Report: U.S. bracing for possible downgrade from S&P; Update: “Expecting and preparing”; Update: S&P bungles numbers? Update: Calculations off by trillions

posted at 4:59 pm on August 5, 2011 by Allahpundit

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Just a headline right now at CNBC, but stand by. Business Insider heard a rumor about this before lunch but discounted it when they couldn’t substantiate it with analysts. There must be something to it, though; it’s unthinkable that CNBC would toss this grenade without something very solid to support the story. Needless to say, the fact that news is breaking within an hour after the market closed suggests that they held it back to avoid a panic and to let investors digest it over the weekend.

A downgrade, not a default, was always the real worry during the debt-ceiling saga. Moody’s and Fitch reaffirmed the U.S. as AAA (albeit with a negative outlook) a few days ago but S&P was conspicuously silent. Negotiators on the Hill believed early on that the debt package had to reduce the deficit by $4 trillion to avoid a downgrade, but S&P’s president told a congressional committee on July 27 that it wasn’t true and that some alternate plans would be acceptable.

Updates are coming. While we wait for details, read this NYT piece from last weekend speculating that the economic fallout from a downgrade would actually be modest since, after all, treasuries are still comparatively safer than any other investment. The fact that Moody’s and Fitch disagree with S&P will soften the blow too. And frankly, if there’s anything that can force the Super Committee and Congress to get serious about entitlement reform, this may be it. Or am I just putting lipstick on a very smelly pig? We’ll know soon!

Update: A government source tells Tapper they’re “expecting and preparing” for a downgrade to either AA+ or AA. Unbelievable. Here’s the spin:

Officials reasons given will be the political confusion surrounding the process of raising the debt ceiling, and lack of confidence that the political system will be able to agree to more deficit reduction. A source says Republicans saying that they refuse to accept any tax increases as part of a larger deal will be part of the reason cited.

Of course, of course. Any rather large elephants in the room missing from that litany of excuses? Here’s a hint: It rhymes with “shmentitlements.”

Update: CNBC says the downgrade could come as early as this evening. In spite of everything, I’ve never really believed that America is in decline because, well, America simply doesn’t decline. Tonight I believe it.

Update: Lots of tough talk this week from Democrats about the Super Committee, with Reid hinting that they might walk away if Republicans don’t appoint anyone willing to agree to tax hikes and Pelosi promising much harder hardball during the next round of negotiations. Let’s see what they say now.

Update: Karl from the Greenroom e-mails to remind me that S&P’s track record is a bit of a joke given that they failed to see the subprime crisis coming. True enough. Last week Zachary Karabell at the Daily Beast wondered why anyone cares what S&P thinks:

To those who say that it’s unfair to blame the messenger—and that on the whole, these agencies are simply calling it as they see it and drawing attention to real risks—there is the pesky fact that they have a legacy of either being chronically late (the mortgage crisis) or then too eager to downgrade (overreaction to the mortgage crisis). And even if they were as good as they could be, they are still simply three companies with a few hundred unelected people making calls that drive the entire global financial system.

There is one last glaring question: should these agencies even be rating a sovereign entity such as the United States? The dollar is now a global currency of commerce, and U.S. Treasuries are a form of safe-haven currency. It’s not as if the world is unaware of the economic issues of the U.S. The Chinese don’t need Moody’s to tell them about the risks of holding a trillion dollars of U.S. bonds. Shouldn’t the “creditworthiness” of the United States, or the viability of a European debt plan for Greece, be left to the determination of investors large and small worldwide along with the governments of those countries and their electorates? The success or failure of their plans will be evident soon enough, and subject to the thumbs up or down of the people, without the ratings agencies piling on or offering a view.

Mark Steyn has the counterargument to that:

Nobody in Greece, Portugal, Spain, or Ireland is talking about “out years” and exciting plans for spending cuts in 2020. They’re getting on with it now — and they’re still being downgraded.

By contrast, both U.S. political parties are playing croquet on the lawn in August 1914 — and the ratings agencies are stringing along with them. Whatever the comparisons of debt-to-GDP ratios between Greece, Ireland, and the U.S., the actual hard dollar amount involved here is of an entirely different order. The Boehner plan tells us that real fiscal discipline is impossible within the U.S. political system. At some point, the ratings guys have to call them on it — or render their system meaningless.

Right. What’s ominous about the S&P downgrade isn’t that it comes out of left field, haphazardly, but that it doesn’t. Given the long-term outlook for U.S. sovereign debt even after this week’s deal, why wouldn’t they downgrade us? Why wouldn’t anyone else? What have you seen over the past year that makes you think America’s political class is remotely equal to the task of dealing with this problem before we have a Greece on our hands?

Update: Tapper updates his post with quotes from another government official who says they’re not sure when — or even if — the downgrade will come.

Update: It goes without saying that between the downgrade and polling showing 60+% support for tax increases on the rich, the GOP will be under intense pressure during the Super Committee phase to add some new revenue to the package. That doesn’t necessarily mean tax hikes; it does necessarily mean tax reform, which might involve lower rates but many fewer loopholes. Krauthammer floats a few ideas about that today, starting with getting rid of the mortgage interest deduction.

Update: Greg Pollowitz of NRO notes that, if the downgrade happens, the U.S. will technically be a greater credit risk than Britain, Germany, and France. Given the debt contagion spreading in Europe first from Greece and now Italy and Spain, does anyone seriously believe that’s true?

Update: No idea yet if this is the truth or White House spin, but if S&P actually botched its analysis on a matter as explosive and closely watched as this, then whatever’s left of their credibility is gone for good:

A third official says that S&P made a “serious mistake” in its analysis, “based on flawed math and assumptions,” so the Obama administration is pushing back. But even though “S&P has acknowledged its numbers are wrong, it’s unclear what they’re going to do.,” the official said.

S&P refused to comment.

Update: You’ve got to be kidding: “S+P was set to downgrade. Obama admin. said their analysis off by ‘trillions’. Now S+P revising figures. Downgrade still poss.”

Update: Still waiting for S&P’s side of this, but if the White House was lying in accusing them of a trillion-dollar error, you’d expect vehement pushback. Instead, silence.

Standard & Poor’s told the U.S. government Friday afternoon that it was preparing to downgrade the U.S.’s triple-A credit rating but U.S. officials notified the S&P that they had made a mathematical error that was off by “trillions,” an administration source told CNBC.

Apparently the error was in the calculation of the U.S. debt-to-GDP ratio over time and was based on a misreading of what the correct congressional baseline was…

An S&P spokesman declined to comment on any possible plans for a downgrade or statement later Friday.

If it’s true, they’ll never recover. They’ve barely recovered from the subprime mess as it is. Then again, it could be that their math is fine and the White House is simply challenging them on a conceptual point, much like how Dems and the GOP argued this week over what tax baseline is appropriate for the Super Committee. In that case it wouldn’t be a math error, it’d be an accounting dispute.

A question from Megan McArdle, though: Who leaked this report? She wonders if the White House might have done it “just to get people yelling at the GOP,” but if that were true, why is the White House pressing so hard to get S&P change its numbers? It’s hard to yell at the GOP when the math is wrong.

Update: The Journal describes it as a “mathematical error” and claims S&P copped to it privately:

After two hours of analysis, Treasury officials discovered that S&P officials had miscalculated future deficit projections by close to $2 trillion. It immediately notified the company of the mistakes.

S&P officials later called administration officials back to say they agreed about the mistakes, though they didn’t say whether it would affect the rating. White House officials remained waiting Friday evening to see what the company would do…

A downgrade by S&P could serve as a psychological haymaker for an American economic recovery that can’t find much traction. It could lead to the prompt downgrades of numerous companies and states, driving up their costs of borrowing. Policymakers are also feeling anxious about the hidden icebergs that the move could suddenly reveal.

Imagine if this had happened during trading hours.

Report: U.S. bracing for possible downgrade from S&P; Update: “Expecting and preparing”; Update: S&P bungles numbers? Update: Calculations off by trillions

posted at 4:59 pm on August 5, 2011 by Allahpundit
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Just a headline right now at CNBC, but stand by. Business Insider heard a rumor about this before lunch but discounted it when they couldn’t substantiate it with analysts. There must be something to it, though; it’s unthinkable that CNBC would toss this grenade without something very solid to support the story. Needless to say, the fact that news is breaking within an hour after the market closed suggests that they held it back to avoid a panic and to let investors digest it over the weekend.

A downgrade, not a default, was always the real worry during the debt-ceiling saga. Moody’s and Fitch reaffirmed the U.S. as AAA (albeit with a negative outlook) a few days ago but S&P was conspicuously silent. Negotiators on the Hill believed early on that the debt package had to reduce the deficit by $4 trillion to avoid a downgrade, but S&P’s president told a congressional committee on July 27 that it wasn’t true and that some alternate plans would be acceptable.

Updates are coming. While we wait for details, read this NYT piece from last weekend speculating that the economic fallout from a downgrade would actually be modest since, after all, treasuries are still comparatively safer than any other investment. The fact that Moody’s and Fitch disagree with S&P will soften the blow too. And frankly, if there’s anything that can force the Super Committee and Congress to get serious about entitlement reform, this may be it. Or am I just putting lipstick on a very smelly pig? We’ll know soon!

Update: A government source tells Tapper they’re “expecting and preparing” for a downgrade to either AA+ or AA. Unbelievable. Here’s the spin:

    Officials reasons given will be the political confusion surrounding the process of raising the debt ceiling, and lack of confidence that the political system will be able to agree to more deficit reduction. A source says Republicans saying that they refuse to accept any tax increases as part of a larger deal will be part of the reason cited.

Of course, of course. Any rather large elephants in the room missing from that litany of excuses? Here’s a hint: It rhymes with “shmentitlements.”

Update: CNBC says the downgrade could come as early as this evening. In spite of everything, I’ve never really believed that America is in decline because, well, America simply doesn’t decline. Tonight I believe it.

Update: Lots of tough talk this week from Democrats about the Super Committee, with Reid hinting that they might walk away if Republicans don’t appoint anyone willing to agree to tax hikes and Pelosi promising much harder hardball during the next round of negotiations. Let’s see what they say now.

Update: Karl from the Greenroom e-mails to remind me that S&P’s track record is a bit of a joke given that they failed to see the subprime crisis coming. True enough. Last week Zachary Karabell at the Daily Beast wondered why anyone cares what S&P thinks:

    To those who say that it’s unfair to blame the messenger—and that on the whole, these agencies are simply calling it as they see it and drawing attention to real risks—there is the pesky fact that they have a legacy of either being chronically late (the mortgage crisis) or then too eager to downgrade (overreaction to the mortgage crisis). And even if they were as good as they could be, they are still simply three companies with a few hundred unelected people making calls that drive the entire global financial system.

    There is one last glaring question: should these agencies even be rating a sovereign entity such as the United States? The dollar is now a global currency of commerce, and U.S. Treasuries are a form of safe-haven currency. It’s not as if the world is unaware of the economic issues of the U.S. The Chinese don’t need Moody’s to tell them about the risks of holding a trillion dollars of U.S. bonds. Shouldn’t the “creditworthiness” of the United States, or the viability of a European debt plan for Greece, be left to the determination of investors large and small worldwide along with the governments of those countries and their electorates? The success or failure of their plans will be evident soon enough, and subject to the thumbs up or down of the people, without the ratings agencies piling on or offering a view.

Mark Steyn has the counterargument to that:

    Nobody in Greece, Portugal, Spain, or Ireland is talking about “out years” and exciting plans for spending cuts in 2020. They’re getting on with it now — and they’re still being downgraded.

    By contrast, both U.S. political parties are playing croquet on the lawn in August 1914 — and the ratings agencies are stringing along with them. Whatever the comparisons of debt-to-GDP ratios between Greece, Ireland, and the U.S., the actual hard dollar amount involved here is of an entirely different order. The Boehner plan tells us that real fiscal discipline is impossible within the U.S. political system. At some point, the ratings guys have to call them on it — or render their system meaningless.

Right. What’s ominous about the S&P downgrade isn’t that it comes out of left field, haphazardly, but that it doesn’t. Given the long-term outlook for U.S. sovereign debt even after this week’s deal, why wouldn’t they downgrade us? Why wouldn’t anyone else? What have you seen over the past year that makes you think America’s political class is remotely equal to the task of dealing with this problem before we have a Greece on our hands?

Update: Tapper updates his post with quotes from another government official who says they’re not sure when — or even if — the downgrade will come.

Update: It goes without saying that between the downgrade and polling showing 60+% support for tax increases on the rich, the GOP will be under intense pressure during the Super Committee phase to add some new revenue to the package. That doesn’t necessarily mean tax hikes; it does necessarily mean tax reform, which might involve lower rates but many fewer loopholes. Krauthammer floats a few ideas about that today, starting with getting rid of the mortgage interest deduction.

Update: Greg Pollowitz of NRO notes that, if the downgrade happens, the U.S. will technically be a greater credit risk than Britain, Germany, and France. Given the debt contagion spreading in Europe first from Greece and now Italy and Spain, does anyone seriously believe that’s true?

Update: No idea yet if this is the truth or White House spin, but if S&P actually botched its analysis on a matter as explosive and closely watched as this, then whatever’s left of their credibility is gone for good:

    A third official says that S&P made a “serious mistake” in its analysis, “based on flawed math and assumptions,” so the Obama administration is pushing back. But even though “S&P has acknowledged its numbers are wrong, it’s unclear what they’re going to do.,” the official said.

    S&P refused to comment.

Update: You’ve got to be kidding: “S+P was set to downgrade. Obama admin. said their analysis off by ‘trillions’. Now S+P revising figures. Downgrade still poss.”

Update: Still waiting for S&P’s side of this, but if the White House was lying in accusing them of a trillion-dollar error, you’d expect vehement pushback. Instead, silence.

    Standard & Poor’s told the U.S. government Friday afternoon that it was preparing to downgrade the U.S.’s triple-A credit rating but U.S. officials notified the S&P that they had made a mathematical error that was off by “trillions,” an administration source told CNBC.

    Apparently the error was in the calculation of the U.S. debt-to-GDP ratio over time and was based on a misreading of what the correct congressional baseline was…

    An S&P spokesman declined to comment on any possible plans for a downgrade or statement later Friday.

If it’s true, they’ll never recover. They’ve barely recovered from the subprime mess as it is. Then again, it could be that their math is fine and the White House is simply challenging them on a conceptual point, much like how Dems and the GOP argued this week over what tax baseline is appropriate for the Super Committee. In that case it wouldn’t be a math error, it’d be an accounting dispute.

A question from Megan McArdle, though: Who leaked this report? She wonders if the White House might have done it “just to get people yelling at the GOP,” but if that were true, why is the White House pressing so hard to get S&P change its numbers? It’s hard to yell at the GOP when the math is wrong.

Update: The Journal describes it as a “mathematical error” and claims S&P copped to it privately:

    After two hours of analysis, Treasury officials discovered that S&P officials had miscalculated future deficit projections by close to $2 trillion. It immediately notified the company of the mistakes.

    S&P officials later called administration officials back to say they agreed about the mistakes, though they didn’t say whether it would affect the rating. White House officials remained waiting Friday evening to see what the company would do…

    A downgrade by S&P could serve as a psychological haymaker for an American economic recovery that can’t find much traction. It could lead to the prompt downgrades of numerous companies and states, driving up their costs of borrowing. Policymakers are also feeling anxious about the hidden icebergs that the move could suddenly reveal.

Imagine if this had happened during trading hours.

Palin knocks it out of the park

posted at 10:05 am on August 9, 2011 by J.E. Dyer
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Few people in the public eye have said anything useful about the recent unpleasantness with the national debt and the national credit rating.  The president hasn’t.  The vice president hasn’t.  Surprisingly few of the declared Republican candidates have.  The MSM haven’t.  They’re busy trying to make the expression “Tea Party downgrade” go viral.

Indeed, at this hour of reckoning, with the Dow plunging and markets in turmoil around the world, the MSM have achieved another playground-taunt triumph with the silly Newsweek cover featuring an unflattering photo of Michelle Bachmann.  These people seem to have no sense of proportion, no judgment, no recognition that things have become serious and the time for sophomoric media jabs is past.

Who cares how they can make Bachmann look on a magazine cover?  The tabloids demonstrate several times a year that they can make the world’s most beautiful women look like something from the back of the refrigerator, if they photograph them in bad light with a telephoto lens.  The Bachmann cover is the equivalent of a slam-book entry, about as intelligent as holding your nose and chanting “You smell!” at a classmate.  Ridicule is the cheapest thing there is – and in politics, it’s usually deployed to shift the focus from a needed debate to specious topics and emotion.  I’d call it a reversion to high school, but it would be an insult even to middle-schoolers to pin it on their age group.

Meanwhile, Marco Rubio and Paul Ryan have had good, inspiring, on-target things to say about the US fiscal crisis.  Michelle Bachmann has had good things to say.  John Bolton had an important piece making the case that national security is inextricably linked with fiscal security, a much-needed point in the context of the recent debate.

But Sarah Palin came through today with a Facebook post that strikes the right tone and is at once simple, direct, and comprehensive.  It doesn’t rail at past mistakes, nor does it come across as a raised-voice, you’ve-got-to-get-this-people communication.  Palin takes it for granted – with refreshing common sense – that we are in a crisis, its features are obvious, and the task now is to deal with it, not continue to argue whether it’s really a crisis or how big it is or whose name we can pin on it.

She makes no bones about the significance of the problem we face.  I am particularly impressed with her point that if we don’t square ourselves away, the specter hangs over us of IMF staffers showing up on our doorstep with China and France and Germany arrayed behind them, ready to throw folders on a desk and start telling us how much we can spend on cable TV and incidentals each month.  Whether things would really play out for the US as they are playing out for Greece and Ireland is a valid question, but Palin is quite correct that the pitched confrontation is on the horizon now, as it was not six weeks ago – and she has the courage to face that possibility head-on.  It’s not pleasant to mention it, but it’s the right thing to do.

The last third of Palin’s post is devoted to laying out what we need to do.  Grow the economy by releasing the regulatory clamps on it, starting with the energy sector.  Cut spending and reform entitlements.  She doesn’t pretend the latter would be easy, but she faces head-on the fact that it is inescapably necessary.  I urge you to read her post for the discussion of particulars.  It is material and convincing without being in the weeds.

The piece is positive and encouraging for its forthrightness.  There is nothing “clever” to be done in this situation; it’s all straightforward.  The US federal government has to cut spending and let the economy grow, even if that means breaking the stranglehold of unions on the public trough and overruling advocacy groups and government bureaucrats who don’t want the economy to grow.  Pretending that the federal budget is too complex to be governed by the ordinary rules of accounting – or that the US is too special to be limited by the ordinary definition of fiscal solvency – is a dodge, not a sign of insight or expertise.

Palin focuses like any good executive on the big picture.  We have to cut spending and get government out of the economy’s way so it can start pumping out revenues again.  These things are increasingly obvious to everyone, and moreover, they constitute a plan.  Talking ourselves into corners about other, tangential things isn’t even interesting any more.  It feels so wrong that it’s hard to watch anyone’s news program at the moment: no one seems to be talking about what matters.

What is interesting is how few in our national political life have put the case together, as Palin has, without temporizing or bloviating.  I haven’t heard anyone else do what she does with this post.  She acknowledges the actual, enormous scope of the problem, envisions a solution, and outlines what to do to achieve it, with encouragement that it can be done.  It is sad and a little frightening that so many Americans have become unable to see this for what it is:  leadership.  Almost everyone else is focused more narrowly, on one aspect of the problem or another, and a good few commentators don’t seem to even have the vocabulary or the mental infrastructure to address the problem itself; they can only express opinions about the impossibility of the politics surrounding it.

It is the opposite of stupid to recognize the problem’s stark and simple outlines when all around you are swinging blindfolded at piñatas.  We spend too much, and we suppress economic growth and revenues with regulation.  Palin articulates that clearly.  Her ability to reach out directly through social media, and put her case in her terms, is a net positive for our current political climate.  She remains one of the best reasons to not let the MSM dictate our ideas and preferences to us.

J.E. Dyer’s articles have appeared at The Green Room, Commentary’s “contentions,” Patheos, The Weekly Standard online, and her own blog, The Optimistic Conservative.

This post was promoted from GreenRoom to HotAir.com.
To see the comments on the original post, look here.

London rioter: “We’re just showing the rich people that we can do what we want”

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Two clips to usher in night four of Droogfest 2011. The common thread is that in both cases you’re watching rampaging cretins behave in a quasi-civilized manner. In the first, two giggly girls chat calmly with the BBC about the “mad fun” they’re having; in the second, rioters handle a wounded boy gingerly … before proceeding to rob him. Maybe we can let the lot of them off easy with a modified version of the Ludovico technique.

If you missed it in Headlines this morning, read Brendan O’Neill’s essay on the riots as a byproduct of welfare-state decay. At the Corner, Iain Murray elaborates:

    Another left-wing friend of mine in the UK has another interesting theory — that the particular targeting of electronics and clothes shops represents an explosion of consumerism. Stay with me, because I think he has a point and I’d like to explain why. Much of the British underclass has had easy access to credit over the past decade or so — and why not, when they are on a secure income stream of state benefits — and they have spent this for the most part on TVs, video games, and “chav” fashion. That easy credit — which I should emphasize was encouraged by the loose monetary policy of Gordon Brown and Tony Blair — has now dried up, so they are looking to take for free what they previously got for nominal sums. There is more evidence for that conclusion in this BBC recording of two girls saying that the riots were about taking what they wanted, for free…

    I think what we are seeing in Britain is a conflation of two liberal dreams — that of the 1960s, in which parenting and tradition went out the window, and that of the 2000s, in which self-help was replaced by easy credit, benefits, and an all-mighty “health and safety” bureaucracy — together with the unfinished nature of the Thatcher revolution. Mrs. T enabled economic Thatcherism but was unable to finish the project of what I termed social Thatcherism, whereby a free society recognized the importance of what once were called manners.

    The result is a feral underclass without any understanding of tradition from right or left.

O’Neill ends by laying into British cops for their paralysis, a ubiquitous critique in stories about the riots after three days of window-smashing. There are a lot of reasons for that. The police have in fact held back, only now considering water cannons and plastic bullets after millions in damage. The prime minister and the mayor of London were both on vacation when the riots began and Scotland Yard’s leadership recently resigned over the phone-hacking scandal, so for several days there’s been no one in charge. The Home Secretary, who was also on vacation, is prone to saying moronic things like, “The way we police in Britain is not through use of water cannon, the way we police in Britain is through consent of communities,” even as young degenerates ransack local communities without their consent. And of course it’s comforting in a moment of chaos to focus on the failings of the police, who are, unlike the rioters (oops, I mean “protesters”), accountable to the public. Build a better force and in theory you ensure this can’t happen again. In theory:

    Business owners accused police of adopting a softly-softly approach which left their shops and businesses vulnerable to attack by baying mobs.

    While police were criticised in some quarters for being far too slow to get to riot scenes, officers were accused by shopkeepers in Hackney of standing just yards away from looters as windows were smashed and armfuls of goods were scooped up…

    Firearms units trained to use the rubber bullets are braced in case they are needed. It would be the first time ever the baton rounds have been used in British disturbances.

    Mr Kavanagh said Scotland Yard was ‘not going to throw 180 years of policing with the community away’ as the prospect of using the ammunition for the first time at a British disturbance was raised.

Imagine how bad things could get if they did that. There might be riots.

There are many ways to measure the awfulness of what’s happening but chew on these two while you watch. According to residents in Birmingham, looters are literally stealing the clothes off of people’s backs, stopping them and forcing them to strip. The Daily Mail has a too-bad-to-check photo via Twitter. Beyond that, in the Middle East and elsewhere, there’s gloating going on both by authoritarian governments, who are mocking the Brits for not liquidating all of their troublemakers on the spot, and by the victims of those authoritarian governments, who are mocking the rioters for turning their “protests” into a pretext to steal DVD players. All of which is to say, this is a complete fiasco by any yardstick.

Onto the videos. I’ve included a third (audio) clip below as a little bonus; yes, that is indeed Hulk Hogan’s voice you’re hearing. Click the image to watch.

AT&T customers try to block merger with T-Mobile

Talk about a David and Goliath story. The New York-based law firm of Bursor & Fisher is working with some AT&T customers in the hopes of blocking AT&T's proposed $39 billion acquisition of T-Mobile.
AT&T to buy T-Mobile

The firm is working on behalf of a small group of AT&T customers to demand arbitration from the company, which is the second largest wireless phone company in the U.S. and one of the biggest political contributors in the country. In its arbitration filings, Bursor & Fisher alleges that the deal between AT&T and T-Mobile would violate the Clayton Antitrust Act and harm competition in the wireless market. The firm has already signed up 11 AT&T customers, and it's soliciting more on its Web site: FightTheMerger.com. It filed the first arbitration demand Thursday in a 236-page document.

The main argument in the arbitration request is that the merger will lead to higher prices and diminished service, which would harm consumers. The customers are asking that the merger be blocked or at the very least that certain requirements be put on the merger, such as AT&T divesting some wireless spectrum and stopping its practice of entering into exclusive contracts with handset makers.

The Department of Justice and the Federal Communications Commission are already reviewing the merger. It's expected to take the agencies a year to complete their evaluation of the merger. The Justice Department in particular will be looking at potential antitrust claims while the FCC's main obligation is to ensure that the merger will serve the public interest, since the wireless licenses that AT&T and T-Mobile hold are regulated by the FCC. The FCC said this week that it has stopped the clock on its review as it obtains additional information from AT&T.

Scott Bursor, a partner at Bursor & Fisher, said his firm expects to file hundreds of these cases. While arbitration is typically used to dispute individual complaints, such as an erroneous charge on a bill, Bursor said he thinks the process can also be used for antitrust disputes, since class-action lawsuits are not available to AT&T customers.

"The law gives private parties the opportunity to sue in antitrust cases," Bursor said. "So we are using this arbitration process to help consumers, who are barred from filing class-action suits."

In its contracts, AT&T prohibits customers from suing the company directly or as part of a class-action lawsuit. A U.S. Supreme court decision in April upheld this practice. Instead, consumers must use an arbitration process. But consumers are also prohibited from filing arbitration as a group or class and instead must file claims individually, which is why Bursor has said the company will file hundreds of these claims.

And because each arbitration request is assigned to a separate judge, each case will be evaluated independently, which in theory could increase the chances of a beneficial outcome for the customers filing the complaint.

AT&T said in a statement that the arbitration process is not intended to hear class-action cases, such as the ones Bursor plans to file.

"The claims made by the Bursor & Fisher Law Firm are completely without merit," the company's statement said. "An arbitrator has no authority to block the merger or affect the merger process in any way. Our arbitration provision allows customers to resolve their individual disputes with AT&T in a prompt and consumer-friendly manner."

Bursor's firm has worked with wireless customers in the past on class-action suits over early-termination fees. His firm also sued AT&T over mobile-handset exclusivity. Michael Aschenbrener of Aschenbrener Law in Chicago, who has also brought class-action suits against wireless companies in the past, said that using the arbitration process to air antitrust complaints is unusual. So it's difficult to say if it will be effective. But he said at the very least it might get these consumers' concerns heard.

"Arbitration is a new approach in this context but necessary in light of recent anticonsumer Supreme Court precedent," he said. "Whether these consumers will be successful remains to be seen, but this demonstrates that consumers want to be heard and will be heard--no matter how much the courts and big businesses try to silence them."

These AT&T consumers involved in the arbitration are not the only ones opposed to AT&T's plan to buy T-Mobile. Sprint Nextel has also expressed its opposition. And this week, Senator Herb Kohl, who heads up a subcommittee on antitrust matters, asked regulators to block the deal.

Some states are also taking a closer look at the merger. California's Public Utility Commission is examining it. New York Attorney General Eric Schneiderman announced in March that his office would "undertake a thorough review of AT&T's acquisition of T-Mobile" and analyze the merger for "potential anticompetitive effects on consumers and businesses."

Meanwhile, AT&T has also garnered support from a number of groups. There are already governors in 26 states that have signed on to support the merger. And 76 members of Congress have also expressed their support for the merger.

AT&T said earlier this week during its earnings call that it is confident it will get the approval for the merger. And the company said it expects the deal to close in the first quarter of next year.

DOJ takes swipe at EFF over encryption passphrases

The U.S. Department of Justice took a thinly veiled swipe at an online civil liberties group that's arguing a Colorado woman can't be forced to decrypt her laptop for police inspection.

In a legal brief filed yesterday in what is likely to be a precedent-setting case, the Justice Department claimed that the Electronic Frontier Foundation had previously agreed that being forced to type in your passphrase was legal and did not violate Americans' rights to self-incrimination.

Prosecutors are hoping to convince a federal judge to order Ramona Fricosu, accused of running a mortgage scam, to decrypt an encrypted laptop that police found in her bedroom during a raid of her home. Fricosu has been charged with bank fraud, wire fraud, and money laundering as part of an alleged attempt to use falsified court documents to illegally gain title to homes near Colorado Springs.
EFF staff attorney Hanni Fakhoury

EFF staff attorney Hanni Fakhoury
(Credit: EFF)

EFF's Know Your Rights guide, prosecutors said, warns the public that "a grand jury or judge may still order you to disclose your data in an unencrypted format under certain circumstances."

The upshot, they said, is that "EFF's 'Know Your Rights' publication correctly states that a judge may properly order the production of unencrypted data consistent with the Fifth Amendment." (The Fifth Amendment broadly protects Americans' right to remain silent--see CNET's Q&A with defense attorney Phil Dubois.)

EFF staff attorney Hanni Fakhoury, a former public defender in San Diego, wrote the guide. Fakhoury told CNET today that the Justice Department isn't exactly describing his work fairly:

    This (the guide) is simply stating the obvious: whether the Fifth Amendment privilege against self-incrimination applies is fact-dependent. EFF believes that under the facts presented in the Fricosu case, the privilege applies and prevents the government's attempt to force Ms. Fricosu to decrypt the laptop. Under a different set of facts, the outcome might be different; something that's true in most areas of the law.

    This is obviously a situation in which the government is trying to do something it has rarely tried to do before, so the courts are just starting to consider it. That is why EFF got involved in the first place, to assist the court by providing it with what we think the law should be. I'm flattered the government believes the guide I wrote is legal precedent, and I look forward to the day when that's actually the case.

The Justice Department also argues that Fricosu's Fifth Amendment rights are effectively nullified because the government obtained the laptop through a search warrant, not a grand jury subpoena.

"Evidence obtained through search warrants does not implicate the self-incrimination clause because search warrants do not compel individuals to make statements..." prosecutors said. "The applied-for order would use as the source of evidence only material seized with a warrant; it would not make use of any compelled statements."

Prosecutors have stressed that they don't actually require the passphrase itself, meaning Fricosu would be permitted to type it in and unlock the files without anyone looking over her shoulder. They say they're not demanding "the password to the drive, either orally or in written form," and that they know the laptop is hers because of a legally intercepted phone call she made to someone in prison.

Competing legal analogies: What's a PGP passphrase like?
The question of whether criminal defendants can be legally compelled to cough up their encryption passphrase remains an unsettled one, with law review articles for at least the last 15 years arguing the merits of either side of the issue. A U.S. Justice Department attorney wrote an article in 1996, for instance, titled "Compelled Production of Plaintext and Keys."

Much of the debate has been over which of two analogies comes closest to the truth. Prosecutors tend to view PGP passphrases as akin to someone possessing a key to a safe filled with incriminating documents. That person can, in general, be legally compelled to hand over the key. Other examples include the U.S. Supreme Court saying that defendants can be forced to provide fingerprints, blood samples, or voice recordings.

On the other side are civil libertarians citing other Supreme Court cases that conclude Americans can't be forced to give "compelled testimonial communications" and extending the legal shield of the Fifth Amendment to encryption passphrases. Courts already have ruled that such protection extends to the contents of a defendant's minds, so why shouldn't a passphrase be shielded as well?

While the U.S. Supreme Court has not confronted the topic, a handful of lower courts have.

In March 2010, a federal judge in Michigan ruled that Thomas Kirschner, facing charges of receiving child pornography, would not have to give up his password. That's "protecting his invocation of his Fifth Amendment privilege against compelled self-incrimination," the court ruled (PDF).

A year earlier, a Vermont federal judge concluded that Sebastien Boucher, who a border guard claims had child porn on his Alienware laptop, did not have a Fifth Amendment right to keep the files encrypted.

Update 3:15 p.m. PT: I've heard back from Phil Dubois, Fricosu's criminal defense attorney. Dubois' position remains, he said in an e-mail message:

    That to force my client (assuming that she has the ability) to decrypt the hard drive would be an unreasonable and therefore unconstitutional search and so a Fourth Amendment violation; and

    That to force her to decrypt the drive would not be the same as compelling her to surrender the key to a safe, the new technology making that analogy inapposite, but would instead be compelling her to use the content of her mind to perform an affirmative act to assist the government to prosecute her, which raises the Fifth Amendment problem.

Microsoft sued over Kinect for patent infringement

A Bay Village, Ohio, company has sued Microsoft for allegedly infringing on its patents with the rapidly selling Kinect motion-sensing video game controller.

Microsoft's Kinect for Xbox 360
(Credit: CNET)

Impulse Technology filed the suit in federal court in Delaware, accusing Microsoft and several game makers--including Electronic Arts, Ubisoft, and THQ--of violating patents related to, among other things, tracking and assessing movement skills in multidimensional space. The suit was filed on July 1, but was only recently written about by the Web site Law360.

Impulse claims that the Kinect violates seven patents, issued from 2001 to last year. In its suit, the company said it notified Microsoft in March about the patents. The suit does not mention if Microsoft replied to the notification. And Impulse's attorney did not return a call.

Microsoft declined to address the specific charges, but said it works hard to make sure its products don't violate patent holders' rights.

"While we can't comment about this specific case, Microsoft invests heavily in protecting our intellectual property rights and has hundreds of pending and issued patents covering Kinect," Kevin Kutz, director of public affairs at Microsoft, said in a statement.

Perry hits the road

Anyone who has watched the Republican debates knows Rick Perry’s most glaring vulnerability — including Rick Perry.  However, he has steadily improved and had a good debate on Saturday, and now he’s hitting the campaign trail in a big way in Iowa.  And rather than playing to his weakness, this plays right into Perry’s biggest strengths, as the National Journal reports:

    Rick Perry has a reputation as a campaigner in Texas: He’s dangerous, but even more dangerous when he’s down. The next three weeks in Iowa will present him with the ultimate underdog challenge as he undertakes a last-ditch, massive effort to save his presidential bid.

    Wednesday marks the beginning of a 14-day, 42-city bus tour that will see the Texas governor traverse the Hawkeye State, logging more than 1,000 miles as he strives to regain his standing among the top tier of candidates for the GOP nomination. …

    His Iowa tour will begin in Council Bluffs, on the western edge of the state, and run in a semicircle across the northern half of Iowa heading east. After a leisurely break for Christmas — Perry has no events planned from the afternoon of the 22nd until the morning of the 27th — the tour will resume with a swing through the southern part of the state and snake back around to the center. Most days follow a pattern: two to four “meet-and-greets,” often at local restaurants or coffee shops, followed by a town hall meeting in the afternoon.

    As he travels through the state, Perry will seek to build a coalition of evangelical and tea party voters, often attempting to pick off supporters from his rivals. He’s shown as much in the ads he’s run in the state targeting those specific groups. His fight for the Christian right, a key voting bloc during the Iowa caucuses, will put him in competition against Rep. Michele Bachmann of Minnesota and former Sen. Rick Santorum of Pennsylvania.

Assuming his back troubles are behind him (pardon the pun), Perry can be a force of nature in retail politics.  He got off to a good start in Iowa when he jumped into the race, but his immediate rise in national polls took his focus elsewhere.  Now with Iowa the only prize that Perry can reasonably grasp at the moment, he’s going all in — like Bachmann and Rick Santorum, the latter of whom has already visited all 99 counties and has built a surprisingly extensive organization.

Those will be his two main competitors for voters who won’t back either Gingrich or Romney, and of course Perry wants to split social conservatives and Tea Party activists away from Gingrich, if possible.  There is some evidence, although rather thin, that a Perry comeback has already begun.  The latest poll from the American Research Group shows Perry rising to fourth place, but more significantly, into double digits at 13%.  That’s a bounce upward of eight points since last month, trailing only Gingrich’s 19-point rise in the same period.  Ron Paul and Mitt Romney are just ahead of Perry at 17%, putting Perry within reach of a second-place finish.

If Perry can even get to second place in Iowa, it would be a stunning change of fortune and could restore credibility to his campaign.  With conservatives despairing at the prospect of a Gingrich-Romney contest, Perry could steal a march on the Right and find himself very much back in the mix — assuming that Ron Paul doesn’t beat him to it.

Christiane Amanpour out as host of “This Week”? Update: Stephanopoulos in?

As with any dull, lifeless marriage, it’s probably better that this one ends than that they stay together out of obligation.

I want to try an idea out on you, but really think it over before you say no. Okay?

“This Week with Chelsea Clinton.”

    Christiane Amanpour is preparing to leave as the anchor of “This Week,” the Sunday morning news program on ABC, two people with knowledge of her plans said Tuesday…

    Rumors about Ms. Amanpour’s status on “This Week” have swirled for months, and were given more oxygen last Sunday when The New York Post said that ABC News executives were “mulling who might replace” her. ABC did not deny the newspaper’s report…

    At the time she joined ABC, she said she would “focus on the intractable convergence of domestic and foreign policy.” Arguably her biggest scoop on ABC came last February when she interviewed then-Egyptian president Hosni Mubarak shortly before he stepped down.

    Ms. Amanpour’s tenure on “This Week” coincided with a decline in ABC’s competitive position on Sunday mornings.

Here’s the Post item from Friday alleging that neither side was thrilled with the other and that Amanpour might be angling to go back to the foreign affairs beat at CNN, which makes sense. If you were a journo who’d made your rep in international news, what would you rather be doing these days: Covering Iran’s nuclear progress, Syria’s civil war, and Egypt’s new Islamist government or refereeing ideological slapfights between George Will and Paul Krugman?

Like everyone else in America, I’ve never understood why ABC tapped someone with her resume for a political talk show. The idea, I guess, was to add a foreign-affairs dimension to Sunday morning yakfests, but that’s kind of like hiring a business reporter to anchor SportsCenter. Sure, there’s some subject-matter overlap, but nobody’s watching SC for a panel discussion on revenue sharing or the salary cap. And even if a crisis overseas blows up and dominates the U.S. news cycle, what special insight is Amanpour supposedly bringing to “This Week” by dint of her experience as a correspondent? The Mubarak interview was a nice “get” but (a) it was Barbara Walters, not Amanpour, whom Assad turned to for ABC’s latest big “get,” and (b) if it’s Amanpour’s contacts abroad that are prized by ABC, they should have put her in the field rather than behind a desk in D.C. By making her anchor, they were promising especially penetrating discussions of foreign affairs from week to week. Does anyone think they delivered?

Exit question: Amanpour’s loss is Jake Tapper’s gain, right? He’s delivered for them before, you know.

Oh my: Ron Paul within one point of Gingrich in Iowa?

posted at 3:56 pm on December 13, 2011 by Allahpundit

Hey now. I was writing “Could Ron Paul seriously win Iowa?” posts before writing “Could Ron Paul seriously win Iowa?” posts was cool.

    There has been some major movement in the Republican Presidential race in Iowa over the last week, with what was a 9 point lead for Newt Gingrich now all the way down to a single point. Gingrich is at 22% to 21% for Paul with Mitt Romney at 16%, Michele Bachmann at 11%, Rick Perry at 9%, Rick Santorum at 8%, Jon Huntsman at 5%, and Gary Johnson at 1%.

    Gingrich has dropped 5 points in the last week and he’s also seen a significant decline in his favorability numbers. Last week he was at +31 (62/31) and he’s now dropped 19 points to +12 (52/40). The attacks on him appear to be taking a heavy toll- his support with Tea Party voters has declined from 35% to 24%.

    Paul meanwhile has seen a big increase in his popularity from +14 (52/38) to +30 (61/31). There are a lot of parallels between Paul’s strength in Iowa and Barack Obama’s in 2008- he’s doing well with new voters, young voters, and non-Republican voters…

Simple question: What’s Paul’s ceiling in Iowa? A friend on Twitter was arguing earlier that it’s 20 percent, which is borne out by the polls — so far. If he’s right then Paul can’t win. But … what if Paul’s ceiling is actually 30 percent? Note that his favorables are trending upwards while Newt’s are sinking under the weight of renewed scrutiny of his various conservative heresies. If you’re an Iowan who’s unhappy with the “electable” candidates — Romney for being too opportunistic, Gingrich for flirting too often with activist government, Perry for seeming too darned hapless — then Paul’s an obvious choice for your “none of the above” protest vote. So obvious, in fact, that both Glenn Beck and Joe Scarborough are threatening to back him as a third-party candidate if Gingrich is the nominee. (An interesting footnote in the PPP data: Voters split equally on whether their view of the GOP establishment is favorable or unfavorable, and among the latter group Paul leads by double digits at 34 percent.) If he can pull 10 percent from voters like that on top of the 20 percent who make up his base, then his chances at an upset improve dramatically. And don’t forget, not only is Paul’s base famously enthusiastic and guaranteed to turn out, he’s one of the best organized candidates in Iowa this time. He might be able to get leaners to come out and caucus come rain or shine. Can Gingrich do the same?

I’ll bet Romney’s kicking himself now for not having abandoned Iowa early on. If he had done that, he could have sent his supporters out to caucus for Paul, thereby detonating Newt’s chances; if he tried that now, having competed in earnest in the state, the headlines would be all about Romney’s shockingly poor finish in Iowa, which would actually help Gingrich in New Hampshire even if he finished second to Paul in the caucuses. (On the other hand, per Rasmussen, Paul’s just four points back of Gingrich for second place in New Hampshire too.) Two exit questions for you, then. One: As chances of a Paul upset grow, will Iowa’s Republican leaders swing behind Newt or Mitt? They want the caucuses to remain relevant to choosing the eventual nominee, and if Paul wins, that’ll be two elections in a row where the Iowa winner realistically had no chance. Two: Could a Paul victory achieve a real “none of the above” outcome for the nomination? A brokered convention is unlikely – but, as Sean Trende explains, not impossible if Paul fares well.

    Caucus states are also concentrated in the Mountain West, where his brand of Republicanism holds greater appeal. They’re also front-loaded, meaning that (a) his supporters will be less likely to have been swayed by the “can’t win” argument and (b) the more “establishment” Republican candidates are likely to split the non-Paul votes.

    Overall, 486 delegates will be awarded in caucus states. If Paul picks off a sizable number of these delegates, say a quarter of them, and two other GOP candidates battle to a draw, there might not be a nominee by the end of June. This type of fight could carry over to the convention, since Paul is pretty feisty and is probably the least likely candidate out there to be “bought off” with a Cabinet position or speaking slot.

    If, say, Perry and Gingrich are knotted up with about 1,050 delegates each, and Paul holds the remaining 200 and refuses to budge, you could end up with a deadlocked convention that eventually turns to a dark-horse candidate.

Ron Paul winning Iowa just might mean the GOP nominating Ryan, Christie, or Daniels. Second look at Ron Paul winning Iowa?