the second-largest consumer electronics company; Nokia Oyj, the world's largest cell phone maker; and Samsung Electronics Co., the second-largest mobile phone maker.

George Boyd, a spokesman for Tokyo-based Sony, declined to comment. Susan Allsopp, of Espoo, Finland-based Nokia, says the company is researching whether Zhejiang Huayou is an indirect supplier.

``We have no evidence to suggest that they are supplying any of our suppliers,'' she says. ``We take any accusations of this nature seriously and do not accept the use of child labor or abuses of human rights. We will continue to monitor this matter, and if we find any breaches of our standards, we will take swift action.''

`I Don't Know'

Samsung spokeswoman Hae Won Choi says the company is investigating and, so far, 70 percent of its suppliers say they don't buy cobalt from Zhejiang Huayou.

Zhejiang Huayou's Zhai says he doesn't know whether his company buys minerals that originated with child labor.

``I've never been to Congo, so I don't know the mines,'' he says. Zhai says his firm has a policy against child labor and will investigate. It will stop purchasing ore if it was dug by children, he says. ``It's our responsibility to make sure the local children are safe, so we won't buy from any children,'' he says.

Congolese law must be respected, the Chinese government says. ``Chinese companies need to observe local labor laws and regulations and fulfill their social commitments,'' says Chen Rongkai, a Beijing-based spokesman for the Ministry of Commerce.

Hand Diggers

Congo, like China, has ratified an ILO convention against hazardous child labor. The Democratic Republic of Congo, formerly known as Zaire, borders the Republic of Congo.

Since 2005, the Chinese have become the primary owners of furnaces that rely on ore from hand diggers, says Katanga Governor Moise Katumbi. He says more than 60 of Katanga's 75 processing plants are owned by Chinese companies and adds that 90 percent of the region's minerals go to China.

From the deserts of Sudan in the north to the savannahs of Zimbabwe and South Africa, a juggernaut of Chinese companies is moving across Africa.

The goal is to secure natural resources to supply factories, build cities and fuel an economy that has expanded more than 9 percent per year on average since the late 1970s, when Chinese Communist Party Vice Chairman Deng Xiaoping pushed his country toward free enterprise. Deng is commonly associated with the phrase ``To get rich is glorious'' -- although he denied saying it.

Because China isn't self-sufficient in natural resources, the government has made the hunt for minerals and food around the world a foreign policy priority.

Lethal Conditions

In its global quest for commodities, China relies on laborers -- from hand diggers in Katanga to iron ore miners in Peru -- who work in unsafe, unsanitary and sometimes lethal conditions.

In mines, smelters and ports, hundreds of workers have been injured or killed since 2005 working for Chinese companies in Africa, Asia and Latin America, according to government administrators, workers, doctors and official documents.

In Congo, Fidele Kalwa, who runs the biggest morgue in Katanga province, eyes a list of 33 names of people, including four boys aged 13 to 17, who have died in separate mining landslides since the beginning of 2007.

``Many others aren't even dug up because they get buried in their holes,'' Kalwa says.

In Zambia, a blast in 2005 killed at least 45 workers at an explosives factory owned by Chinese-run Chambishi Nonferrous Mines Ltd.

Lung Disease

In Ban Chagnee, Laos, Chinese rubber plantation owners took rice paddies from villagers against their consent and unknowingly removed soil from a burial ground to build a road, according to a February 2008 study for German aid agency GTZ.

In Peru, regulators fined a unit of Shougang Corp., which is owned by Beijing's municipal government. Peruvian officials found that the firm violated regulations by allowing 110 workers with lung disease to work in an iron ore mine. Two have died since 2006. The company disputes those findings.

Africa's weak law enforcement makes the continent vulnerable to Chinese companies with lax practices.

``China desperately needs the raw materials that Africa supplies, to keep its economy growing,'' says Christopher Cramer, professor of the political economy of development at the University of London's School of Oriental and African Studies. ``Chinese companies will go anywhere in the world for natural resources, and many are neglecting labor standards where they are not likely to be challenged.''

Paving New Way

Africa is the world's poorest continent, burdened by centuries of slavery, colonial exploitation, civil war, despotism, corruption, famine and disease. In the past five years, Africa has become China's new frontier for oil, copper, cobalt and iron ore.

Chinese diplomats are paving the way for China's companies, courting governments in places like Congo with promises to build roads, railways and ports -- and to provide jobs. In exchange, China has received access to mines and oil fields and the rights to buy minerals for years to come.

The Chinese don't tie African aid and investment to requirements that governments respect human rights and labor standards, says Ana Maria Gomes, a European Parliament member from Portugal. She sponsored a Parliament resolution critical of China's African strategy that passed by 618 to 16 votes on April 23.

Yang Jiechi, China's foreign minister, said at London's Royal Institute of International Affairs in December that countries should be allowed to set their own standards for development. ``The right of all countries to choose their own social system and development path should be respected,'' he said.

Summer Olympics

China's policy of noninterference is paying off just as the country prepares to host an international coming-out party in the form of the Summer Olympics in Beijing. Exports from Africa to China rose to $29.9 billion in 2006 from $6.3 billion in 2000, according to the International Monetary Fund.

State-owned China National Petroleum Corp., China's largest oil and gas company, is the biggest foreign oil producer in Sudan. More than 200,000 people have died since 2003 as the result of a civil war in Sudan's Darfur region, in what the UN has described as one of the world's worst humanitarian crises.

China, a permanent member of the UN Security Council, has long opposed sanctions against Sudan and its president, Umar al-Bashir.

China also trades with Zimbabwe. On June 29, President Robert Mugabe, 84, declared himself the victor in a runoff election that European Union leaders and the White House called a sham.

On July 11, Mugabe's regime escaped UN sanctions when China and Russia vetoed a U.S. effort to punish him with an arms embargo.

`An African Problem'

``This is an African problem,'' says Liu Zhenmin, Chinese deputy ambassador to the UN.

Wu Zexian, China's ambassador to Congo, says, ``We will work economically in countries without interfering at all in their internal affairs.''

Wangari Maathai, a Kenyan environmentalist who won the Nobel Peace Prize in 2004 for opposing political repression, says China has an obligation to ensure it and its companies act in a civil and humane manner.

``In countries where human rights aren't respected and where people can't hold their governments accountable, it's vital for foreign governments and investors to impose conditions,'' Maathai, 68, says.

The no-strings deals China makes in Africa benefit consumers in the U.S., Europe and Japan, says Jonathon Bond, managing partner at London-based Actis Capital LLP, which has invested $3 billion in Africa and other developing regions.

`Subcontracted Manufacturing'

The commodities Chinese companies acquire in Africa and Latin America supply factories in China that export more than $1 trillion of goods a year.

``The West has subcontracted its manufacturing industries to China,'' Bond says. ``China imports African raw materials and then re-exports them as components of finished goods to the West.''

That supply chain starts in places like the Kamatanda mine, where hundreds of men, women and children toil in the scorching sun, digging and trading on ground covered by feces in an area with no sewage system and no tap water.

Amid the clamor of hammers, picks and shovels, dust fills the air. The workers don't use excavators or trucks, nor do they work in ventilated shafts. Instead, they labor barefoot and shirtless in lunar landscapes of rocks and pits.

There are 67,000 miners known as creuseurs -- a word of French origin, meaning diggers -- working in Katanga's copper belt, according to Saesscam, a government labor agency that oversees ore miners.

His Body Hurts

One of the workers is Adon, the homeless teenager. On a sweltering day in March, Adon breathes in rancid air as he stands in a stream below the mine, surrounded by workers washing ore. He says his whole body hurts, especially his feet and shoulders.

He has been carrying 40-pound sacks of ore to the river. His small, calloused hands are raw, and bits of stone are shoved under his fingernails.

Sitting on a bag of copper ore a few feet away is a trader, Giselle Ngoya, who breastfeeds her 7-month-old daughter as she haggles over prices with miners.

When Adon was 9, his father died and his mother abandoned him. Adon's aunt and uncle, angry that they had another mouth to feed, accused the child of witchcraft and turned him onto the streets, Adon says.

``I don't believe in this sorcery stuff,'' says Adon, who attends church on Sunday mornings before going to the mine. One day, he says, he'd like to be a mechanic.

Soon after Adon was thrown out of his house, a friend suggested he work at the mines. During Adon's first year on the job, he was nearly killed. He was carrying a sack of ore on his head when torrential rain caused a landslide. Adon, fleeing with other miners, lost his footing in the mud and fell. A rock slammed into his left shin.

`Blood Was Flowing'

``Blood was flowing a lot,'' he says. ``I could even see the bone.'' Adon says that among the dead were four friends -- Fabrice, Jean, Patient and Patrick.

Adon works for middlemen like Patrick Nsumba, who manage the flow of ore from Kamatanda to the smelters. Adon says other middlemen aren't as fair as Nsumba.

``There are a lot of people who haven't paid me,'' he says.

Nsumba says Adon asked him for the work because he needed the money to buy food.

``I'll do everything so my kids don't have to work in the mines,'' Nsumba says. ``The conditions are too tough.''

Nsumba graduated from Congo's Lubumbashi University in 2005 with an economics degree. He pays child laborers like Adon a flat rate of $3 a day.

Copper Prices Triple

Adult diggers who explore deep underground for minerals are paid more when they're producing. Those workers pay a tax of 18 cents per 110-pound bag to Saesscam, the agency that oversees hand diggers.

Nsumba sells the ore for a markup of almost 100 percent to Congo Dong Fang International Mining Sprl, which is owned by Zhejiang Huayou. Even though the three-year rally in commodities lost steam earlier this year, cobalt prices have doubled since the start of 2005, and copper values have almost tripled.

Aside from the Chinese, Gecamines and companies run by Indian, Lebanese and local entrepreneurs also purchase the ore unearthed by the hand diggers, says Denis Kampashi, who runs Saesscam's office in Lubumbashi.

A few hundred feet up a slope from the stream where Adon works, a hill is scarred with dozens of hand-dug shafts, piles of dirt and narrow, slippery trails with gaping pits on each side.

Another teenage boy, Carlito Muamba, climbs partway down a 50-foot-deep shaft that workers have dug with their hands and small shovels. There's no ladder; Carlito scrambles in and out of the hole using his hands and feet.

No Bracing

The shaft has no bracing to protect against cave-ins. It has no fans or vents for air circulation to prevent suffocation.

Carlito, 15, wearing a T-shirt and ripped sneakers with no laces, crouches on a narrow ledge about 10 feet down and stabs a shovel into the mine wall to search for ore.

His digging causes the unsupported tunnel walls to come loose. Red dirt and pebbles begin falling onto Carlito's shaved head. Even so, he keeps digging for more stones with his hands, sweating. Then he claws at the earth with his fingers and climbs out of the hole. Carlito says he is risking his life because he's hungry.

``I work to pay for food,'' he says.

Carlito says he's too young to dig at the bottom of the hole, where miners use hammers, chisels, shovels and their bare hands to secure ore. ``My brothers work down there,'' he says.

Carlito dropped out of school in fifth grade to work with two older brothers at the mine. Four other siblings live at home with his mother in Likasi, and his father can't afford to feed and school them all.

`Poison Mines'

Everyone in Katanga province, including the managers of Chinese smelters, knows children work in the mines, says Betty Bambi, who runs a charity orphanage where Adon sometimes sleeps. She says neither the government nor the companies do anything to help the child miners.

``The mines are like poison,'' says Bambi, 61, who wears a black gown with a pattern of apples and blossoms and is known as Mama Betty to the children in her orphanage. ``The kids work without any safety equipment. The Chinese don't care about the kids. All they're after is the minerals.''

Yang Youngjian, external relations manager in Likasi for Congo Dong Fang, says he hasn't been to the mine, which is 3 miles from his office in Likasi.

``I've seen pictures,'' he says. ``The conditions aren't so good. They are even working with babies on their backs. They are very grueling conditions.''

Centuries Old

He says that if his company stops buying, the workers will lose jobs.

The hand diggers of Congo use methods -- such as working in shafts without shoring, lighting or ventilation -- that began to disappear in other parts of the world in the 1700s because mining companies viewed them as too dangerous, says John Tilton, a professor of mining economics at the Colorado School of Mines in Golden, Colorado.

``Nobody in their right mind would want a job like that unless there's nothing else,'' he says. Katanga hand diggers say they buy their own picks, shovels and torches.

The situation at Kamoto, an underground mine 80 miles from Kamatanda, is different. There, the miners are all employees, not freelancers. They work for the mine's owner, Bermuda-based Katanga Mining Ltd.

The company supplies every miner with $250 worth of safety gear, including a lamp fixed to a hard hat, steel-toed leather boots, coveralls, a belt, a jacket and pants.

Weak Enforcement

``We want to bring safety standards up to North American or European safety standards,'' Katanga Mining manager Andre Boudreault says.

Congo regulators have safety and environmental standards for the mines at which hand diggers collect ore for Chinese companies, but government enforcement is weak, Governor Katumbi, 43, says. Congo's rules follow ILO standards banning child labor.

A Chinese smelter called South China Mining Sprl gets copper ore from Katanga's Kawama mine on a hill overlooking the Congo River, where 3,500 people work inside unstable hand-dug holes.

Joe Kongolo smashes boulders with a sledge hammer. Last year, a mine shaft near where Kongolo was working caved in and buried three men under dirt and rocks, he says. Kongolo, 24, rushed to assist.

``I was helping, digging with my shovel and my hands,'' he says. The workers managed to save two of the men, he says. The third, whom Kongolo didn't know, died.

South China Mining founder Hilton Tsoi, who's based in Hong Kong, says he's visited hand diggers' mines.

`They Have No Choice'

``The conditions are so-so,'' Tsoi says. ``Just humans, no machinery.'' Tsoi, 58, says he's buying ore from people who have to work to survive. ``They have no choice,'' he says. ``How can they get their food?''

Chinese-owned smelters in Katanga are particularly prone to accidents that maim or kill workers, Katumbi says.

``It's not even the Chinese standards which they are building here,'' he says. ``There are no standards.''

Most North American and European companies adhere to international safety and labor guidelines set by groups such as the Geneva-based International Organization for Standardization and the ILO. The rules forbid using children under the age of 18 in hazardous conditions.

Since March 2007, Katumbi says he has expelled about 600 Chinese nationals from Katanga for violating labor and environmental laws, about 12 percent of the number working there at the time.

Chinese Explorers

China's connections to Africa go back to the early 1400s, when Chinese explorers sailed through the Indian Ocean to the continent. The Ming dynasty, which ruled China from 1368 to 1644, reined in oceangoing voyages as part of a policy of isolationism.

Britain, Portugal and Spain started raiding Africa in the 1500s to bring slaves to work on plantations in the Americas. By the 19th century, European powers had colonized most of the continent, in part to gain control of its resources.

The Congo region was claimed by Belgian King Leopold II in 1885 as his personal property. The Belgian Congo was granted independence by Belgium in 1960 and became the Democratic Republic of Congo in 1997.

China's influence in Africa started to grow after Mao Zedong founded the People's Republic of China in 1949.

The communist leader established ties to Africa's newly independent states in the 1960s, competing for influence on the continent with the West and the Soviet Union, which sought resources and political relationships of their own, says Martyn Davies, executive director of the Centre for Chinese Studies at South Africa's Stellenbosch University.

`International Prestige'

``Mao was seeking international prestige and recognition,'' he says. In Kinshasa, Congo's capital, China built the National Assembly building in the 1970s and the Stade des Martyrs soccer stadium in the 1990s.

Since 2003, Chinese Premier Wen Jiabao and President Hu Jintao have visited 20 African countries between them. In November 2006, representatives of 48 out of 53 African states gathered in Beijing for a summit.

In January, China expanded its ties with Congo by promising to finance $9 billion of roads, railways and mines in exchange for 10 million metric tons of copper and 600,000 tons of cobalt from six Gecamines-run mines over a decade at a fixed price.

``We are going to build major public works at the same time as building mines,'' says Wu, China's ambassador to Congo.

Congo's southern plains are scattered with derelict mines and furnaces -- relics of the predecessor of Gecamines, which Belgium built to extract minerals from its colony.

`A Disaster Area'

The company was plundered during the 32-year regime of dictator Mobutu Sese Seko, who was ousted from power in 1997 by rebel leader Laurent Kabila. In a civil war that lasted from 1998 to 2003, scrap-metal scavengers hacked Gecamines facilities to pieces.

Kabila was assassinated in 2001 by one of his bodyguards. He was succeeded as president by his son Joseph.

``The mines are like a disaster area,'' says Paul Fortin, 69, the Canadian-born chief executive officer of Gecamines. He says China's $9 billion offer was the best one on the table. ``If anybody else can match that, please tell me,'' he says.

Wu says Chinese banks will guarantee the loans for the deal so they won't increase Congo's $11.5 billion of debt.

Xavier Maret, the IMF's Congo representative, isn't so sure. It's not clear who will borrow all the money. Neither country has fully disclosed the terms of the deal, he says. Congo may have to guarantee the loans, which would jeopardize an IMF plan to forgive more than half the national debt, Maret says.

Molten Cobalt

China's promises are meaningless to Mbayo Muyambo, who says he's witnessed a torrent of injuries as safety director at Chinese- controlled Feza Mining Sprl in Likasi.

Muyambo, 38, says Feza's workers are routinely burned at the company's smelter by fiery drops of molten cobalt because the company doesn't supply fireproof suits.

``They say they're too expensive,'' says Muyambo, who had previously worked for 17 years at Gecamines, where he received training from German safety engineers.

China's Wanbao controls Feza, according to Wang Xiao, Feza's deputy director. Feza's shareholders include Congolaise des Mines et de Developpement, which is owned by Gecamines, and Ramat Gan, Israel-based DGI International Ltd.

On March 29, one of Feza's inspectors, Punda Luhendwe, mutilated his left eye when he tried to put out a fire in the smelter control room because he wasn't wearing protective glasses, Muyambo says.

Pushed back by waist-high flames, Luhendwe grabbed a fire extinguisher and its hose whipped up into his eye, Muyambo says.

`Only Productivity'

``The only thing the Chinese care about is productivity,'' he says of his bosses.

A Feza spokeswoman who identified herself as Mrs. Yang declined to comment. Beijing-based Wanbao Mining Ltd. didn't respond to requests for comment. DGI spokesman Pieter Deboutte says the firm has no role in managing Feza and gets no profit from the smelter.

Ambassador Wu says his government can't police the multitude of Chinese investors in Africa.

``There are entrepreneurs who go all over, and when they find a place with good prospects, they stay,'' he says. ``All investors need to respect the law.''

Katanga's government struggles to enforce its own labor and environmental regulations, provincial Mining Minister Barthelemy Mumba says. On a sweltering 90-degree-Fahrenheit (32-degree-Celsius) day in March, he's driving a silver Toyota Land Cruiser over a rutted dirt road.

He arrives unannounced at a cobalt drying plant run by Chinese-owned Cota Mining Sprl near Lubumbashi. The provincial environmental mining ministry had shut down the facility in December because a pool of acid was in danger of leaking into a stream.

`Why Did You Restart?'

The plant was supposed to stay shut until further notice. On this visit, Mumba finds dozens of men shoveling ore into a 50- foot-long oven, their feet baking inside thin rubber boots.

``We suspended your production,'' Mumba tells Nino Ngaktambo, Cota's top Congolese manager at the site. ``Why did you restart without our authorization?''

Ngaktambo says, ``We were just trying to --'' as Mumba yells at him, ordering him to close the site.

One worker, Dunancien Molupenga, tells Mumba he's afraid he'll be fired if he doesn't get back to stoking the drying oven. A few feet away, a Chinese manager in a straw hat gives Molupenga a signal to get back to work. The Chinese manager doesn't speak French, Swahili or English. He declines to give his name or to comment.

`I Could Be Fired'

``I could be fired just like that if I don't work,'' Molupenga says, adding that most Chinese managers don't speak the language of workers, so they use hand gestures to communicate. The Cota raid lasts 30 minutes. By the time Mumba leaves, everyone who paused in his labors is back at work.

``You have to distinguish between those companies that abide by international standards and those that don't,'' Mumba says. ``Among those that don't, you often find Chinese companies. We don't want people to come and build things like this. This, really, isn't investing.''

On March 6, Cota got an order from Katumbi allowing the firm to continue work. Lan Mei, vice director of the company's operations in Lubumbashi, says workers were making adjustments to the oven on the day of the raid, and no cobalt was being refined.

``It was preparatory work,'' says Lan, who tours her smelter dressed in a baggy black dress, burgundy boots with untied laces and a 2-inch (5-centimeter) amber-colored pendant around her neck. Since the December inspection, Cota has given workers cloth masks, rubber boots and long-sleeve work shirts, Lan says.

No Formal Training

``We provide safety equipment,'' she says. A year ago, Lan says, she got the second-highest-ranking job at Cota because she speaks French, unlike her Chinese bosses.

Lan, 37, a former fine arts student in Aix-en-Provence, France, has no formal training to oversee Cota's six smelters, which heat copper ore to the melting point of 1,981 degrees Fahrenheit until it's ready to be drained, at which point the furnace is opened and liquid metal gushes out, along with toxic smoke and flying drops of molten metal.

Cota's Congolese workers say they suffer from a lack of safety equipment. Welder Clovis Pienar's arms and chest are covered with two dozen scars. Pienar, 25, wears a plastic visor and thin cotton overalls. They don't protect him, he says. His pants caught fire earlier this year, and today there's a dark hole on one leg.

``We are treated like animals,'' Pienar says.

Jerome Musonda, 33, has two scars next to his right eye, where he was burned stoking Cota's smelter without safety gear earlier this year.

``Nearly every week there's an accident,'' he says.

Mumba also faults Chinese companies for paying workers less than North American and European mining companies. Cota workers say they're paid $65 a month, 35 percent less than the $100-a-month base pay Katumbi has said he's seeking.

`Benefits Are OK'

A few miles away is a smelter owned by Societe pour le Traitement du Terril de Lubumbashi, or STL, a joint venture between Cleveland-based OM Group Inc., Lubumbashi-based investor George Forrest's Forrest Group and Gecamines.

``The pay and benefits are OK,'' says Alex Tetemukombo, who gets $218 a month for tending a smelter in heat-resistant steel-toe boots and a fireproof suit. ``A lot of people who work at other smelters don't get that protection, especially when they work for the Chinese.''

As more and more Chinese arrive in Katanga, pressure is rising to prove to locals that they'll benefit from the new investors, Gecamines' Fortin says.

``There will be a backlash,'' he says.

On March 6, there was one. Diggers from the Kamatanda mine clashed with riot police in Likasi. They were protesting because Gecamines wanted to oust them from the land and reclaim the mine after it traded six of its other mines to China.

Teenager Mistakenly Killed

As stones flew, a policeman shot Landry Milongo, a passing 15- year-old schoolchild, Likasi Mayor Marthe Chiwengo says. By the time the teenager reached the hospital, he was dead.

Three days after the shooting, about 50 relatives mourn next to an avocado tree at the family's tin-roofed hut.

``The population isn't benefiting at all from the mining,'' says Rene Kasongo, the dead boy's great-uncle. ``The companies just take the minerals and pay the bare minimum.''

Chinese companies are scouring the world for commodities to feed the fastest growth rate of any major economy.

``Chinese economic growth is dependent upon access to these resources,'' says Chris Alden, a professor at the London School of Economics and Political Science and author of ``China in Africa'' (Zed Books, 2007). ``Some of these companies are exporting worst practice instead of best practice from China.''

China's leap from Marxism to capitalism has come at a cost of deadly labor conditions, says Han Dongfang, who founded the China Labour Bulletin in Hong Kong, which monitors Chinese worker abuses.

`Totally Ignored'

``The government has totally ignored health, environmental and social responsibility,'' Han says. ``The Chinese, from the top leaders to the desperate ordinary people, believe that making money is more important than human life.''

Chinese coal mining accidents killed an average of 10 workers a day last year, according to the Chinese State Administration of Work Safety. Last year, the governor of Shanxi province was forced to make a public apology after official media disclosed that brick kiln managers in his province were using child slave labor.

Under Mao's state socialism, China's masses were supposed to be protected by a cradle-to-grave welfare system dubbed the ``iron rice bowl.'' The government and its giant state-owned enterprises offered full employment, subsidized housing, free health care and pensions.

Mao's regime was no workers' paradise: 70 million people died from manmade famine and political oppression, according to ``Mao: The Unknown Story'' (Knopf, 2005).

415,000 Millionaires

In the past 30 years -- following Mao's death and Deng's embrace of market principles -- 300 million out of a population of 1.3 billion have lifted themselves out of poverty, according to the UN. More than 415,000 of them have become millionaires, according to a study by Merrill Lynch & Co. and Capgemini SA.

Still, another 200 million live on less than $1 a day, according to a 2004 World Bank estimate.

The new China urged unprofitable state-owned companies to put profit ahead of providing for employees. From 1995 to 2001, 46 million Chinese lost their jobs, according to Andy Rothman, a Shanghai-based China strategist at CLSA Ltd. and former economic official at the U.S. Embassy in Beijing. Private companies now account for 70 percent of China's gross domestic product compared with 17 percent in 1990.

The rush to make money came at the expense of workers, says Auret van Heerden, Washington-based CEO of the Fair Labor Association, a nonprofit organization that monitors work conditions in 60 countries.

New Laws

``Conditions in China became comparable to the period in the West from the Industrial Revolution in the 18th century up to the Second World War,'' van Heerden says.

This year, in an effort to bridge the growing chasm between rich and poor and to close down the worst sweat shops, Chinese President Hu passed new labor laws setting minimum wages and assuring one month's pay for each year worked for employees who get fired. Hu has yet to send that message to Chinese companies working abroad.

Maathai, the Kenyan Nobel laureate, says Chinese companies should respect human rights and internationally accepted labor standards around the world.

``We in Africa expect China to help and not to take advantage of Africa's vulnerability,'' she says. ``China needs to understand Africa. We hope she will.''

For Adon Kalenga, the 13-year-old from Congo whose minerals supply Chinese smelters, the concept of fair treatment is a world away.

It's the end of a nine-hour workday in March, and he's slumped in a chair, nursing his back. Tomorrow, as he has almost every day for more than three years, Adon intends to return to the mine and the stream.

``I want a normal life, like the people I see walking in the street,'' says Adon, who can barely read and write. ``But I can't even afford to go to school. Things will never change.''

Fannie Mae Unsold $5 Billion Homes Bring Peril to Shareholders

July 23 (Bloomberg) -- Fannie Mae, the largest U.S. mortgage finance company, couldn't find a buyer who would pay $6,900 for the three-bedroom house at 1916 Prospect St. in Flint, Michigan. So broker Raymond Megie, who is handling the foreclosure sale, advised cutting the price to $5,000.

Megie still couldn't sell it. ``There's oversupply,'' he said. The home sold in 2005 for $110,000.

Fannie Mae acquired twice as many homes through foreclosure in the first quarter as it sold, regulatory filings show. Unsold properties may weigh on the company's stock, which lost almost half its value since June 5, said Moshe Orenbuch, managing director of equity research at Credit Suisse Group AG in New York. Late payments on the company's home loans, a harbinger of foreclosures, almost doubled in the past year.

Together, Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance companies, owned a record $6.9 billion of foreclosed homes on March 31, compared with $8.56 billion held by all 8,500 U.S. commercial banks and savings and loans. Foreclosed houses sell at an average discount of about 20 percent, according to economists Ethan Harris and Michelle Meyer at New York-based Lehman Brothers Holdings Inc. At that rate, the two mortgage companies stand to lose $1.39 billion on the foreclosed houses they currently own.

``Progress on this is probably one of, if not the single most important economic process right now,'' Orenbuch said. ``With prices decreasing, it's better to get rid of houses quickly.''

$10 a Share

Orenbuch, whose Fannie Mae recommendations would have yielded a 65 percent return to investors who followed them over the last year, the highest of any stock analyst tracked by Bloomberg, said the Washington-based company will sink to $10 share. That's 25 percent lower than its $13.41 New York Stock Exchange composite price yesterday.

The value of Fannie Mae's foreclosed property doubled in the first quarter to $4.72 billion from $2.4 billion a year earlier, and the number of homes it owned climbed 64 percent to 43,167, according to a regulatory filing. The amount the company sold was $952 million, compared with $706 million a year earlier.

``It's a no-win for the housing market,'' said Ron Peltier, chief executive officer of Berkshire Hathaway Inc.'s HomeServices of America Inc., the second-largest U.S. residential real estate brokerage. ``Where there are pockets of distressed real estate, it does have an adverse effect on the surrounding properties.''

Unpaid Principal

Fannie Mae's goal in selling its properties is to get the highest possible price, even if it means hanging on to them longer, said Gabrielle Harrison, the company's vice president for REO sales. REO stands for ``real estate-owned,'' a designation for properties that have been repossessed by creditors. Getting the highest price helps preserve neighborhood property values, she said.

``We want to treat that home as if it was your own, or as if you were living next door to it,'' Harrison said. ``You wouldn't want that home to bring down your property value.''

The typical price Fannie Mae received for foreclosed homes sold in the first quarter fell to 74 percent of the unpaid mortgage principal from 93 percent in 2005, according to Harrison.

Harrison declined in an interview to say how long it takes to sell the average foreclosed home or estimate how many more Fannie Mae may acquire through foreclosure in the coming months.

The number of borrowers whose payments were late by 90 days or more rose to 1.15 percent in the first quarter from 0.62 percent a year earlier, according to Fannie Mae regulatory filings.

13-Year Low

Fannie Mae, led by Chief Executive Officer Daniel Mudd, contracts with up to 5,000 real estate agents to manage and sell the houses, Harrison said.

Freddie Mac fell to its lowest valuation in 13 years and Fannie Mae to its lowest in 16 years in New York Stock Exchange composite trading on July 7 after Lehman Brothers analysts said in a report that an accounting change may force them to raise a combined $75 billion.

The companies plunged another 35 percent during the next four trading days, prompting the Federal Reserve to authorize lending to them directly. On July 13, a Sunday, Treasury Secretary Henry Paulson said he would ask Congress for authority to buy unlimited stakes in the two mortgage companies.

Analysts estimate Fannie Mae will report a net loss this year of about $3.8 billion on an adjusted basis and Freddie Mac's losses will total more than $1.4 billion, according to surveys by Bloomberg.

Chartered by Congress

Fannie Mae, founded as part of President Franklin D. Roosevelt's plan to resuscitate the U.S. economy in 1938, and Freddie Mac, started in 1970, were chartered by Congress. They bundle home loans into securities to sell to investors and use cash from the sales to fund mortgage lenders. Together, Fannie Mae and Freddie Mac own or guarantee about half of the $12 trillion of mortgages in the U.S.

Securitization of residential mortgages by underwriters outside of Fannie Mae and Freddie Mac has almost stopped. Banks bundled $1.15 trillion of home loans into so-called private-label securities in 2006, Inside Mortgage Finance reported. The number fell to $46 billion in the first half of 2008, according to the Bethesda, Maryland-based industry publication.

The two government-sponsored enterprises own or guarantee 81 percent of U.S. mortgages originated this year, data compiled by the Washington-based Office of Federal Housing Enterprise Oversight show.

New Roof

The home on Prospect Street in Flint needs a new roof and carpeting and the plumbing has been ripped out, said Megie, a broker with Realty Executive Main Street LLC in Lapeer, Michigan, who sells Fannie Mae-owned homes. The house was originally listed for sale in April, he said.

``Two years ago I didn't have any Fannie Mae properties and now it's probably pushing 50 percent of what I have listed,'' Megie said. Fannie Mae is fixing vandalized homes instead of ``just dumping them to investors,'' he said.

Bruce Norris, a builder and real estate investor in Riverside, California, estimates about 15 percent of foreclosed houses have been intentionally damaged.

``Banks can't fix all the homes because they just have too many,'' said Norris, president of Norris Group, referring to all owners of repossessed homes and not specifically to the government-sponsored enterprises.

Neighborhood `Blight'

The longer it takes to sell a house, the lower the profit will be, said Dean C. Williams, chief executive officer of Williams & Williams Worldwide Real Estate Auction in Tulsa, Oklahoma. It costs creditors such as Fannie Mae 2 percent of the value of the property every month in taxes, insurance, utilities, lost revenue, maintenance, management and cleanup after vandalism, Williams estimates.

``This problem is not just how it affects the credit markets, it's how it affects neighborhoods,'' Williams said. ``We use the word `blight.' It becomes a reinforcing vicious circle in terms of the value of ownership. Now the value of ownership is increasingly a negative return.''

Fannie Mae owns or guarantees $51.2 billion of subprime loans, those given to borrowers with bad credit histories, a category that makes up about 2 percent of its total mortgage holdings, according to the company's Web site. Subprime mortgages default at five times the rate of prime mortgages, according to the Mortgage Bankers Association in Washington.

Alt-A Mortgages

Fannie Mae also owned or guaranteed $344.6 billion of Alt-A mortgages, which are granted without full documentation of a borrower's income. Those loans represent about 13 percent of the company's holdings.

Less than 1 percent of its loans, or $20.6 billion, are payment-option adjustable-rate mortgages that let borrowers pay less than they owe each month, with the unpaid balance added to the principal.

Freddie Mac's inventory of foreclosed homes also is rising. The value of single-family properties that McLean, Virginia-based Freddie Mac held in the first quarter rose to $2.2 billion from $871 million a year earlier, according to a regulatory filing. The company acquired 9,939 homes in the quarter, sold 5,914 and owned 18,419 properties at the end of March.

Freddie Mac's real estate is managed and sold by a network of 1,800 brokers coordinated by its HomeSteps division in Carrollton, Texas, according to spokesman Brad German. HomeSteps spends an average of $5,000 on repairs to each house, German said.

Days On Market

Freddie Mac-owned properties spend an average of 152 days on the market and typically sell for 92 percent of the listed price, usually about 30 percent less than the peak prices of 2006, said Ingrid Beckles, vice president of servicing and asset management. The company re-evaluates prices every two weeks, she said.

``We are very careful to ensure our properties are not driving market values down and they show well,'' Beckles said. ``Our challenge is like everyone else's from a volume perspective: maximize recovery and minimize credit losses, and balance that with making sure we're not driving down property values and not destabilizing neighborhoods.''

Part of the difficulty for all owners of foreclosed property, and not just Fannie Mae, is a shortage of qualified agents in the field who can sell the homes efficiently, said Jesse Ramirez, a broker associate at Re/Max Partners Real Estate in Corona, California.

``They are all recent college grads without experience,'' Ramirez said. ``They have 300 files each and they're overwhelmed. They don't understand how the typical transaction goes. These people didn't have jobs two years ago, not doing this.''

Paulson & Co. Plans Fund to Provide Capital to Banks (Update2)

July 23 (Bloomberg) -- John Paulson, the money manager whose wagers against the U.S. housing market helped him earn an estimated $3.7 billion last year, is now seeking to profit from Wall Street's search for capital to offset mortgage writedowns.

Paulson plans to open a hedge fund by December that will invest as the world's biggest banks and brokers add to the $345 billion they've raised in the past year, according to two people with knowledge of the matter. His Paulson & Co., which oversees $33 billion, hasn't set a size target for the fund, said the people, who declined to be identified because the plans aren't final.

The New York-based firm's credit funds rose as much as sixfold last year, helped by bets that rising defaults on subprime home loans would pummel the value of mortgage-backed securities. The meltdown has forced the world's biggest banks and securities firms to take $467 billion in asset write-offs and credit losses and led to the collapse of Bear Stearns Cos.

``Investors who are able to make money in a declining market and then rapidly turn around and profit from a rising market is highly unusual,'' said Thomas Whelan, president of Greenwich, Connecticut-based Greenwich Alternative Investments, which advises clients on investing in hedge funds.

Paulson declined to comment. His 2007 earnings made him the highest-paid hedge-fund manager, according to Institutional Investor's Alpha magazine.

`Right Entrance Point'

Losses caused by the credit crisis may reach $1.3 trillion, Paulson, 52, said at a conference in Monaco on June 18. His firm has hired employees this year to research securities firms such as Citigroup Inc. for long-term investment positions.

``We're trying to see the right entrance point,'' he said at the Monaco conference. ``If you invest too early, you lose money.''

The 11-member Amex Securities Broker/Dealer Index slumped 35 percent in the past 12 months, led by declines in Lehman Brothers Holdings Inc. and Merrill Lynch & Co., and U.S. mortgage lenders Wachovia Corp. and Washington Mutual Inc. lost more than 65 percent of market value in the same period.

Barclays Plc, Britain's third-largest bank, agreed last month to raise capital by selling shares to an investor group including the Qatar Investment Authority. New York-based Merrill Lynch, Morgan Stanley and Citigroup, and UBS AG of Zurich also have received capital injections from sovereign wealth funds.

``Paulson has significant knowledge of the subprime market that has created earthquakes for the banks,'' said Ron Geffner, who represents hedge funds at the New York-based law firm Sadis & Goldberg LLP. ``I expect that he understands their experiences, balance sheets and financial exposure better than many.''

Rockefeller Fund

Rockefeller & Co., a New York investment firm, is also raising money to invest in insurers, banks and brokerages, according to James Chang, one of two portfolio managers of the Rockefeller Global Financial Services Recovery Fund LLC.

``We do think that on a long-term horizon of three to five years there are a lot of interesting opportunities,'' Chang said in an interview. ``You have seen in the last several days that a little bit of good news can trigger a rally.''

All of Paulson's funds profited last year buying credit default swaps on mortgage assets, which are instruments that rise in value as the risk of default increases. Paulson told investors in November that he had increased his holdings of derivatives that gain in value when the chances of corporate credit defaults rise.

Bear Pedigree

Companies that Paulson named as representative of deeper troubles included Merrill and Citigroup, as well as bond insurer Ambac Financial Group Inc. and credit-rating firm Moody's Corp.

Paulson started his firm in 1994. He previously was a partner at Gruss Partners between 1988 and 1992 after working for four years at New York-based Bear Stearns, where he was a managing director in the mergers and acquisitions group. He graduated from New York University in 1978 and received a master's in business administration degree from Harvard Business School two years later.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices and participate substantially in profits from money invested. The funds declined by an average 1.6 percent in the first half of 2008, according to data compiled by Hedge Fund Research Inc. in Chicago.

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