FRIDAY, JUNE 4, 2010

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ECONOMY BUSINESS

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Economy growing slowly but steadily

BROAD-BASED

Signs of better times

RECOVERY

Job market improves; consumer spending rises

by Neil Irwin

The headlines right now are ominous — from the European debt crisis to a gargantuan gulf oil spill to renewed political tensions in several corners of the world. Fi- nancial markets have faltered as a result.

But the U.S. economic recovery is still plugging along. That is the message from the

latest wave of economic data, in- cluding several reports Thursday. And Friday morning, the Labor Department plans to release what is expected to be the best report on job growth in years, though the numbers will be boosted by tem- porary hiring by the Census Bu- reau. It all adds up to continued steady — though hardly excep- tional — economic growth, de- spite various threats to its contin- uation.

Recent data “suggest that the

recovery is more broad-based and self-sustaining, and perhaps even stronger than anticipated,” Thom- as M. Hoenig, president of the Federal Reserve Bank of Kansas City, said Thursday in a speech in Oklahoma, even as he acknowl- edged that the European crisis will have a “modest net negative” effect on growth. Thursday’s data showed the

various elements of the recovery. Consumer spending has contin- ued its gradual rise, as reflected in a 2.6 percent increase in sales last

3.0% 3.7% 2.6% 0.8%

Jan. 2010

Feb. March April May

Jan. 2010

month at major retail chains com- pared with May 2009. The corpo- rate sector is expanding steadily, with activity at service businesses rising at the same rate in May that it did in April, according to a sur- vey by the Institute for Supply Management. That progress is resulting, if

slowly, in an improved job mar- ket. The number of people filing new claims for unemployment in- surance benefits dipped last week to 453,000, a drop of 10,000 from the previous week. And the pay- roll-processing firm ADP an- nounced its estimate that private employers added 55,000 jobs in May. The reports Thursday followed

a slew of data this week pointing to a similar conclusion, including an index showing continued strong growth in the manufactur- ing sector in May and better-than- expected sales of cars and trucks. Friday’s employment report is the most important release of the week and could provide the strongest evidence yet of whether

Feb. March April May

SOURCES: U.S. Labor Department, Institute for Supply Management, International Council of Shopping Centers

the economy is maintaining its momentum. Analysts predict that the economy added 536,000 jobs in May, which would be the most gained in a single month since 1983. But much of that expected gain is due to workers hired to perform the once-a-decade census who will lose their jobs in the sec- ond half of the year.

Economists forecast solid growth in private payrolls as well, expecting 180,000 jobs to have been added outside the govern- ment. That would be down a bit from April, when private payrolls rose by 231,000, but suggests that businesses continue to ramp up their hiring. And that, in turn, will be the key to the recovery continuing apace through the second half of the year. So far, consumers have in- creased their spending by reduc- ing savings. Job growth — and a resulting rise in incomes — will be key to a self-sustaining recovery. “If you get a strong job-growth number, that will go a long way in allaying some of those concerns

Jan. 2010

Feb. March April May

THE WASHINGTON POST

AUTOMOTIVE

about the sustainability of con- sumer spending,” said Anthony Chan, chief economist at J.P. Mor- gan Private Wealth Management. Still, the unemployment rate is

expected to edge down only slightly, to 9.8 percent from 9.9 percent, which reflects the contin- ued dire situation facing Amer- ican workers. Even as jobs are be- ing created, some workers are re- turning to the labor force, keeping upward pressure on the unem- ployment rate. Speaking in Detroit, Federal

Reserve Chairman Ben S. Ber- nanke emphasized that high job- lessness can have long-lasting consequences. “High unemployment imposes

heavy costs on workers and their families, as well as on our society as a whole,” Bernanke said at an event where he encouraged banks to resume making loans available to quality borrowers, aiming to use his bully pulpit to fight one of the factors that has held back the economy.

irwinn@washpost.com

H

ow can a guy like Bernie Madoff snooker so many wealthy, sophisticated people out of so much money over such a long time? The following local tale offers

at least a partial answer. From the end of World War II until the early 1990s, the commercial real estate industry in Washington was dominated by a handful of Jewish families. Most of the patriarchs had begun in the construction business, building homes and apartment buildings for Washington’s growing army of federal employees. In time, they and their offspring also began developing suburban shopping centers and downtown office buildings.

Calling out Madoff but falling on deaf ears

STEVEN PEARLSTEIN

While some of these clans are well-known, like those of Morris Cafritz, Charles E. Smith and Ted Lerner, others were content to stay out of the limelight — the Gudelskys, the Cohen brothers, the Abramsons and the Kays, to name a few. They frequently did business with one another, selling land and investing in projects, in many instances sealing deals with only a handshake. They used many of the same local lawyers (Arent Fox, Grossberg, Yochelson and the late Max Ammerman), the same architects (Vlastimil Koubeck and Eddie Weihe) and building contractors (Hyman and Magazine Brothers). And you could often find them having lunch together at Duke Ziebert’s, sipping a drink at the High Hat Lounge or playing golf at Woodmont or Indian Springs.

Taking it to committee

Of all the family partnerships,

however, perhaps none has been stronger, or more successful, than the one linking the Kaplan, Gewirz and Small families, which together have developed and managed numerous buildings over the years, among them 1700 K St., 4000 Massachusetts Ave. and 1000 Connecticut Ave., the last of which was recently torn down to make way for Arent Fox’s new offices. All three Northwest Washington buildings were built by William Magazine’s construction firm, which took a minority share in the partnerships that owned the buildings. Over the years, the Magazine partnership’s share has been subdivided among children

SHANNON STAPLETON/REUTERS

Bernard Madoff swindled local real estate heavyweights in his Ponzi scheme — despite warnings from one of the investors.

and grandchildren, with a less than 2 percent stake eventually flowing to Ross Magazine. And it is there that this little Madoff story begins. Late in 2006, Ross recalls hearing from his brother Marc, who represents the family on the management committee for the properties. At a committee meeting, Marc had voiced concern that the reserve funds for the buildings — which at the time were valued at about $30 million — were entirely invested with a New York money manager named Bernard Madoff. Marc proposed that the portfolio be diversified, but as he recalled this week, the other committee members rejected the idea, explaining that Madoff had generated great returns for them for many years. It was then that Marc

suggested that Ross, a professional investment adviser, dig further into the Madoff accounts. After reviewing a few documents that were sent to him, Ross had a lengthy and, in his view, unsatisfactory phone call with Edward Kaplan, the partnership’s managing director, and then followed up with a four-page letter several weeks later laying out several objections to investing the reserve funds with Madoff. “When I discussed Madoff’s

firm with you, you appeared to get defensive,” Ross wrote Kaplan in January 2007. “As you told me, he has discretion over the account, and to quote you, ‘No one knows how he does what he does.’ It is my opinion that in an account of over $15 million [the balance of the reserve fund in one of the buildings] somebody should know how he does what he does.”

Motion to dismiss

Among other things Ross

found fishy was the “veil of secrecy” around the Madoff operation, particularly the absence of any year-end

statements summarizing activity in the account. He found it curious that Madoff’s firm did not appear to have an investment advisory service registered with the Securities and Exchange Commission or a Web site for the service. He complained about a fee structure that charged 4 cents per share for every transaction, which he argued gave Madoff an incentive to churn the account while yielding a less-than-stellar return of 6.39 percent in 2005. And he questioned the appropriateness of an investment strategy using risky options trading for an account whose primary purpose should have been preservation of capital. As it turns out, those were just the right questions. Ross never got a response and, according to his brother Marc, the committee took no action in response to his letter. In hindsight, the members probably wish they had. For it turns out that members of the Kaplan, Gewirz and Small families had more than just building reserve funds invested with Madoff — they also lost millions of dollars of their own in the Ponzi scheme, along with money in charitable foundations with which they were associated. Several of them knew Madoff from Palm Beach, Fla., where they have winter residences and, with Madoff, were members of the exclusive Palm Beach Country Club. So why, with so much of their own money at stake, would they so cavalierly dismiss Ross Magazine’s warnings and questions? Ed Kaplan declined to return my phone call this week. But he effectively answered that question in a letter he finally sent to Magazine in

Panel: Current technology can cut fuel use

A prestigious U.S. research panel has concluded that tech- nology already widely available could significantly cut fuel con- sumption by cars and light trucks without sacrificing safety or per- formance.

With some technologies, the fuel consumption by passenger cars, sport-utility vehicles, mini- vans and light trucks can be re- duced by nearly half, but at a price — anywhere from a few hundred dollars to several thou-

THE INTERNET

sand dollars per vehicle, the Na- tional Research Council said in a report released Thursday. The report looked at three

types of automotive engines and found that the full combination of improved technologies could reduce fuel consumption by 29 percent in medium and large cars and pickup trucks with conven- tional engines, at an added cost to consumers of about $2,200.

— Associated Press

As fewer people are filing for unemployment insurance . . .

Unemployment claims

New filings, in thousands

456 453

. . . More people are buying goods from chain stores . . .

Chain-store sales

Percent change, year-over-year

9%

. . . which has stabilized business activity nationwide.

Non-manufacturing index

50.5 53.0 55.4 55.4 55.4

10-YEAR TREASURY

DOWN $1.90 PER $1,000, 3.37% YIELD

CURRENCIES

$1 = 92.74 YEN; EURO = $1.216

DIGEST

FINANCIAL

J.P. Morgan’s London unit fined $48.6 million

J.P. Morgan Chase’s London unit has been fined a record $48.6 million by Britain’s finan- cial regulator for not properly separating client money from the firm’s accounts. An average of $8.6 billion was not properly segregated by J.P. Morgan Securities in an error that went undetected for seven years, the Financial Services Au- thority said in a statement Thurs- day. As much as $23 billion of cli- ent money held by the bank’s fu- tures and options business was not put in separate overnight cus- tomer accounts between 2002 and 2009, the FSA said. The bankruptcy of Lehman

Brothers Holdings, which roiled financial markets worldwide in 2008, forced the FSA to put finan- cial companies on notice that they must properly separate cli- ent funds. New York-based Leh- man’s creditors filed more than $830 billion of claims, and reg- ulators worldwide are trying to unravel how money moved through its global units. J.P. Morgan spokesman David

Wells declined to comment. The New York-based bank escaped a 47.6 million-pound fine by coop- erating with the regulator, ac- cording to the FSA’s statement.

— Bloomberg News

S

A13

February 2009, two months after Madoff was arrested. In it, Kaplan rationalized the board’s decision by explaining that Madoff’s stated investment strategy was a reasonable one, based on “proprietary techniques” that fooled lots of other wealthy investors. Kaplan also dismissed the significance of Ross’s earlier questions, saying they failed to “describe any irregularities or fraudulent activity by Madoff that pointed to the kind of massive fraud that was only recently discovered.” The larger truth may be that Kaplan and other loyal customers had more than money invested with Madoff— they had their reputations invested, as well. Madoff’s genius was tapping into his victims’ need to see them- selves — and be seen by others — as sophisticated and well connected. To have questioned the original decision to invest — even when there were warnings that something might be amiss — would have meant questioning those other things as well. I don’t know if, under District

law and the original partnership agreement, Ross Magazine is owed any money as a result of the management’s committee’s careless actions. At his request, an outside lawyer was hired to make a recommendation on that. What I do know is that he is owed a simple and sincere apology. He’s still waiting for that.

pearlsteins@washpost.com

RENE TILLMANN/ASSOCIATED PRESS

Google faces German probe

Google permanently stored data it collected from wireless networks while conducting the mapping process for its Street View service in Germany, a regulator said Thursday. Johannes Caspar, Hamburg’s data-protection regulator, inspected cars and software Google used for Street View, he said in a statement on his Web site. Caspar is looking into how the search-engine company collected WiFi data while map- ping, and Hamburg prosecutors have opened a criminal probe.

— Bloomberg News

ALSO IN BUSINESS

 Airline delays

reduced: The

government said airlines virtu- ally wiped out three-hour tarmac delays in April before huge fines for holding passengers on the runway went into effect. As of April 29, airlines faced fines up to $27,500 per passenger for tarmac delays of more than three hours. Carriers improved their on- time performance as well. The 18 airlines that report statistics to the Transportation Department were on time 85.3 percent of the time in April, compared with a rate of 79.1 percent a year earlier and 80 percent in March. U.S. Airways posted the best on-time

rate among major mainline carri- ers. American Airlines reported the worst on-time rate of big U.S. carriers.

 Dishwashers recalled: Whirl-

pool Corp is recalling 1.7 million dishwashers sold at its U.S. stores from February 2006 through April 2010. The recall covers May- tag, Jenn-Air, Amana, Admiral, Magic Chef, Performa by Maytag and Crosley branded dishwash- ers. An electrical failure in the dishwasher’s heating element could pose a serious fire hazard, the appliance maker said.

— From news services

Post Tech

CECILIA KANG

Excerpt from voices.washingtonpost.com/posttech

Facebook continues to face heat over privacy

Facebook’s announcement last week of simpler privacy settings was

a good first step, users and privacy advocates said. But the social- networking giant continues to hear complaints that it isn’t doing enough to address user concerns. On Thursday, Chris Kelly, a former Facebook privacy chief who is running for California attorney general, said the company is still leaving its users vulnerable because it requires them to take extra steps to turn off a feature that shares their information with partner sites Yelp, Pandora and Microsoft’s Docs. “Today, I remain troubled by the news that Facebook still plans to

offer only an opt-out to ‘instant personalization’ — meaning that users’ information will be shared with third parties without clear consent,” Kelly wrote on an online mailing list operated by MoveOn.org. He called on the organization’s members to join the 171,00-member strong Facebook group called “Facebook: Respect my privacy.” Facebook says its instant personalization program is easier to shut

off with the new privacy settings announced last week. Meanwhile, Germany’s consumer protection minister, Ilse Aigner,

said Thursday that after meeting with Facebook’s European policy director about the recent privacy changes, she had “doubts as to whether these improvements will really bring a true turning point,” according to the Associated Press. Aigner said that her meeting with the company “unfortunately confirmed my skepticism” and that she plans to delete her Facebook account. Facebook spokesman Andrew Noyes said the meeting with Aigner

was “constructive.” “We appreciate Minister Aigner’s willingness to share her views with us on how we should further develop our model of privacy and user control and we will reflect on this, as we constantly do with others policymakers in Europe and elsewhere,” he said. Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60  |  Page 61  |  Page 62  |  Page 63  |  Page 64  |  Page 65  |  Page 66  |  Page 67  |  Page 68  |  Page 69  |  Page 70  |  Page 71  |  Page 72  |  Page 73  |  Page 74  |  Page 75  |  Page 76  |  Page 77  |  Page 78  |  Page 79  |  Page 80  |  Page 81  |  Page 82  |  Page 83  |  Page 84  |  Page 85  |  Page 86  |  Page 87  |  Page 88  |  Page 89  |  Page 90  |  Page 91  |  Page 92  |  Page 93  |  Page 94  |  Page 95  |  Page 96  |  Page 97  |  Page 98  |  Page 99  |  Page 100  |  Page 101  |  Page 102  |  Page 103  |  Page 104  |  Page 105  |  Page 106  |  Page 107  |  Page 108  |  Page 109  |  Page 110  |  Page 111  |  Page 112  |  Page 113  |  Page 114  |  Page 115  |  Page 116