Washed It!

General Motors Co. is set to reemerge as a public company this week in one of the year’s hottest initial public stock offerings, but many American taxpayers who helped rescue the company won’t be going along for the ride.

That’s because most Americans won’t have access to the new shares of the Detroit automaker. And many of those who do are likely to be well-heeled customers at big Wall Street firms.

The situation is not much of a surprise on Wall Street, where little guys often are shut out of deals, especially coveted ones where demand far outstrips supply and where fast-rising prices usually provide quick profits to anyone getting IPO shares.

But some experts said an opportunity to reward average Americans is being wasted, even though the Treasury Department said two months ago that individuals would have “ample opportunity” to participate in the IPO.

“Wall Street thumbed its nose at” individual investors, said David Menlow, president of research firm Ipofinancial.com. “We continue to help Wall Street out, and Wall Street seldom feels the need to say thank you.”

Concern about small investors getting a piece of the action underscores the nation’s outrage over the massive bailouts of banking and auto companies during the deepest recession since the Great Depression. Even the four major banking companies handling the IPO deal were bailed out by taxpayers.

The federal government put nearly $50 billion into GM to rescue it and usher it through Bankruptcy Court last year, ending up with a 61% ownership stake in the company.

On Thursday, when the offering goes public, the new owners are likely to include a wide swath of investors from large U.S. mutual funds to foreign entities, such as sovereign wealth funds and China’s largest car company, SAIC Motor Corp.

The major underwriters are JPMorgan Chase & Co., Morgan Stanley, Bank of America Corp. and Citigroup Inc. — all of which received billions of taxpayer dollars to rescue them during the severe credit crunch in the recession.

In one twist from the ordinary IPO, a number of female- and minority-owned brokerages are involved in the deal. Among them are Loop Capital Markets in Chicago and Williams Capital Group in New York. Helping to market shares overseas are China International Capital Corp. and two Brazilian banks, Itau and Bradesco.

“There is just an inordinate amount of foreign companies in this considering this is taxpayer money,” said Bill King, president of female-owned M. Ramsey King brokerage outside Chicago. He said his firm didn’t receive the customary request for information from the Treasury Department asking it to participate.

The IPO is garnering such demand that underwriters reportedly are expected to boost the price of initial shares to more than $30 from the stated range of $26 to $29.

The automaker plans to sell 365 million shares, or roughly one-quarter of the company, in a deal currently worth about $10.6 billion.

The Treasury Department is expected to sell $7 billion to $8 billion of its holdings, reducing its position to as little as 43%. GM has repaid $7.4 billion to the government and agreed last month to repay an additional $2.1 billion by repurchasing preferred stock from the government once the IPO closes.

By some measures, individual investors could fare better than they normally do in coveted IPOs.

Underwriters are expected to allocate about 20% of the shares to so-called retail investors, more than the 15% that’s normal in IPOs, said Scott Sweet, senior managing partner at IPO Boutique.

However, Sweet said, there were rumors last week that as much as 30% of the deal would go to individuals before demand rose among large institutional investors, forcing the retail amount to be scaled back.

Discount brokerage firms such as Charles Schwab Corp. and TD Ameritrade aren’t getting shares to allocate to their customers. Those firms sometimes get IPO shares, though it varies from deal to deal.

“In general, the hotter the IPO the harder it is to get an allocation of shares,” said Ram Subramaniam at TD Ameritrade. “We’d have loved to have gotten GM’s IPO. We just don’t have it.”

Access to General Motors stock offering won’t include many of its rescuers

Newsweek, a 77-year-old magazine that once helped set the national news agenda, is linking its future with a startup website just two years in the making.

Three months after agreeing to buy the money-losing weekly for just $1, audio equipment magnate Sidney Harman has completed on-again, off-again negotiations to merge it with The Daily Beast.

It is not just a marriage between old and new media. Harman will also be getting as an editor for Newsweek Tina Brown, who led both Vanity Fair and The New Yorker before deciding to give Web publishing a try.

Brown said in a posting Thursday on The Daily Beast that the deal was settled Tuesday evening “with a coffee-mug toast between all parties.”

It will create a joint venture called The Newsweek Daily Beast Company. Brown, who was a co-founder of The Daily Beast, will be editor-in-chief.

Harman and Barry Diller, who backs The Daily Beast through his media conglomerate, IAC/InterActiveCorp., will serve as directors on the venture’s board.

Neither side disclosed how they will split up revenue that the company generates.

Although Newsweek has faced a steady decline in both readership and advertising revenue, print magazines still generally take in far more money than their Web-only counterparts.

Even so, the latest tie-up is just one of several instances lately in which Web and print publications have decided they can do better teaming up than remaining apart.

Another struggling but still prominent magazine, Forbes, bought out a Web operation called True/Slant over the summer. Like The Daily Beast, the site was also run by a print veteran, Lewis Dvorkin, who is now remaking Forbes as a more Web-centric company.

Even the staid New York Times is beginning to partner with local startups to expand its coverage at a time of shrinking resources, most recently striking a deal with the nonprofit Texas Tribune.

In the case of The Daily Beast and Newsweek, Brown wrote that it will give her site “the versatility of being able to develop ideas and investigations that require a different narrative pace suited to the medium of print.”

She added that “for Newsweek, The Daily Beast is a thriving front line of breaking news and commentary that will raise the profile of the magazine’s bylines and quicken the pace of a great magazine’s revival.”

Newsweek is certainly in need of a turnaround. The Washington Post Co., which had owned the weekly since 1961, put it up for sale back in May, conceding that it did not see a way to make the magazine profitable. It racked up $30 million in losses in 2009 and is on track to lose more money this year.

Since news of the sale, some of its most prominent talent, including columnist Fareed Zakaria and senior Washington correspondent Howard Fineman, have defected to other publications.

Brown pointed out some of The Daily Beast’s own brand-name contributors, who may be able to help shore up the magazine’s ranks. They include Howard Kurtz, The Washington Post’s former media columnist, and Peter Beinart, who came from The New Republic.

Harman, the 92-year-old founder of audio equipment company Harman International Industries Inc., said in a statement, “In an admittedly challenging time, this merger provides the ideal combination of established journalism authority and bright, bristling website savvy.”
Daily Beast, Newsweek reach deal to join

The leaders of the world’s 20 major economies on Friday ended a frequently rancorous two-day summit in this northeast Asian capital without reaching agreement on specific steps to avert damaging currency and trade wars.

There were far more setbacks than gains, but President Obama suffered the biggest disappointment, falling short in his attempt to forge a unified approach to boosting the global economy.

In one blow, G-20 members refused to endorse a U.S. effort to force China to raise the value of its currency, prolonging a bitter dispute that many say could eventually lead to a global trade war. Before world leaders left the city, they issued a watered-down statement agreeing merely to refrain from “competitive devaluation” of currencies.

The joint statement described their intent to promote growth while balancing trade and exchange rates and avoiding protectionist policies in general. U.S. officials described it as a substantial deal that will help relieve some of the pressure on countries suffering big trade deficits. But nations are under no binding obligation to follow the agreements.

The previous day, the U.S. and South Korea acknowledged that they remained in a stalemate over a free-trade agreement that has languished in the national legislatures of both nations.

In his final speech, Obama put a positive spin on a disappointing summit, saying that the world’s developed and developing economies have been successful in putting the global economy back on a path toward recovery.

Yet he acknowledged that the summit nations risk slipping back into the old imbalances that contributed to the global economic crisis.

Still, he would not admit defeat in back-door meetings that often seemed on the verge of breaking into hostility.

“The work that we do here is not going to seem dramatic. It is not always going to be world-changing. But step to step, what we’re doing is building stronger international mechanisms and institutions” and reducing tensions among nations, Obama said.

He also blamed the media, saying that the reporting on the G-20 summit has been “all about conflict,” while ignoring that what was accomplished.

He stressed that G-20 leaders made strides, including the development of a system to give the international community a mechanism to determine whether countries are engaging in unfair practices with their trading partners.

“Sometimes I think naturally there’s an instinct to focus on the disagreements,” the president said, when in fact “in each of these successive summits we’ve actually made progress.”

But time and again in Seoul, world leaders showed that they were in no mood to compromise and instead were headed toward broad, general pledges that did little to mask their inability to find common ground for immediate action.

At times, that failure to find consensus raised the specter of countries pursuing their own interests at the expense of coordinated and balanced global growth.

British Prime Minister David Cameron warned of the risks of that route at the summit opening, saying failure by the G-20 to accomplish some sort of global accommodation could lead to “a return to what happened in the 1930s: protectionism, trade barriers, currency wars, countries pursuing beggar-thy-neighbor policies; trying to do well for themselves but not caring about the rest of the world.”

Many countries, however, appeared to be doing just that. In particular, they took aim at the Federal Reserve’s recent decision to pump $600 billion into the U.S. financial system, a move that critics saw as an attempt to lower the value of the dollar and therefore make U.S. exports more competitive.

As the leaders gathered in Seoul, Bank of China Chairman Xiao Gang called the Fed’s move “dangerous,” writing in the semiofficial China Daily newspaper that it had driven the dollar down in value, raised expectations of inflation and hurt other economies. That position was backed by former Federal Reserve Chairman Alan Greenspan, who said the U.S. was “pursuing a policy of currency weakening.”

U.S. officials declared they were doing no such thing. And, in fact, the U.S. dollar has been rising in value in recent days.

“We will never seek to weaken our currency as a tool to gain competitive advantage or to grow the economy,” Treasury Secretary Timothy F. Geithner told CNBC from Seoul. “It’s not an effective strategy for any country, and it’s not for the U.S. We’ll never do that.”

G-20 summit ends with watered-down agreement

As Jerry Brown prepares to take over as governor, California faces a $25.4-billion deficit — far larger than state officials were projecting only days ago — the state’s chief budget analyst said Wednesday.

The figure, projected over the next year and a half, results from billions of dollars in phantom savings approved by Gov. Arnold Schwarzenegger and legislators last month, more budget restrictions passed by voters last week and predictions of a “painfully slow economic recovery,” according to the report from the nonpartisan Legislative Analyst’s Office.

In addition, more than $8 billion in temporary sales, car and income taxes are set to expire in the coming year, and the federal stimulus program that has helped prop up schools, healthcare for the poor and other state programs also will soon disappear.

The report shows $20-billion annual shortfalls in future years as well.

“There is no good news,” said Legislative Analyst Mac Taylor.

Simply keeping K-12 public schools funded at their current level would expand the deficit, Taylor said. That is because billions of dollars in school cutbacks are already factored in.

The predicted $25.4-billion deficit is the equivalent of about 29% of this year’s general fund budget. Erasing the gap will require a combination of severe cuts and more in tax collections over several years, the report said.

“They have to consider everything,” Taylor said of lawmakers and the governor-elect.

Brown, on a post-election vacation, was unavailable for comment. He is scheduled to return to Sacramento next week. One of his campaign pledges was that he would not raise taxes without voters’ approval.

Republicans immediately vowed to block any tax hikes, and Democrats pledged to protect core programs and jobs and to use the shortfall as a reason to restructure government. Senate minority leader Bob Dutton (R-Rancho Cucamonga) called for an emergency legislative session to immediately address the projected deficit.

Schwarzenegger signed the latest spending plan in modern history last month, 100 days into the fiscal year. The analyst’s report Wednesday estimated that $6 billion, or roughly a third, of the deficit-cutting that the governor and legislative leaders said they achieved will never materialize.

Prisons spending will outpace what was budgeted only a month ago by $965 million, and overly rosy assumptions of a helping hand from Washington will prove too optimistic by $3.5 billion, according to the report.

Any future aid from the nation’s capital, where Republicans decisively seized control of the House of Representatives last week on promises to curb federal spending, is also unlikely.

“Good luck,” Rep. Howard P. “Buck” McKeon (R-Santa Clarita) said Wednesday. “We’re going to be trying to reduce spending here, not increase spending.”

Taylor sought to lower expectations that a robust economic recovery would pave the way for California’s return to solvency. His report reduces tax receipt estimates for the current year, citing a “sluggishly” improving economy.

Tax collections in California — a center of the mortgage boom and bust — won’t return to their peak levels of 2007-08 until 2015-16, the report forecasts.

“It’s not just budget, it’s also the economy,” said Assembly Budget Committee Chairman Bob Blumenfield (D-Woodland Hills).

Taylor projected a $22.4-billion deficit in fiscal 2012-13. That ebbs only slightly to $19.4 billion by fiscal 2015-16. Even those bleak figures could prove optimistic: They assume no cost-of-living adjustments and that California will win all pending lawsuits against the state.

Voters widened the deficits last week by approving two measures that constrain legislators’ ability to assess fees on businesses and to take funds from local governments. Combined, the measures unravel $800 million in savings this year and up to $1 billion annually in the future, the report said.

But Californians also voted to allow the Legislature, which Democrats control, to pass budgets with a simple majority rather than a two-thirds vote. That could eliminate the need for GOP approval, which has often stalled the budget process. But a two-thirds vote is still required to raise taxes, which necessitates some Republican support.

shane.goldmacher@latimes.com

Times staff writer Richard Simon in Washington, D.C., contributed to this report.

Estimated state budget deficit reaches $25.4 billion

For former insiders at some of the several hundred banks that collapsed during the financial crisis and in its aftermath, a day of reckoning has arrived.

The Federal Deposit Insurance Corp. has told dozens of former bank officers and directors that it has drawn up lawsuits accusing them of misdeeds such as fraud and breach of fiduciary duty. The federal agency is seeking damages to help offset losses in the nation’s deposit insurance fund.

It’s time, the FDIC warns these officials, to sit down and work out settlements — or head to court to decide the matters there.

The letters being sent by the agency are “very detailed,” said Jeffrey A. Tisdale, a Los Angeles lawyer for former officials of five banks targeted by the agency.

“I mean eight to 10 single-spaced pages of purported misdeeds,” he said.

The showdowns follow FDIC probes that typically take well over a year.

“We’re only doing this after careful investigation. We don’t bring suit every time a bank fails,” said Richard Osterman, the FDIC’s acting general counsel.

The FDIC board has authorized suits seeking to recover more than $2 billion from more than 80 former bank officials, up from about 50 a month ago, Osterman said. The number could multiply as the agency works through its investigative backlog.

The agency could end up suing or settling with former insiders of about one-quarter of the more than 300 banks that have failed since the start of 2008, officials say.

“This is only the first wave,” Tisdale said. “I’ve got my next five-year professional plan laid out pretty well.”

Although the FDIC says it will try to settle the cases, officials expect to file a significant number of suits. Criminal charges could result in a few cases.

“We are investigating [criminal] bank fraud and related cases in many different parts of the country, including in California,” said Fred Gibson, deputy inspector general at the agency.

So far only two civil suits have been filed. The first, filed in July, accuses four executives of Pasadena’s defunct IndyMac Bank of negligence in granting construction and development loans that the suit says were unlikely to be repaid. The defendants are contesting the suit, which seeks $300 million in damages.

Last week, the FDIC sued 11 former insiders at defunct Heritage Community Bank in Glenwood, Ill. Calling the case “regrettable and wrong,” defense lawyers said in a statement that their clients, in failing to foresee the economic meltdown, were no different from Wall Street and the FDIC itself.

Tisdale concurs that the FDIC is going after people for failing to accurately predict the future.

“The economy is the real culprit here,” he said. “There was no way to plan for real estate values dropping 30% to 50% throughout California, Nevada and Arizona.”

But Darren Robbins, a San Diego lawyer who specializes in filing investment fraud suits, says the FDIC has plenty to work with just by looking at what banks said about their assets toward the end of the boom.

“It’s our belief that in places like Illinois, Georgia, California and Arizona there was an inordinate amount of game-playing with financial statements in ‘07 and ‘08,” said Robbins, whose firm has fraud suits pending against several casualties of the bust, including PFF Bancorp, the former parent company of Pomona’s PFF Bank & Trust, which failed in November 2008.

In targeting the former officials, the FDIC typically also has its eyes on insurance companies that would be on the hook for damages stemming from alleged misconduct by the bankers. In many cases, the FDIC formally gave notice of possible litigation months ago, just before the expiration of the relevant insurance policies, to ensure that the coverage would apply.

Some policies covering directors and officers don’t apply to actions by the FDIC. In such cases, the agency is going after bank officials only if they have sufficient assets to justify the expense and risk of litigation, Osterman said.

The FDIC’s litigation strategy borrows from a playbook the agency used after the savings and loan meltdown of about two decades ago. From 1986 through 1996 the FDIC recovered $5.1 billion from former insiders at failed banks and savings and loans, Osterman said. That’s a small fraction of the eventual cost of the S&L crisis.

scott.reckard@latimes.com
FDIC prepares to crack down on officials of failed banks

Google Inc.’s decision to give all of its 23,300 employees a 10% pay raise next year — and a $1,000 bonus to boot — is just the latest volley in what has become a full-fledged war for top Silicon Valley talent.

With engineers in short supply, technology companies are competing for employees who can write the software programs needed for new products and services. And they’re increasingly stealing them from one another.

Google is particularly vulnerable. The Internet search giant, long known for aggressively recruiting the smartest in the business, is under siege from Facebook Inc. and other competitors that are trying to lure them away.

A few weeks ago, Lars Rasmussen, the brainy co-founder of Google Maps and a six-year Google veteran, bolted for Facebook, joining more than 200 former Google employees who now work at the world’s most popular social networking service.

Facebook tapped its most persuasive pitchman to close the deal. Founder and Chief Executive Mark Zuckerberg personally wooed Rasmussen to move halfway around the world from his Google office in Sydney, Australia, to Facebook’s headquarters in Palo Alto.

Facebook could be “a once-in-a-decade type of company,” the Danish-born computer science engineer said in explaining his decision.

That kind of talk rankles Google executives, who think they run the hottest company in Silicon Valley.

With 2,000 employees, Facebook is a much smaller operation than Google. Even so, 1 in 5 employees can list “Google” somewhere on their resumes, including Chief Operating Officer Sheryl Sandberg and Executive Chef Josef Desimone, who prepares fresh meals for Facebook employees.

Facebook says its recruiters don’t target Google; they seek out top candidates wherever they work.

“For us, it’s just important to find the best talent,” said Thomas Arnold, Facebook’s director of recruiting, who himself hails from Google. “If it comes from Google, that’s great. If it comes from Hewlett Packard, that’s great. If it comes from a start-up you have never heard of, that’s great. If it’s a kid sitting in a basement in small town somewhere who has created something neat on the Web, that’s even better.”

The flight to Facebook is not a subject Google would discuss, though it did throw out a few counterpunches: Google’s attrition, it said, remains below the industry standard. It hires more people every 10 days than Facebook has recruited in all from Google. And when Google makes a counteroffer to its employees, 70% decide to stay at Google rather than leave for Facebook, the company said.

“Google is an attraction and training ground for incredible talent,” recruiter Paul Daversa said. “The question is: Can Google fill up on talent as fast as it’s losing it?”

The skirmish for talent is driving up compensation and prompting a flood of offers and counteroffers. In one case, Google countered an offer from Facebook to a software developer with a promise of a 15% bump to his $150,000 salary, a quadrupling of stock benefits and a $500,000 cash bonus to stay a year, according to people familiar with the situation. He still took off for Facebook.

Google is hardly alone as it tries to make itself as sticky as flypaper to prospective recruits and employees alike.

Despite California’s unemployment rate of 12.4%, tech job listings are up 62% year over year in Silicon Valley, which has shown 11 straight months of growth, according to technology and engineering career website Dice.com. On any given day, companies are trying to fill 4,600 jobs on Dice.com, up from 2,800 open positions last year.

That reflects the strength of Silicon Valley’s major tech companies, chiefly Google, Apple Inc. and Facebook. Google dominates Internet advertising, Apple rolls out one must-have gadget after another, and Facebook has taken flight with more than 500 million users.

Along with these companies, there are newcomers such as Zynga Gaming Network Inc., a San Francisco company that makes wildly popular social games on Facebook and elsewhere. Zynga added 800 of its 1,200 employees in the last year alone.

With strong demand for their products and services, Silicon Valley companies have plenty of money to shower on signing bonuses and retention incentives.

“We believe this trend will only accelerate in the next 18 months,” Patrick Pichette, Google’s chief financial officer, said on a call to discuss the company’s strong third-quarter results. “We strongly believe that the difference between the winners and the losers in our industry will be to a large extent determined by who can continue to attract and retain the very best people.”

Venture capitalist Marc Andreessen, whose firm helps the companies it invests in recruit engineers and other key employees, says the supercharged recruiting market is the “single hardest challenge in Silicon Valley.”

“A good engineer can easily have 10 job offers,” Andreessen said.

All the top companies are poaching from the same pool: sought-after workers with a prized mix of engineering chops, ingenuity and initiative.

They raid one another’s ranks, mine colleges and universities for promising prospects and jump at unusual opportunities to nab engineers. As soon as news broke this week that Ask.com was laying off 130 people, job offers started popping up on Twitter.

In September, Feross Aboukhadijeh, a computer science major at Stanford University, bet his roommate that in one hour he could create software that would search YouTube in real time. He lost the bet (it took him three hours) but YouTube Instant racked up 1 million users in 10 days, netting Aboukhadijeh a job offer from YouTube co-founder Chad Hurley. Aboukhadijeh, already an intern at Facebook, decided to take the job at YouTube while he continues his studies at Stanford.

As the behemoths duke it out, some fleet-footed start-ups are giving everyone a run for their money in the recruiting department.

Facebook is competing with companies started by its own employees such as Asana, Path and Quora. These spinoffs are snapping up their share of the brightest engineers by appealing to their entrepreneurial instincts.

“There is definitely stepped-up and accelerated pace and urgency around courting the name talent and the high-quality talent,” Daversa said. “He who courts best is going to win. You have to embrace a candidate with a big bear hug. If you blink, he’s gone.”

jessica.guynn@latimes.com
War heats up for top Silicon Valley talent

They’re called “floating cities,” massive cruise ships that resemble skyscrapers and offer all the amenities of high-end resorts — spas and casinos, Broadway shows and amusement parks, fine dining and luxury shopping.

But the Carnival Splendor also offers a cautionary tale about just how vulnerable these mega-ships can be. Left powerless by an engine fire shortly after embarking on a seven-day cruise to the Mexican Riviera, the Splendor is expected to be towed into port in San Diego late Thursday. If the ship cannot make sufficient speed under tow, it is possible it will be taken to Ensenada, company officials said.

An early morning fire in the generator compartment Monday knocked out several of the ship’s operating systems and left the nearly 4,500 passengers and crew members without air conditioning, hot food and telephone service. Even the flush toilets were down for a while.

With communications largely cut off, it’s unclear what kind of hardship passengers have had to endure. But Carnival Chief Executive Gerry Cahill acknowledged in a statement that passengers were dealing with an “extremely trying situation.”

“Conditions on board the ship are very challenging, and we sincerely apologize for the discomfort and inconvenience our guests are currently enduring,” he said.

The “gourmet delicacies” of the “Manhattan chic” Pinnacle Steakhouse were replaced by 70,000 pounds of bread, canned milk and other emergency supplies, which were flown from the North Island Naval Air Station at Coronado to the U.S. aircraft carrier Ronald Reagan and then helicoptered out to the Splendor, stranded 160 miles southwest of San Diego. The company is paying the military for the food and supplies, officials said.

“There are significant risks as these ships get bigger and bigger,” said Kendall Carver, president of International Cruise Victims. “This one held over 4,000 people. The new ones owned by Royal Caribbean hold over 6,000 passengers and 2,000 crew members, over 8,000 people. A fire on a ship like that would be disastrous.”

The Carnival Splendor experienced its problems relatively close to several major ports, making rescue possible in only a few days.

“If it was hundreds of miles out, and you had a fire that wasn’t suppressed, and you had rough weather, you’d have a complete disaster,” said Jim Walker, a Miami-based attorney who specializes in cruise line litigation.

Although the $40-billion cruise ship industry — and its vessels — has been growing, it has been dogged in the last decade with controversies over passenger health and safety. Carver helped start International Cruise Victims after his daughter, Merrian, disappeared while on an Alaskan cruise in 2004.

The organization has pushed for stiffer laws regulating the cruise ship industry; just four months ago, President Obama signed into law tougher new rules for reporting crimes at sea, improving ship safety and training staff to collect evidence of crimes. The changes will go into effect in 2012.

But the new law makes only passing mention of fire safety issues, even though “the most serious event that can happen on a cruise ship is a main space fire, which is what happened on the Splendor,” said Mark Gaouette, former director of security for Princess Cruises and author of the recently released “Cruising for Trouble.”

On a Navy ship, Gaouette notes, every person has a fire-fighting role, and the crew is trained constantly in how to respond to a fire. On a cruise ship, “two-thirds to three-quarters of the population are passengers. They become problems and liabilities in a major fire. They have to be shepherded to safe areas.”

Statistics are hard to come by for incidents on cruise ships, but Gaouette said the website cruisebruise.com lists eight major fires on cruise ships in the last five years, compared with just three in the previous seven years.

“As cruise ships become larger and their number increases on the high seas,” he said, “the threat of fire and other risks to passengers will increase proportionally.”

On the Splendor at 6:30 a.m. Monday, the 3,299 passengers were evacuated from their cabins and told to go to the ship’s upper deck. They were later allowed to return. By afternoon, the U.S. Coast Guard had dispatched three cutters and an HC-130 Hercules helicopter to the ship’s aid. The Mexican navy sent aircraft and a 140-foot patrol boat.

The Coast Guard has remained in contact with the ship throughout the ordeal, officials said. Whether the ship goes to San Diego or Ensenada, the company has promised to transport passengers back to Long Beach.

Miami-based Carnival Cruise Lines has promised a full refund for passengers and a complimentary future cruise equal to the amount paid for this voyage, which was scheduled to visit Puerto Vallarta, Mazatlan and Cabo San Lucas. The company, which along with its brands has 98 ships worldwide, announced that the Nov. 14 seven-day cruise from Long Beach to the same ports has been canceled.

“The safety of our passengers and crew is our top priority, and we are working to get our guests home as quickly as possible,” said Cahill of Carnival Cruise Lines. Carnival Corp. reported revenues of $13.2 billion in 2009.

A spokeswoman for the Cruise Lines International Assn. did not respond to requests for comment. The organization’s website says the U.S. Coast Guard calls cruising “one of the safest modes of transportation, and the industry is constantly striving to improve its safety procedures. Over the past two decades, an estimated 90 million passengers safely enjoyed a cruise vacation.”

But that is little comfort to Lynnette Hudson, whose father died of smoke inhalation during a fire on the Star Princess, which is operated by Carnival, in 2006. It was his first cruise, she testified to Congress, and he was celebrating his 72nd birthday.

Hudson pushed for the more stringent standards that were signed into law this summer and is still fighting for stiffer laws. “I think if there’s a major fire on a cruise ship, they’re not prepared,” she said in an interview. “They don’t have sufficient training.”

maria.laganga@latimes.com

tony.perry@latimes.com

Times staff writer Richard Marosi contributed to this report.

Stranded cruise ship offers lesson in huge vessels’ vulnerabilities

Prime Minister Benjamin Netanyahu clashed publicly with President Obama on Tuesday over Israeli construction in disputed East Jerusalem, throwing a teetering Mideast peace effort deeper in doubt.

Responding to criticism from Obama, Netanyahu struck a defiant tone in commenting on plans to build 1,300 more Jewish housing units in East Jerusalem, saying his government had never agreed to limit construction in the city.

“Jerusalem is not a settlement. It is the capital of the state of Israel,” Netanyahu said in a statement. “Israel sees no connection between the diplomatic process and the planning and building policy in Jerusalem.”

Netanyahu’s statement came hours after Obama warned that the new construction, announced by Israel on Monday, could harm a renewed Mideast peace effort began in early September. Obama made the remarks a few hours after arriving in Indonesia, his boyhood home for four years, where he was set to deliver the second major speech Wednesday in his outreach to the Muslim world.

“This kind of activity is never helpful when it comes to peace negotiations, and I’m concerned that we’re not seeing each side make that extra effort involved to get a breakthrough,” Obama said. “Each of these incremental steps end up breaking trust.”

Israel also is moving ahead with 800 units in the West Bank settlement of Ariel, Israeli news reports said Tuesday.

Saeb Erekat, the chief Palestinian negotiator, said Israel’s latest expansions are part of “a premeditated process to kill the possibility of an independent Palestinian state.” He said that if the Obama administration is unable to get peace talks back on track in the coming weeks, it should recognize an independent Palestinian state with pre-1967 borders.

Israel claims all of Jerusalem, but the Palestinians claim East Jerusalem, which was captured in the 1967 Middle East War, as the capital of their future state. The international community does not recognize Israel’s annexation of the city’s eastern sector, and a succession of American administrations have urged Israel not to build there.

Netanyahu’s pronouncement was consistent with Israeli policy, yet his sharp tone may embarrass Obama at a moment of vulnerability. Obama is visiting the world’s largest Muslim country, and the rebuke may again raise questions in the Muslim world about how much influence the American leader really has on a priority issue.

The disagreement also comes a week after Obama suffered a setback in the midterm elections, which gave Republicans, who are likely to be sympathetic to Netanyahu’s point of view, majority control of the House of Representatives. Some Israeli officials and U.S. analysts had predicted before the election that Netanyahu might feel emboldened to push back on Obama if the Democrats fared poorly.

Obama launched a new peace effort Sept. 1, but it has been nearly stalled as the Palestinians refuse to negotiate unless Israel halts construction in the disputed areas. Palestinian leaders contend that the Jewish settlers are taking land whose ownership should be decided in negotiations.

Robert Danin, a former U.S. official and specialist on Arab-Israeli issues, said it may have been politically risky for Netanyahu to oppose the new construction project, since Israelis view such building as fully within their rights.

With Netanyahu planning to meet Secretary of State Hillary Rodham Clinton in Washington on Thursday, the strong words will not help the U.S. efforts to bring the two sides back to the peace table, said Danin, who is with the Council on Foreign Relations.

“For there to be a deal, the temperature has to come down,” he said.

Israel’s go-ahead to build 1,300 homes in East Jerusalem met with a storm of disapproval from around the world, including all four members of the diplomatic “quartet” that seeks to promote the Mideast peace talks: the United Nations, the European Union, Russia and the United States.

The Russian Foreign Ministry said in a statement that Russia views the announcement “with most serious concern.… We find it essential that the Israeli party refrain from the declared construction.”

Obama’s relationship with Netanyahu has gone through alternating periods of warm and cool. Obama was furious with Netanyahu in March, when new construction was announced in East Jerusalem just as Vice President Joe Biden was visiting. In July, Obama warmly welcomed Netanyahu to the White House.

Yet Obama has maintained pressure on the Israeli prime minister like few recent presidents. In September, he called on Netanyahu from the podium of the United Nations General Assembly to halt settlement construction in the name of peace, a plea Netanyahu has so far resisted.

cparsons@latimes.com

paul.richter@latimes.com

Parsons reported from Jakarta and Richter from Washington. Times staff writer Edmund Sanders in Jerusalem contributed to this report.

Netanyahu defiantly answers Obama’s warning over construction in East Jerusalem

Military and aviation officials say they don’t know who may have launched a mysterious object spotted in the sky late Monday off the Southern California coast, but said that whatever the projectile was, it did not pose a threat to national security.

A KCBS news helicopter spotted what appeared to be a missile traveling through the sky northwest of Catalina Island, about 35 miles west of Los Angeles.

Video posted online by the television station showed a luminous point hurtling through the sky followed by a long contrail.

Officials with the Defense Department, the Navy and the Air Force said did not have any details on the object or its launch site. Pentagon officials said that initial indications were that the military was not involved.

“We are aware of the unexplained contrail reported off the coast of Southern California yesterday evening,” according to a statement from the North American Aerospace Defense Command and the U.S. Northern Command, which operates the U.S. and Canadian missile warning system. “At this time, we are unable to provide specific details but we are working to determine the exact nature of this event.”

“We can confirm that there is no indication of any threat to our nation and we will provide more information as it becomes available,” the statement said.

The Federal Aviation Administration didn’t approve any commercial space launches in the area Monday, said spokesman Ian Gregor.

“We’re looking into this,” he said.

Updated at 9:55 a.m.: Naval Base Ventura County spokeswoman Teri Reid said the contrail seen off the Southern California coast Monday did not originate at Naval Air Station Point Mugu.

“It didn’t happen here,” she said. “There was no firing on the range yesterday.”

Nor was it Vandenberg Air Force Base, whose last launch was putting a satellite into orbit on Friday.
Mystery ‘missile’ launch near L.A. no threat to national security, government officials say

President Obama, challenged by Indian students Sunday to explain why the United States had not labeled Pakistan a terrorist state, defended his administration’s efforts to help the Pakistani government root out extremism and urged Indians to remember their own stake in promoting their longtime rival’s stability.

Obama’s call to India for a gradual rapprochement with Pakistan, made during a sometimes lively town hall-style meeting at St. Xavier’s College in the Indian city of Mumbai, is likely to be repeated at a speech Monday to the Parliament in New Delhi.

Despite the pointed exchange over Pakistan, Obama’s day with students included a session of impromptu dancing by the president and the first lady that offered personal images to balance the generally serious and carefully scripted elements in the Obamas’ first visit to this nation.

A day earlier, Obama met with survivors of the 2008 terrorist attack on Mumbai by Pakistani extremists, but he was careful to avoid mentioning Pakistan.

On the second day of a 10-day Asia trip, Obama was clearly ready for more direct engagement on the matter. “I must admit I was expecting it,” he said, eliciting laughter from the college audience assembled outdoors on a sunny afternoon.

Obama said the U.S. approach toward Pakistan on the issue of terrorism has been “to be honest and forthright … to say we are your friend, this is a problem and we will help you with it, but the problem has to be addressed.”

He said he was “absolutely convinced that the country that has the biggest stake in Pakistan’s success is India.”

“So my hope is, is that over time trust develops between the two countries,” he said, “that dialogue begins — perhaps on less controversial issues, building up to more controversial issues — and that over time there’s a recognition that India and Pakistan can live side by side in peace and that both countries can prosper.”

India was partitioned to create Pakistan at the time of independence from Britain in 1947, and the two neighbors have fought three major wars since.

Although Indian students also grilled him about his views on jihad and Afghanistan policy, as well as his take on the teachings of Mahatma Gandhi, Obama kept at least a part of his message focused on the main aim of his second extended trip to Asia: opening up markets to create job opportunities for Americans.

Over the weekend, he spoke about the “enormous untapped potential” in trade, calling on India to lower barriers in everything from retail imports to telecommunications. On Sunday, he told students that Americans were frustrated with the U.S. economy and how the midterm election results had forced him to make “some midcourse corrections and adjustments.”

“So I want to make sure that we’re here because this will create jobs in the United States and it can create jobs in India,” Obama said. “But that means that we’ve got to negotiate this changing relationship.”

Some listeners were skeptical, aware that Obama and other Democrats often speak disapprovingly of U.S. companies that “ship jobs overseas.” India has long been a favored destination for American outsourcing of data processing, call centers and back office functions.

“It is offensive,” said Lopa Mullick, an owner of an events-management company who attended Obama’s session at St. Xavier’s College. “It hurts us…. You’re not looking at all the opportunities that India has created for the U.S., at the economic benefits both sides get.”

Still, the young entrepreneur said she came to listen to Obama because she believes he can “shift the focus” and that he may actually want to do so.

During an earlier visit with schoolchildren, Michelle Obama broke out into a lengthy dance that dominated TV and inspired local newspaper headlines such as “When Michelle Got Into the Groove.”

The president himself showed off his footwork as schoolchildren enticed him to join the first lady in a traditional Indian dance during a Diwali celebration. It inspired some low-key moves, though mostly unrelated to the elaborate steps everyone else was doing.

cparsons@latimes.com

don.lee@latimes.com

Parsons reported from Mumbai and Lee from Washington.
Obama fields tough questions from Indian students