Investors Are Looking on the Sunny Side of a Downturn(NYTimes, 6/24/06)

June 24, 2006
Investors Are Looking on the Sunny Side of a Downturn
By VIKAS BAJAJ and JEREMY W. PETERS
As his investments in the stock markets of developing countries were hitting record highs in early May, Tristram Millard had a nagging feeling that things were about to turn down.
He resisted the temptation to cash out, believing that his investments still had more bang left in them.
But things did turn down and the recent swoon left him with a 15 percent loss in a Latin American fund and reduced his profits in a broader emerging market fund.
But he is not panicking.
"As gut wrenching as it is when the market shakes out like this, I tend to see it as a buying opportunity," Mr. Millard, 29, said. "It's not like all those companies are going to go out of business."
Like Mr. Millard, most investors — professionals and amateurs, individuals and institutions — have reacted with relative calm to the recent downdraft in global financial markets.
Certainly, they have taken money out of developing countries and fast-growing American companies, but they have not, at least so far, sold out of the market as they did during the technology crash of 2000 or the 1997 Asian financial crisis.
They have reinvested some of the money in more conservative areas like bigger American companies, money market accounts and certificates of deposit.
The contraction in markets and investor confidence, as a result, is slow and small by recent standards. Since April of this year, the Standard & Poor's 500-stock index is down 5 percent and the Nasdaq composite index is down 8.7 percent. By contrast, in the two months after they peaked in March 2000, the S.& P. dropped 8.4 percent and the Nasdaq fell 33 percent.
Most individual investors are making only minor adjustments in their portfolios, according to one study. Transfer activity in the 401(k) accounts of 1.6 million employees studied by Hewitt Associates has increased only slightly and most of the transfers were out of emerging market funds.
The investor pullback is a natural outgrowth of higher interest rates and tighter monetary policies worldwide, experts say. "The punch bowl is being taken away everywhere you look," said Liz Ann Sonders, chief investment strategist at Charles Schwab.
The Federal Reserve is expected to raise short-term interest rates next week by a quarter point for the 17th time in two years, to 5.25 percent. The Bank of Japan has been removing cash from banks as it prepares to raise rates that have been close to zero for more than five years. The European Central Bank has raised interest rates modestly and expects to increase them further. Money flow could ease even in the white-hot Chinese economy as the government tightens lending standards.
Ms. Sonders has been advising Schwab's clients to take a conservative, though not bearish, position by increasing the allocation of cash in their portfolios by 10 percentage points and reducing their stocks by an equal amount. Investors are heeding those recommendations, Ms. Sonders said, but the change has been gradual.
"People are trying to hunker down and ride through this and hope that the correction is over," she said.
Since the start of May, more than $84.2 billion has flowed into money market funds, according to AMG Data Services, a research firm. By contrast, investors took $21.6 billion out of money market funds in the first four months of the year and took $290 billion out from 2002 to 2005.
Some experts say that the tightening of monetary spigots is only now starting to be felt by investors, who became more aggressive with their investments in recent years.
But by historical standards, money remains relatively cheap. The Fed's interest rate for interbank loans is below its 50-year average. Japanese rates are not expected to move much higher than zero and not until the end of the year, and in Europe those costs are still below 3 percent.
Though concern about the United States trade deficit and housing market worry economists at the World Bank, the organization expects the global economy to grow 3.7 percent this year and 3.5 percent in 2007 after expanding by an estimated 3.6 percent last year.
"The comfort that we can take right now is a global economy that is on more solid ground than it was in 1997 or 2000," said Jerry Webman, the chief economist at Oppenheimer Funds.
Fund managers, meanwhile, see opportunities. Shares of large American companies, which languished relative to international stocks and commodities in recent years, may come back in favor as investors look for stable growth, said Michael E. Schroer, managing partner at Renaissance Investment Management in Cincinnati. His fund recently invested in Coca-Cola and Colgate-Palmolive and sold Apple.
Most of the fallout in the spring retreat occurred in developing countries and in commodities.
For developing countries like Brazil, the contraction could put a damper on stock prices, though probably not their economies, experts say. That is so, they said, because investors have been borrowing at low rates in developed countries to invest in developing markets with, until recently, expectations of a higher return.
Such returns are needed to entice investors into those markets because as interest rates rise similar returns are available in money markets and bonds with less risk.
Brazil's main stock index, for instance, has fallen 17.4 percent after rising 25.5 percent from January until May 9, when it peaked.
"Brazil was benefiting from a series of trends that will no longer exist if interest rates get much higher in more developed countries," said Armínio Fraga, a former president of Brazil's central bank who is now a partner at Gávea Investimentos, an asset management company in Rio de Janeiro.
In the last five weeks, investors pulled $4.7 billion from emerging market funds, after putting in $16 billion during the first four months of the year. The Morgan Stanley capital international emerging markets index of stocks in 25 countries has fallen 16.5 percent since April.
The sell-off was accentuated by the increasing popularity of exchange-traded funds, which can be bought and sold like a stock, rather than just once a day with mutual funds. Many of these newly popular funds track indexes of stocks by country, region or sector and maintain no cash. So, when investors redeem them, the funds sell shares in local markets to raise cash, said Robert L. Adler, president of AMG Data. "They are simply hitting the market at the same time," he said.
In India, the selling from these funds dumped more shares on markets than local demand could absorb, said Shriram Iyer, head of research at Edelweiss Securities in Mumbai. "When the global funds started selling," he said, "this acted as a trigger and led to a downward spiral."
India's Nifty index of 50 stocks is down 19 percent since May 10, after climbing 32.4 percent for the year until then.
Markets for commodities like gold, silver and platinum have had similar trajectories.
In Chicago, Jay R. Feuerstein, a futures trader, unwound his firm's holdings in gold after his computer models suggested the price had crossed an important threshold at $690 an ounce. He now has a short position on gold, which hit a 26-year high at $721.50 on May 11 and closed yesterday at $584.80. "We were very fortunate," he said.
But even in those volatile markets, a few of the faithful are standing pat.
Jim Brownold, a retired actor, bought more gold coins when the price fell. After losing money on technology stocks like Yahoo in 2001, Mr. Brownold believes he has become more conservative with his investments.
"I prefer to invest in something and let it roll until it develops some kind of problem," he said.
Ira Scott, a psychiatrist based in Manhattan, is staying with the stock market. He trades stocks every day, but recently has taken a more conservative approach and is making fewer trades but he said he remained confident in his investments, even if the volatility was nerve-racking.
"I've been a little more on the safe side lately," he said. "I'm trading smaller but more confidently."
Paulo Prada and Saritha Rai contributed reporting for this article.

Immigration Math: It's a Long Story (NYTimes,6/18/06)

June 18, 2006
Economic View
Immigration Math: It's a Long Story
By DANIEL ALTMAN
MUCH of today's debate about immigration revolves around the same old questions: How much do immigrants contribute to production? Do they take jobs away from people born in the United States? And what kinds of social services do they use? Yet every immigrant represents much more than just one worker or one potential citizen. To understand fully how immigration will shape the economy, you can't just look at one generation — you have to look into the future.
Sociologists and economists are just beginning to study the performance of second- and third-generation members of immigrant families. Because of the variety of experiences of people from different countries and cultures, it's not easy to generalize. But recent research has already uncovered some pertinent facts.
Education is a good place to start, because it's strongly correlated with future earnings. Children of immigrants complete more years of education than their native-born counterparts of similar socioeconomic backgrounds. "You can expect a child of immigrants whose parents have 10 years of education to do a lot better than a child of natives whose parents have 10 years of education," said David Card, a professor of economics at the University of California, Berkeley. Being a child of immigrants, he said, "sort of boosts your drive."
As a whole, though, the second generation also tends to move toward the American average, Professor Card said. Some graduate from high school even though their parents didn't, but some whose parents have doctorates will earn only bachelor's degrees.
Still, it can take several generations for poor immigrant families to catch up to American norms. "For the largest immigrant group — that is Mexicans and Mexican-Americans — the picture is progress, but still lagging behind other Americans," said Hans P. Johnson, a research fellow at the Public Policy Institute of California. "They're doing much better than their parents, graduating from high school, but they still have very low graduation rates from college."
But despite the lag in education, Mr. Johnson said, Mexican immigrants and their families don't have much trouble finding jobs. "One of the paradoxes of Mexican immigration is that you have these workers with low skills but incredibly high employment rates," he said. "The second generation isn't able to maintain employment levels that are quite so high, but they're basically in the same ballpark."
Second generations of immigrant families are managing to climb the skills ladder, too. A recent survey by the Census Bureau reveals that 40 percent of the female workers and 37 percent of the male workers in the second generation took professional or management positions, up from 30 and 24 percent, respectively, in the first generation. The survey, taken in 2004, included many adults whose parents came to the United States decades ago, noted William H. Frey, a visiting fellow at the Brookings Institution in Washington who compiled data from the survey. With more recent immigrants, he said, it's possible that lower education rates may eventually lead to worse outcomes.
Other factors could also make success more difficult for today's children of immigrants, compared with those of the past.
One is increased competition. The children of Italians and Poles who came to the United States around the turn of the 20th century didn't face much of it, because the government imposed quotas on immigration after their parents arrived, said Roger Waldinger, a professor of sociology at the University of California, Los Angeles. By contrast, the children of recent arrivals face competition from successive waves of immigrants from numerous regions.
Inequality of income and wealth is another factor that could affect opportunities. "The second generation of Italians and Poles came of age in an era of historically low inequality," Professor Waldinger said. "The second generation of Mexican immigrants is coming of age in an era of historically high inequality, and that has to work to the disadvantage of those with low levels of schooling."
But there are also forces working in the opposite direction. For one thing, the children of today's immigrants will have much better access to education and the labor market than those of a century ago. "It almost certainly will be the case that tomorrow's third generation will have better outcomes than today's third generation," Mr. Johnson said. "The conditions today are better in terms of educational opportunities."
Adding to that, members of several immigrant groups have often risen quickly to — or even started at — the top of the wage scale. Professor Waldinger said that "the median for Indian immigrants is 16 years of schooling" and that, on balance, "the Indians, the Koreans, the Chinese — they're already successful." One reason, he added, is that society is "much more open to outsiders" in top jobs and at elite colleges than it ever was before.
EVEN if successive generations of immigrants manage to become as economically successful as native-born Americans, a big question will remain: How many people do we really want in the United States? From the standpoint of government fiscal policy, Professor Card said, you could argue that the only immigrants you'd want in the United States were those "whose children are going to get Ph.D.'s" and would therefore be economically productive.
Some people might argue that a larger population raises housing prices and causes more pollution, he said. But there can be advantages to size, too. "If you have population growth, you can finance intergenerational transfer systems" like Social Security and Medicare, he said. And lest we forget, he said, "big countries have more power."
Mr. Frey agreed that waves of immigration could help to solidify a country's position in the world. In that respect, he said, Europe and Japan have a problem. "They have a very aging society because they don't like immigrants," he said. "They're going to end up on the back burner of the global economy."

Is This Game Already Over? (NYTimes, 6/18/06)

June 18, 2006
Is This Game Already Over?
By GRETCHEN MORGENSON
AFTER a Long Island charity that provides financial support for 190 current or former firefighters lost $614,036 in the stock market during the Internet bubble several years ago, it eventually did what many aggrieved investors do: it filed an arbitration case against its former broker, Andrew Sirico, contending that he had churned its account to rack up trading fees and had improperly invested its funds in speculative securities.
As is also routine in the brokerage business, a panel of three arbitrators — one representing the securities industry and two designated as public investor representatives — convened to hear the case of the charity, the East Islip Volunteer Firemen's Benevolent Association. But if the association's members hoped to get a speedy hearing, they were disappointed. Nearly 15 months have passed since the association filed its case, and the most basic facts in the dispute have yet to be argued.
Most of the delay is attributable to the time that Stuart D. Meissner, the association's lawyer in New York, has spent arguing that arbitrators assigned to the case were either biased or improperly classified as investor representatives when, instead, they were closely associated with the brokerage industry. Mr. Meissner said in an interview that he had found what he considered to be conflicts of interest with all five panelists assigned by NASD to the case.
Four of five candidates nominated to serve on the panel withdrew after Mr. Meissner's challenges. NASD Dispute Resolution, which is one of the securities industry's two main self-regulatory bodies, rejected his challenge on the fifth panelist. That arbitrator is now the panel's chairman.
Panelists who decide private arbitration cases are supposed to be completely neutral, like jurors hearing public court cases. But lawyers say that arbitrators with undisclosed ties to Wall Street or other potential conflicts that might disqualify them are common, as the East Islip firefighters' case, and others, demonstrate. Lawyers representing investors uncovered the possible conflicts in those cases, not NASD or the Big Board, also indicating that self-regulators have holes in their screening processes.
"In every instance we uncovered," Mr. Meissner said of his case, "it is clear the screening process is not being enforced and there is very little being done about checking on conflicts."
NASD says it does not discuss individual cases, but that its extensive screening process and the disclosure demands required of arbitrators keep its system fair and reliable. The New York Stock Exchange, which handles far fewer arbitration hearings than NASD, said the same about its resolution procedures.
In theory, private arbitration panels are supposed to offer a fast and fair system in which customers can resolve complaints with their brokers. Last year, according to NASD, the average turnaround time for a case was 14.3 months, down from 15.4 months in 2004. In 1995, the average was 10.5 months.
But from start to finish, the securities industry itself oversees the arbitration process. Brokerage firms require clients to file grievances with private arbitrators, not in state or federal court. Arbitration is the only forum that investors can use to resolve disputes — opening the door to the possibility of lax enforcement or, at worst, outright compromises of the system.
BOB SILHAN is secretary of the East Islip association, and its members include retired, indigent and disabled firefighters. "The biggest impact this has had is on our members' families," he said, adding that the association can give its families only about $3,500 in annual death benefits. "We were on the threshold of trying to increase that when all this happened."
Securities arbitration has become a thriving business. Last year, 6,074 cases were filed with NASD Dispute Resolution, which oversees more than 90 percent of investor complaints. The peak year for NASD cases was 2003, when 8,945 were filed — most of which, lawyers say, were related to the stock market fall that began in 2000. The number of cases filed this year is down 13 percent from 2005, NASD said.
According to NASD, the percentage of cases in which the plaintiff won an award has declined steadily since 2001. Then, 54 percent of cases were won by plaintiffs. By last year, that figure had fallen to 43 percent.
Arbitration as a way to resolve investor disputes really took off in 1987, after the Supreme Court ruled in a case known as Shearson/American Express v. McMahon that account forms signed by customers requiring that disputes be resolved in arbitration were enforceable contracts. Brokerage firms soon required all customers to sign such documents.
Securities lawyers who have conducted arbitrations for many years say that during the 1990's, arbitration seemed to work well — that it was an efficient, low-cost process that bypassed the increasingly clogged court system. No longer.
"Securities arbitration has become much more like formal court litigation in terms of the parties' investment of time and money," said Lewis D. Lowenfels, an expert in securities law at Tolins & Lowenfels in New York. "What started as a relatively swift and economical process for a public customer claimant to seek justice has evolved into a costly extended adversarial proceeding dominated by trial lawyers and the usual litigation tactics."
At the same time that brokerage firms defending themselves in arbitration are resorting to drawn-out litigation maneuvers, some lawyers say panelists are unwilling to push the defendants to produce documents they must maintain.
"There are brokerage firms and lawyers who in the face of rules requiring them to make documents available to the claimants do not do so," said John W. Moscow, a former prosecutor who is a lawyer at Rosner Moscow & Napierala in New York. "The unwillingness of arbitration panels to compel the firms to produce the records they are required to keep puts the less sophisticated and less well-funded claimants at a disadvantage. When a case gets heard only on evidence that one chooses to produce, that is not what the rules envisioned when the S.E.C. approved them."
Three-member panels oversee securities arbitrations. One member represents the financial industry and has expertise in the field; the other two act as public investors' representatives and can come from any arena.
Public panelists cannot have extensive associations with the financial services industry or any other relationship that could compromise their neutrality. Lawyers for both sides choose arbitrators from lists provided by NASD or the New York Stock Exchange. At NASD, for example, there is a pool of 6,340 arbitrators; 3,692 represent the public and the rest are industry panelists. In every case, lawyers for each side can strike arbitrators from the list of candidates during the initial selection process. If all are struck, the lawyers must accept NASD's choices for the panel. At that point, lawyers for both sides can challenge a panelist only for biases, misclassification, conflicts or undisclosed material information.
All arbitrators sign applications disclosing their professional histories and any other information — such as lawsuits filed against them — so that lawyers for both plaintiff and defendant can assess their fitness for a case. But arbitrators are expected to disclose any conflicts that may arise even after a case has begun. Under NASD rules, an arbitrator can be removed for biases or conflicts in the middle of hearing a case; the New York Stock Exchange does not yet allow for such a removal.
THE NASD arbitration manual states that arbitrators must disclose any direct or indirect financial or personal interest in the outcome of an arbitration, and "any existing or past financial, business, professional, family or social relationships that are likely to affect impartiality or might create an appearance of partiality or bias." They must sign oaths stating that they have no personal interest in the case before they agree to hear it. Potential arbitrators must also disclose whether an investor has sued them or whether they have been subjected to regulatory inquiry. But according to lawyers who have uncovered evidence of bias in arbitrators, NASD does not seem to police the disclosures for omissions, disqualifications or conflicts. Steven B. Caruso, a lawyer at Maddox, Hargett & Caruso in New York and president-elect of the Public Investors Arbitration Bar Association, a nonprofit group of 800 lawyers representing individual investors, recalled a recent case he had in Florida.
"The NASD sent me an arbitrator's profile of a guy who was a public arbitrator and he had previously run a securities firm," Mr. Caruso said. "So I challenged it to the NASD; they went to the arbitrator and came back to me and said, 'Well, he thinks he's properly assigned.' "After three or four exchanges they finally took him off my panel and reclassified him as an industry arbitrator. If you didn't have the tenacity or knowledge of the system, or if you were a pro se investor, you would have been taken advantage of."
In fact, NASD relies heavily on arbitrators themselves to make proper disclosures. Last month, Rina Spiewak, a staff attorney in NASD Dispute Resolution's West regional office, wrote an article published on the association's Web site entitled "When in Doubt, Disclose." In it, she wrote that arbitrators "have an affirmative duty to become aware of relationships that should be disclosed" and that the appearance of bias can be as harmful as an actual conflict.
LINDA FIENBERG, president of NASD Dispute Resolution, said her organization's screening and arbitrator training system is elaborate and laborious enough that some applicants drop out of the process. "We believe that our rules are adhered to," she said. "As soon as something comes to our attention that suggests there has been a mistake we obviously look into it and take appropriate steps. We have not had very many instances where that has come to my attention and I monitor these very carefully. If it came to our attention that an arbitrator had intentionally made a material misrepresentation we would remove that arbitrator from our roster."Karen Kupersmith, director of arbitration at NYSE Regulation, a not-for-profit subsidiary that oversees activities of the Big Board's member firms, said the exchange relies on arbitrators to be candid about their potential conflicts. But as financial services firms have grown more complex, the exchange has narrowed the considerations for public arbitrators to exclude anyone who works for a company that may conduct securities transactions or that controls, either directly or indirectly, a brokerage firm, she said.
Previous rules have stated that the spouse of a public arbitrator cannot be engaged in the trading of securities, but under a new rule awaiting Securities and Exchange Commission approval, the list of family members that can disqualify a public arbitrator would also include in-laws, children and parents.
"We are trying to broaden the net and raise awareness," Ms. Kupersmith said. "We also do an ongoing review of arbitrators and classifications through a number of checks and balances which is computer-oriented and picks up things."
The story of the losses incurred by the East Islip firefighters begins like that of so many other investors who lost money during the stock market bubble. Mr. Sirico, their broker, put the group into speculative technology stocks, made risky bets on options and used borrowed money to expand the group's portfolio. In May, Mr. Sirico was fined $10,000 and suspended from associating with any NASD firm for seven months for disclosure failures. He could not be reached for comment.
But trouble in their arbitration began last fall, when Robert W. Cockren, a lawyer at Sonnenschein Nath & Rosenthal, became chairman of their arbitration panel and was to act as a public representative.
Mr. Meissner challenged Mr. Cockren's fitness to serve on the panel because of Sonnenschein Nath's extensive relationships with brokerage houses. NASD rules state that any lawyer whose firm receives more than 10 percent of its annual revenue in the prior two years from the securities industry cannot be considered a public arbitrator. But unless law firms disclose the sources of their revenue, it is impossible to determine if such conflicts exist.
NASD denied Mr. Meissner's challenge, saying that the arbitrator had done a "conflict check" with respect to the brokerage firms that were involved in the case. But Mr. Meissner learned through an extensive search that one client of Mr. Cockren's firm was the parent company of a firm being sued in the case. He presented the evidence to NASD and, on Dec. 9, 2005, Mr. Cockren withdrew from the panel.
Mr. Cockren said: "I fully complied with the NASD rules and regulations and nothing that either I or my firm did was improper. We were substantially below the revenue threshold but it wasn't worth my time or energy to deal with the attacks going on."
Mr. Meissner also challenged four other arbitrators that the NASD proposed, saying that all of them either had conflicts or had backgrounds that made them inappropriate representatives of public investors. Three withdrew from consideration, while the fourth is chairman of the panel.
The East Islip association seeks the $614,000 it lost, as well as attorney's fees, court costs and interest. It has also asked for treble damages, amounting to about $1.8 million. Hearings on the case are scheduled for October.
Problem panelists have plagued other arbitrations. Donald L. Sturm, a wealthy Colorado businessman who sold his ownership in a company to WorldCom for stock and then lost $900 million after the telecommunications company collapsed, filed for arbitration against Citigroup in 2003. He contends that Jack B. Grubman, the banking giant's former telecommunications analyst, advised him to hold onto his WorldCom stock even as it was plummeting. Mr. Grubman was barred from the securities industry for life in late 2002.
An NASD arbitration panel ruled against Mr. Sturm in November. But Mr. Sturm's lawyers are asking a federal court to overturn the decision because David H. Drennen, an arbitrator in the matter, failed to disclose past incidents that the lawyers say should have disqualified him or that they could have used as evidence to strike him from the panel.
According to a brief filed in the case, Mr. Drennen, general counsel at Bathgate Capital Partners, an investment firm in Greenwood Village, Colo., failed to disclose an arbitration panel finding from 1996 that a previous employer, "through Drennen's conduct, committed securities fraud." The panel in the case "awarded both the full amount of compensatory damages alleged and punitive damages" according to the brief.
Mr. Drennen, a former NASD regional counsel, declined to comment. In a deposition taken last month in Mr. Sturm's case, he said he recalled the earlier arbitration but said he did not disclose it on his arbitration forms because his conduct was not an issue in the current case. He also said in the deposition that he had testified in the 1996 arbitration on behalf of his employer, attended the entire proceeding and could not identify anyone else at the firm, besides himself, whose conduct was the subject of the case.
MR. STURM'S lawyers say Mr. Drennen's involvement in the current arbitration is problematic in two ways: first, it may make him less objective or sympathetic to an investor accusing a brokerage firm of fraud, and, equally important, his disclosure of his involvement should have disqualified him from serving on the panel handling Mr. Sturm's grievance. NASD rules state that a prospective panelist is unqualified to serve if he or she, within the past seven years, has been the subject of an adverse, investment-related arbitration award of $25,000 or more. The 1996 arbitration involving Mr. Drennen resulted in a $212,103 award and occurred five years before he applied to become an NASD arbitrator.
David E. Warden, a partner at Yetter & Warden in Houston who represented Mr. Sturm, said that a disclosure failure by any arbitrator "not only deprives the parties of their right to make an informed selection decision but also strips any semblance of integrity from the process.
"There doesn't seem to be a watchdog for any of this," he added.
Plaintiffs' lawyers also say that arbitrator biases and conflicts are harder to plumb as financial services firms grow in size and scope. Rosemary J. Shockman, a former president of the Public Investors Arbitration Bar Association, testified before Congress last year that the problem of potentially biased panelists representing the public "continues to grow as various sectors of the financial services industry continue to consolidate their operations in the admitted quest for 'capturing assets' and offering the consumer 'one-stop shopping.' "
J. Boyd Page, a lawyer at Page Perry in Atlanta, said that he has often found that arbitrators assigned to represent the public in a case have close associations with the securities industry. "I just got a proposed panel in Houston and I have 10 so-called public arbitrators that I can pick from," Mr. Page said. "Of those, six had associations with the securities industry. You really wonder about the quality of monitoring."
The potential for conflicts among arbitrators would not be such a problem, defense lawyers say, if investors had an alternative to arbitration. But they do not.
"We believe that arbitrators should be properly classified and that there should be zero conflicts, either real or apparent," Mr. Caruso said. "An arbitrator is supposed to disclose conflicts but there is no follow-through and no system of checks and balances."

Falling Short of A+(NYTimes, 6/15/06)

June 15, 2006
Falling Short of A+
By DAMON DARLIN
ROUND ROCK, Tex., June 9 — Kevin B. Rollins, the chief executive of Dell, does not want to dwell on what has gone wrong for the last year at his company, the world's largest computer maker. He calls it "wallowing."
When pressed for an explanation of why revenue growth has slowed drastically and why profits have fallen, his explanation is short. "We got a little too far ahead on profit, and that allowed competitors to sneak in," he said in an interview at the company's headquarters here, referring to Dell's profit-margin goals. "Our competitors got better, and that allowed them to get strong."
How could this happen on the watch of a former Bain & Company consultant who prides himself on measuring everything and on meticulous execution? "We just don't know," said Mr. Rollins, who has held the top job since July 2004.
Though the company has faltered, for the first time growing more slowly than the rest of the PC industry, it is not a crisis, said Mr. Rollins. "It's not anywhere near that," he said. Nonetheless, Mr. Rollins is not being blasé about the very real problems facing Dell, which recorded revenue last year of $55.9 billion. He is pushing the company to act quickly and aggressively to fix its problems lest they get bigger. There is truth in the law of big numbers, he said, which states that it is harder for a multibillion-dollar company to grow at the rate a multimillion-dollar company grows.
Dell will be growing more slowly, he said, but it will still grow faster than the rest of the industry, improve profitability and take market share from competitors.
Joseph A. Marengi, Dell's senior vice president for the Americas, said: "There is a feeling of 'let's get this back to where it should be.' It's basic business, but at the end of the day there is a sense of urgency."
One problem was of Dell's own making: the deterioration of its customer service. It has thrown a lot of money at that problem very quickly, more than $100 million in the last few months, to answer consumers' questions quickly.
Its other major problem is more vexing. Dell does not have a major cost advantage in low-priced notebook computers. "That's where our advantage has been a little lower, and that's where the growth has been," said James M. Schneider, Dell's chief financial officer. The company has to find a way to squeeze more costs out of a procurement and manufacturing system that is already world-renowned as the leanest in the industry.
Mr. Rollins insists that the company was not complacent. "We pushed some elements faster than we should have," he said, comparing the situation to that of an A-plus student who merely gets an A. It is still a great performance, but everyone is nonetheless disappointed. Mr. Schneider agreed, saying, "Once someone misses who never misses, there is concern."
The sense of urgency that Mr. Rollins is trying to instill comes at a time when Dell's share price has been in steady decline, hovering lately around $25, a loss of about 40 percent since last July. It is a long way from the heights of almost $60 achieved in 2000, before the stock fell to barely $16 after the technology boom collapsed.
Wall Street is still wary. A. M. Sacconaghi, an analyst with Sanford C. Bernstein & Company, said that Mr. Rollins's "articulation of a series of steps and a plan is a plus." He also said, "The company has misestimated its fortunes before, so there is some healthy skepticism." Mr. Sacconaghi said he thought that the company would have been better off solving its problems with customer service and improving product design before it started cutting prices to increase sales.
To reverse its recent setbacks, Dell is now willing to question just about anything — even breaking longtime exclusive allegiances with a major supplier like Intel.
Dell announced last month that it would begin using chips from Intel's rival, Advanced Micro Devices, in one of its high-end servers. Asked if the company would switch to A.M.D. processors for some of its PC's, Mr. Rollins would answer only with a wink. Glen Yeung, an analyst with Citigroup Global Markets, has said Dell would do so by September.
Dell's exclusive use of Intel processors has lately appeared short-sighted. The fastest-growing segment of the notebook market, which is the fastest-growing segment of the PC market, has been for machines with Advanced Micro chips, Mr. Marengi said. Other companies, most notably Hewlett-Packard, were able to offer lower-priced notebooks because they used Advanced Micro.
Meanwhile, the decline in computer prices took a toll on customer service, long a hallmark of the Dell model. The company found it harder to justify the kind of service it had provided for $1,000 PC's when those systems were selling for $350. So it decided to stop fixing certain kinds of problems, mostly related to software, spam and viruses. It decided to answer more of its customers' questions from call centers overseas, and long waits became common.
The economies made sense on paper because individual consumers account for only 15 percent of Dell's business. But as complaints mounted, Mr. Rollins ordered a reversal. "We will do whatever is necessary to get it fixed," he said. He moved the company's manufacturing wizard, Richard Hunter, to customer service and asked him to apply the methods of employee empowerment to call centers, calling out for help from specialists the moment there is an unmanageable problem. Dell quickly provided staff members for new call centers in North America.
Mr. Rollins sees a new service, DellConnect, as a technology that could solve customer woes and save the company money at the same time. A call center employee asks a customer with a troubled PC whether a Dell technician can take over the machine remotely via a high-speed Internet connection. The technician then diagnoses and fixes as much of the problem as possible.
Mr. Rollins said that DellConnect, which was in testing until early this month, had been used 450,000 times and that 80 percent of problems were resolved. Here is the part Mr. Rollins really liked: 95 percent of customers were left satisfied.
It is hard to argue that Dell ever got complacent about costs. "We've been at this a long time," said Glenn E. Neland, Dell's senior vice president and chief procurement officer. Two years ago, Dell eked out $1.8 billion in cost savings. Last year, it squeezed out 22 percent more, or $2.2 billion. This year, Mr. Rollins wants Mr. Neland to find an additional $3 billion, or 36 percent more than last year. Mr. Rollins does not want it done the easy way, with layoffs. "It gets harder and harder to find it," Mr. Neland said.
Instead, the market's shift to notebooks, which Dell makes in China just as its competitors do, erased much of its cost advantage. "We'd have our thumb on all of the supply and all of the cost," Mr. Neland said.
Five years ago, the cost of assembling the PC's motherboard, which contains the processor and other main electronics, was $20. With a supply base in China, a better knowledge of component costs and of how overseas assemblers operate, and by increasing competition among them, Dell got the cost down to $5. The company might be able to squeeze more out of that area, but the gains will be small. It has to look elsewhere.
The savings are not necessarily in the hardware. For instance, Dell shipped computers to customers in three boxes, one each for the computer, the monitor and the peripherals. That was great for the individual customers, but made little sense for its business customers, who were getting up to 500 computers at a time. So Dell began packing 16 chassis or eight flat-panel monitors in a single box. Customers liked it better, too, because they had fewer empty boxes to dispose of.
Mr. Rollins is presiding over meetings on how to find several more major sources of savings. "Kevin leads a discussion," Mr. Neland said. "He is not a table-pounder. But once we have a level set, he can be very intense." Mr. Neland said sometimes the consultations are daily, "sometimes by the minute."
As focused as Dell is on its core business, a number of challenges remain. It is still relatively small in Asia, where the world's greatest demand for computers has shifted. But it is growing fast in China and India.
Dell needs to catch up with Hewlett in supplying corporate data centers. Though Dell has a bigger share of the American market than its archrival, Hewlett dominates worldwide. Dell has just announced a new line of servers, known as the Power Edge series, that are easier to install and manage.
It has even made the servers more stylish by masking exterior buttons and switches and color-coding interior components to give data center managers a sense of order.
Dell is emphasizing style in its desktops, notebooks and printers as well, in an effort to keep those products from being mere commodities. On the door providing access to the interior of the XPS desktops, for instance, Dell installs a gasket and deadens the ping sound of the spring so it closes with the thud of a car door.
A new all-in-one printer uses a liquid-crystal display instead of many buttons to control functions. Dell designers are convinced that other makers go button-crazy so that the shopper in a store will quickly see how full-featured the product is. Dell, selling online or by phone, does not need that visual sales pitch.
The company has not made a splash selling flat-panel televisions the way it did when it entered the market for servers and printers. That is because prices across the board have fallen sharply, making it difficult for Dell to offer consumers a significant price difference.
But Mr. Rollins said that did not mean the Dell model of selling direct would not work there, too. It is opening stores in malls to display its products, though they must still be purchased directly by phone or over the Internet. The company sees major opportunities selling TV's to corporate customers. Target is buying digital TV's for in-store displays, Dell executives said.
"The opportunity to continue to grow in the highest-growth categories is ahead of us," Mr. Rollins said.

2 New Captains of the Economy Face Volatile Global Markets(NYTimes,6/1/06)

June 1, 2006
2 New Captains of the Economy Face Volatile Global Markets
By EDMUND L. ANDREWS
WASHINGTON, May 31 — One reached the pinnacle of wealth and prestige as a dealmaker on Wall Street. The other was an academic superstar, brilliant but somewhat shy and more at ease in Bermuda shorts than suits.
But now they find themselves side by side in confronting a stiff new test: helping to guide the economy from a period of fast growth and cheap money through one of higher interest rates, jittery markets and a falling dollar.
Henry M. Paulson Jr., the chief executive of Goldman Sachs and President Bush's choice to become his new Treasury secretary, is expected to arrive at his post at a time when global financial markets are suddenly more volatile and investors are more risk-averse than they have been in years.
Ben S. Bernanke, the former Princeton economics professor who became chairman of the Federal Reserve on Feb. 1, has already endured a baptism of fire as the Fed has struggled over when to stop raising interest rates.
Just a few weeks ago, bond prices dropped and critics complained that Mr. Bernanke lacked "manhood" or at least "Street cred" as an inflation fighter. In more recent days, investors have been rattled by the opposite fear: Mr. Bernanke might be too tough and push interest rates higher than they had thought, potentially slowing or reversing the liquidity-driven investment boom of recent years.
Mr. Paulson provoked speculation about the dollar even before he left Mr. Bush's side at the announcement of his nomination on Tuesday morning.
Mr. Paulson called for "steps to maintain our competitive edge in the world," a bland remark that some investors nonetheless interpreted as code for using a weaker dollar to make American exports cheaper in other countries.
"These two captains are forced to navigate in some very choppy waters," said Richard Yamarone, chief economist at Argus Research. "The message that the Fed is sending is that they don't have a clear grasp on the goings-on of the economy, and the same could be said of the Bush administration."
At first glance, the pairing of Mr. Bernanke and Mr. Paulson looks like an attempt to recreate the celebrated collaboration between Alan Greenspan and Robert E. Rubin in the 1990's, when the economy and the stock market soared and the federal budget swung from deficits to surpluses.
Mr. Greenspan, who ran the Fed, was not an academic but shared Mr. Bernanke's penchant for poring over economic data and challenging conventional wisdom.
Mr. Rubin, Treasury secretary under President Bill Clinton, had, like Mr. Paulson, been a chairman of Goldman Sachs. He teamed up with Mr. Greenspan to champion tough restraints on government spending, employed his credibility on Wall Street to assure financial markets that Mr. Clinton was serious about dealing with the budget deficit and played an influential role in shaping foreign policy.
Mr. Paulson, whose nomination has been praised by Democrats as well as Republicans, is almost certain to win easy Senate approval and become a central player on Mr. Bush's team.
But analysts say both he and Mr. Bernanke need to establish their credibility in financial markets at a time when the economy is in a major transition.
For the first time in nearly two decades, inflation is on an upward rather than downward trend. Energy prices remain near historic highs, even though oil prices dropped on Wednesday as immediate fears of a confrontation with Iran eased. Long-term interest rates — the fuel that powers the housing market when they are low — are on the rise.
Meanwhile, the economy faces structural budget deficits that will not disappear without major changes in taxes and spending, and the Fed could find itself in a clash with the Bush administration if budget deficits remain high.
Perhaps most important, however, investors around the world have become more anxious about the United States' huge trade deficits and its ballooning foreign debt. That is pushing down the value of the dollar, a trend that would help reduce trade imbalances but has also elevated worries about a more painful crash for the American currency.
Much of the uncertainty stems from a shift at the Federal Reserve and other central banks. After propping up economic growth by keeping interest rates far below normal levels, the central banks are removing the cushion of cheap money.
"The marketplace over all is being forced to reabsorb risk that formerly had been underwritten by the big three central banks — the Fed, the Bank of Japan and the People's Bank of China," said Paul McCulley, managing director of Pimco Advisers, the giant bond management firm. "When you've got all three taking away the punch bowl, the partyers at the party are not going to be happy."
Mr. Bernanke arrived at the Fed when monetary policy was already at a tipping point. Having raised short-term interest rates under Mr. Greenspan's guidance for nearly two years by the time Mr. Bernanke took over, Fed officials knew they were nearing the point where they could stop. But because there is such a long lag time between changes in monetary policy and their impact, inflationary pressures were on the rise and economic growth was still torrid.
In late April, Mr. Bernanke confounded markets even as he struggled to explain that the Fed needed to keep its options open by basing decisions on incoming economic data rather than maintaining monetary policy on automatic pilot.
Testifying before the Joint Economic Committee of Congress on April 27, Mr. Bernanke set off a rally by announcing that the Fed might pause in its rate increases to assess the impact of its previous increases.
What startled bond investors was Mr. Bernanke's added twist: that the Fed might pause even if "the risks to its objectives are not entirely balanced" meaning that it might take its foot off the monetary brakes, at least temporarily, even if there were signs of slightly higher inflation risks.
Bond investors, suspecting that Mr. Bernanke might be soft on inflation at a time when energy prices were shooting up, began demanding higher yields on long-term Treasury bonds.
Pundits began accusing Mr. Bernanke of vacillating.
"In jest, I've been saying that Mr. Bernanke needs to regain his monetary manhood," Larry Kudlow, an economist and talk show host, recently told viewers on CNBC. "He was people-pleasing Wall Street. Now he has got to go back on message."
Barry Ritholtz, an economic consultant and operator of an economic blog, the Big Picture, went further and called Mr. Bernanke the "Neville Chamberlain of inflation fighters."
"I got the sense that Mr. Bernanke was appeasing the stock market," Mr. Ritholtz said in an interview. "It's not that he has to go out and prove his manhood and his street-fighting cred. It's just that he has to navigate at a particularly perilous moment in the economy, and he has to navigate absolutely flawlessly."
Two days after raising the prospect of a pause, Mr. Bernanke compounded the confusion by venting his frustration about being "misunderstood" during an off-camera conversation with Maria Bartiromo, a correspondent for CNBC.
Word of the comments set off another round of feverish trading on April 29. Last week, Mr. Bernanke told lawmakers at the Senate Banking committee that his remarks to Ms. Bartiromo had been a "lapse in judgment" and that in the future, he would communicate only through formal channels.
Despite the bumpy path, Mr. Bernanke's first few months have been far smoother than Mr. Greenspan's arrival in August 1987. Bond investors, convinced that Mr. Greenspan could not match the inflation-fighting prowess of his predecessor, Paul A. Volcker, quickly pushed up interest rates on long-term Treasury Bonds.
Yields on 10-year Treasury bonds shot up from 8.8 percent to more than 10 percent during Mr. Greenspan's first two months as Fed chairman. The stock market, plagued by a host of uncertainties, fell 22.6 percent on October 19, 1987.
By contrast, rates on 10-year Treasury bonds have climbed modestly since Mr. Bernanke took office, from about 4.5 percent to about 5 percent today. One crucial indicator of inflation expectations, the difference in price between regular Treasury bonds and special inflation-protected Treasury securities, are not much higher today than when Mr. Bernanke took over in February.
Edward McKelvey, an economist at Goldman Sachs, said Mr. Bernanke's message had in fact been clear even if that left investors unsure about the Fed's next move.
"He is sending a fairly consistent message that says we're going to evaluate the data insofar as they affect the outlook," Mr. McKelvey said. "This is child's play compared to what Greenspan had in the first two or three months of his term."
Mr. Paulson may face his own trial by fire. As Treasury secretary, Mr. Paulson would have authority over the government's policy on exchange rates and the value of the dollar.
Mr. Paulson is likely to continue the policy of his predecessor, John W. Snow, in supporting a "strong dollar" but insisting that its value be determined by market forces. In practice, the administration has been content to let the dollar drift down in value for the last two years, a trend that makes American exports cheaper and imports more expensive.
Mr. Snow did not have to grapple with any major currency disruptions, but Mr. Paulson may not be so lucky.
"There are fewer certainties," said Lou Crandall, chief economist at Wrightson ICAP. "He is walking into an environment where the dollar is widely perceived to be at risk."

How eBay Makes Regulations Disappear(NYTimes, 6/4/06)

June 4, 2006
How eBay Makes Regulations Disappear
By KATIE HAFNER
IN quick succession one morning last month, Louisiana state legislators plowed through a long list of bills, including one to relocate the motor vehicle commission, another to regulate potentially abusive lending practices, and yet another that was the handiwork of eBay, the digital shopping mall that bills itself as "the world's online marketplace."
EBay had worked overtime to ensure the passage of Senate Bill 642, which sought to exempt some Internet transactions — like those that occur on its Web site — from Louisiana licensing requirements for businesses conducting auctions. As the State Senate's Commerce Committee convened to consider the bill, Duane Cowart, an eBay lobbyist, testified that forcing eBay "trading assistants" to fork over $300 for a license was unduly burdensome.
"What they do on the Internet is not an auction, and they are not auctioneers," Mr. Cowart told the committee. Trading assistants take items on consignment from other owners and put them up for bid on eBay, but Mr. Cowart said their activities were more akin to placing classified ads. Louisiana's senators seemed to agree with him wholeheartedly. "I think eBay is great," said one, while another regaled the room about his adventures shopping for a Plymouth Prowler on eBay. State Senator Noble E. Ellington, a Democrat who sponsored the bill at Mr. Cowart's behest, beamed as his colleagues gave the legislation their unanimous support.
EBay's lobbying activities are not confined to Louisiana. As the company has spread its innovative and influential wings across the Internet, it has also woven together a muscular and wily lobbying apparatus that spans 25 states. "It is a fast-moving train, and if you get in front of it you'll get flattened," said Sherrie Wilks, an official with Louisiana's licensing agency, who is concerned that eBay flouts regulatory oversight by persuading state legislators to take the company's side.
Regulators in other states also say that when they try to erect guidelines around eBay's activities, they quickly encounter the realities of the company's political power, raising anew the perennial questions about the proper balance among public policy, consumer protection and business interests. EBay's lobbying tactics, meanwhile, illustrate the spoils to be won when a savvy, resourceful company combines local political persuasion and grass-roots rallying to get lucrative regulatory exemptions that allow it to safeguard its profits.
EBay's efforts have been remarkably successful, and the company, which has worked tirelessly to cultivate its image as a friendly neighborhood bazaar even as it engages in hard-nosed lobbying, is not shy about boasting of its victories. Last year, Ohio passed a law that would have regulated eBay sellers, but the company moved quickly — with the help of seasoned lobbyists — to have a pre-emptive and more favorable bill passed.
"We realized what was there, and we worked with local lobbyists and were able to get the law reversed," said Tod Cohen, eBay's vice president for government relations. He oversees the company's efforts to convince state lawmakers of a core eBay belief: that state regulation can impede the flow of e-commerce.
The Federal Trade Commission, which has loosened regulations across a broad range of industries, appears to agree. Late last week, responding to a request from Mr. Ellington for an analysis of the Louisiana bill, the agency advised that the bill promoted competition and increased consumer choice.
Unlike many other Internet companies, eBay has to be especially fleet-footed when it comes to stopping what it perceives as hostile regulation, whether it involves the growing number of eBay drop-off stores — places like UPS stores and small shops where people take their goods to be sold on eBay — or the more general category of trading assistants. Anyone engaged in selling on the site depends on a relatively friction-free environment in order to make a profit. So does eBay, because its overall corporate goal is to keep sales volumes high.
At any given moment, 89 million items are for sale on eBay, and the mother ship — eBay itself — gets a fee for each successful transaction. It also charges its 193 million registered users listing fees for any products they display on the site. EBay's gross transaction fees for the first quarter of 2006 alone were more than $500 million, a 30 percent increase over the same quarter in 2005. Keeping regulators at bay, particularly those whose efforts might slow down sales traffic, is a particularly high priority for the company.
Regulations are threatening to eBay for another reason as well. They set precedents. Once a law regulating eBay sellers takes hold in one state, other states are more likely to follow suit. And not only do licenses and other regulatory requisites increase the cost of selling items on eBay, but regulations may deter entrepreneurs who are thinking of introducing eBay-based businesses. Although regulations can help rein in con artists and other fraudsters masquerading as legitimate vendors on eBay — which is why most regulators say they favor strict licensing requirements — eBay sees its online community as self-regulating.
Analysts say the company has little room to maneuver when it comes to opposing outside oversight.
"EBay doesn't have a choice," said Ina Steiner, editor of Auctionbytes.com, an online newsletter. "This is such a tight-margin, price-sensitive business that if there are excessive regulations on sellers, it will affect eBay dramatically."
Accordingly, eBay fights regulators who try to categorize it as an auction house — despite the fact that for years eBay has used the word "auction" when describing what takes place on its site. In securities filings from 1998, the year eBay went public, it said that it "pioneered online person-to-person trading by developing a Web-based community in which buyers and sellers are brought together in an efficient and entertaining auction format." In the annual report last year, eBay said it provided the "infrastructure to enable online commerce in a variety of formats, including the traditional auction platform."
Yet eBay contends that such references are informal and says that auction laws — many of them written long before the Internet and eBay even existed — should not apply to its sellers.
Chris Donlay, an eBay spokesman, said the timed auctions on eBay were fundamentally different from "someone who holds a live auction in front of an audience until he has achieved the highest price possible for the client." Instead, as the company says on its Web site, eBay merely "offers an online platform where millions of items are traded each day."
THE headquarters of the Louisiana Auctioneers Licensing Board is a modest, three-room office in Baton Rouge with two employees and a dial-up Internet connection. The agency says its mission is to protect the public from "unqualified, irresponsible or unscrupulous individuals."
Late last year, the agency's seven-member board, concerned about possible abuses, decided that eBay trading assistants doing business in Louisiana needed licenses. Last summer, Jim Steele, a retired police officer who is the agency's investigator, started paying visits to eBay sellers around Louisiana who were registered as trading assistants.
Among those visited by Mr. Steele was Cheryl Brown, who runs a small eBay business out of her modest one-story home in Hammond, about an hour's drive east of Baton Rouge. Ms. Brown keeps an eclectic mix of wares — including shoes, belts and Black & Decker laser levels — piled around a bed in a spare back bedroom. Mr. Steele arrived at Ms. Brown's door last February and told her that she needed to get an auction-business license or face a cease-and-desist order.
Ms. Brown said she was "blown away" to find herself singled out. After all, she said, her sales averaged little more than $2,000 a month. Even so, she paid $300 for the license and an additional $250 for a surety bond the licensing board required.
Ms. Brown has yet to make a single sale as a trading assistant ("I don't want to sell people's old clothing," she said) and says she would rather not have to have a license. But, she said, she also enjoys the extra credential that a license gives her. Further, she said, she believes that her transactions on eBay are, in fact, auctions. "My opinion is that eBay is the one doing the auctioning," she said. "They're in control."
Ms. Brown's opinion is shared by Brian Leleux, an eBay seller at the opposite side of the state and the opposite end of the eBay sales revenue stream. Mr. Leleux employs nearly a dozen people and sells some $120,000 each month in recliners, inflatable air beds and other goods on eBay, making him an eBay "Platinum PowerSeller." He pays eBay about $12,000 every month in listing and transaction fees and an additional $2,100 to PayPal, eBay's automated payment subsidiary.
Mr. Leleux operates his business, MassageKing.com, in a large warehouse near Lafayette, and Mr. Steele visited him there earlier this year. Mr. Leleux had signed up with eBay as a trading assistant but done very few consignment sales. Still, he paid the state's fee and applied for the license. Like Ms. Brown, Mr. Leleux said that he did not want a license but that it did give him "one more bit of legitimacy," a notion that appealed to him. And he, too, says he believes that eBay is an auction house.
Still, not every eBay trading assistant was so compliant when Mr. Steele came calling. Barry Simpson has a computer equipment store in Morgan City and sells items on eBay as a sideline. Earlier this year, Mr. Simpson said, Mr. Steele visited him and insisted that he be licensed, even after Mr. Simpson said he would prefer to stop being a trading assistant. Mr. Simpson refused to get a license and complained to eBay, after which the company stepped up its legislative push in Louisiana.
"At that point, we decided we needed to act," said Mr. Donlay, the eBay spokesman.
Mr. Simpson says he believes that complying with certain regulations just does not add up. "If someone comes in and tells me I need a license and I'm selling something for someone else, and I don't do enough of that business, I'll quit," he said.
Unlike most entrepreneurs, Mr. Simpson has a well-heeled and influential corporation — as vigilant about its own interests as it is about his — ready to take on regulators. And eBay appears to be prepared to contest regulators in almost any state where it feels that its prerogatives are threatened.
In California last year, a bill that would have subjected eBay drop-off stores to restrictions now placed on pawnbrokers died quickly after eBay executives — including Meg Whitman, the chief executive — met with leaders of the Republican caucus of the Legislature. "The Republican votes we thought we had withered away," said Leland Y. Yee, the Democratic California assemblyman who sponsored the bill.
Last year, after eBay waged a protracted lobbying effort in Illinois, the state revised its laws to allow Internet auction sites to compete with licensed ticket brokers and sell tickets for more than their face value. New York and Florida have passed similar amendments after eBay lobbied for changes.
Auctioneering laws like those in Louisiana are another focus for eBay. In Maine and Tennessee, after eBay intervened, laws were changed to exempt Internet auctions from licensing requirements.
All of this is just a matter of common sense, according to some people involved in the debate. Ms. Steiner, the newsletter editor, says that many eBay sellers do their trading part time or in addition to another job. "If they are overregulated by licensing fees," she said, "they will abandon their eBay business." For its part, eBay is leaving little to chance.
Over the last eight years, eBay has built a stable of local lobbyists in 25 states. Those lobbyists — who work on retainers that can reach $10,000 a month, according to state lobbying registration documents — have also made contributions to individual politicians who sponsor bills favorable to eBay. For example, Mr. Cowart's political action committee in Louisiana contributed $2,000 to Mr. Ellington in 2005. And eBay lobbyists in Illinois have contributed thousands of dollars to politicians who supported the ticket-scalping bill.
EBay combines its politics-as-usual approach with more creative grass-roots tactics. It keeps its membership informed about regulatory issues as soon as they crop up, using mass e-mail messages and a year-old Web-based initiative called "eBay Main Street," which sends out "legislative alerts" and provides letters that users can send to government officials. Bowing to the traditions of ward politicos adept at turning out the vote, eBay routinely summons its sellers and sends them on personal visits to statehouses around the country to meet with legislators.
"What better way to get a response than to get to the grass roots, which is eBay's members," said Kathy Greer, an eBay seller in New Hampshire, where there has been continuing debate about regulating eBay sellers. "Let them go out and fight your battle."
WHEN eBay sent e-mail messages in April to its Louisiana members to tell them their livelihoods could be threatened by the state's intention to require licenses — and urged them to take action — Ms. Wilks, the licensing agency's sole administrator, was besieged with phone calls and e-mail messages from angry eBay sellers. After she explained that the board intended to require that only about 460 registered eBay trading assistants be licensed, the hubbub died down.
But some sellers who joined in the campaign say they felt that eBay had misled them by making it appear that the proposed regulations were more sweeping. "They approached it in a very underhanded way," said Stephen Dille, a Baton Rouge accountant who sells items intermittently on eBay but received the alert and sent an e-mail message to Ms. Wilks. "I always thought of them as a good company, but now I'm questioning their culture, and their ethics."
Anna Dow, a lawyer for the Louisiana licensing board, put it more forcefully. "They're being deliberately misrepresentational of what's going on," she said.
For their part, eBay officials say that the licensing board has repeatedly refused to give the company a clear answer on whom it plans to regulate, so it has sent e-mail messages to a wide variety of recipients. EBay's anti-regulatory stance extends to storefront drop-off centers, which have been proliferating rapidly around the country. Vendors welcome the company's help.
Debbie Gordon, the owner of Snappy Auctions, a nationwide chain of eBay drop-off stores that is based in Nashville, says she believes that all eBay consignment stores should follow certain practices to make sure that customers are protected. But she was outraged two years ago when Tennessee regulators told her that she would have to get an auctioneer's license and attend a week of auctioneering school.
Ms. Gordon paid $700 for a license and other fees and spent what she called "five days I'll never get back" at a training course for auctioneers. "Ninety-nine percent of the course had nothing to do with our business," she recalled. "It was about traditional auctioneering, cattle and land and firearms."
Soon after a local newspaper publicized Ms. Gordon's experience, eBay stepped in. It convinced lawmakers that not only did outfits like Ms. Gordon's have no relationship to hog calling, but also that because of the timed nature of an eBay auction, the transactions were altogether different and thus not subject to auctioneering laws.
"We fundamentally believe that auctioneering laws are not applicable, are detrimental and are being used to harm competition," said Mr. Cohen of eBay in an interview. "They protect entrenched incumbents rather than enhancing competition, consumer choice and entrepreneurial spirit."
BUT Ms. Wilks of the Louisiana licensing board says that if trading assistants on eBay are not required to have licenses, people like Linda Williams will have nowhere to turn. Earlier this year, Ms. Williams, who lives near Baton Rouge, gave an antique couch to someone to sell on consignment on eBay, she said. The couch was sold, Ms. Williams said, but she did not see a penny of the proceeds.
Ms. Williams called the licensing board, which found that the seller was an auctioneer who was already facing a separate investigation. A bank seized his assets — which included a warehouse filled with items he had taken on consignment from dozens of people, including Ms. Williams — and his license was revoked, according to Ms. Wilks and Ms. Dow. "They were very helpful, and told me to call any time," said Ms. Williams of her experience with the licensing board. "If it wasn't for them, there would be nothing I could do."
EBay executives say that stories like this do not mean that more laws are required. They point out that law enforcement agencies are set up to investigate Internet fraud. "Regulators regulate — that is their job," Mr. Cohen said. "But we have an obligation as a company to protect our community."
Shortly after the first legislative hearing on Senate Bill 642 in Louisiana, eBay sent out another e-mail alert, this time to its biggest sellers in the state. The company asked sellers to attend a meeting late last month to update them on the bill and to brief them on other potential impediments to their businesses. Some 50 sellers from around the state attended the meeting at a Baton Rouge Marriott. Michelle Peacock, eBay's director of state government relations, flew in from California to join Mr. Cowart, the lobbyist. Large colorful billboards outlining "barriers to e-commerce" decorated the room.
Ms. Peacock discussed the proposed revisions to Louisiana's auctioneer statute and talked about a bill supporting the elimination of restrictions on the resale of tickets on the Internet. After the meeting, several attendees piled onto a shuttle bus that eBay provided and drove to the Capitol to talk with their state representatives about Senate Bill 642.
The next day, the Commerce Committee of the Louisiana House of Representatives took up the bill, which the State Senate had already passed. The bill received unanimous support in the committee. Mr. Ellington, the state senator, said in an interview last week that he expected to see the bill pass the full House this week — without a hitch.
Iris Smalbrugge contributed reporting for this article.