Growth Bounce

Phil Gramm had a point. Based on yesterday's report of a modest second quarter growth bounce, the former John McCain adviser was right when he said last month that we aren't in a recession. He was impolitic, but the news is that the U.S. economy is stronger than the wails of Great Depression II on Wall Street and Capitol Hill would have us believe.

No one is doing cartwheels over 1.9% annual growth, especially with business investment coming up very weak in the quarter. On the other hand, exports are booming and providing most U.S. growth -- a message for the protectionists on Capitol Hill, and for Barack Obama. An inventory drawdown reduced growth in the period, as businesses hedged their bets. But that drawdown suggests room for inventory expansion later in the year. Even residential housing sapped growth less than it has in previous quarters.

The White House is bragging on its January "stimulus" -- especially those tax rebates -- for the modest growth rebound. And the checks have given consumer spending a temporary lift. However, the checks do nothing to change incentives to work or invest, and so their impact is as fleeting as dropping dollar bills from helicopters. By adding $150 billion to the budget deficit, this bipartisan re-election ploy also makes it that much harder to pass marginal-rate tax cuts that would spur growth.

The rebates have also been marginalized by the wallop to consumers from the surge in food and energy prices. Consumers have had to spend much of their discretionary income on $4 gasoline and other necessities. The tragedy is that the GDP numbers show that this price spike didn't have to happen. Only a year ago, the price of oil was $70, but it exploded as the Federal Reserve slashed interest rates in the name of shielding the economy from Wall Street's troubles.

We now know the economy's weakest point was the fourth quarter of 2007 into early 2008, and that it was recovering even before the impact of Fed easing could be felt with its usual lag. By tanking the dollar and igniting a commodity spike, however, the Fed has made the recovery more difficult and lengthened the period of malaise ahead. Chairman Ben Bernanke and his band of Fed academics have listened too much to Wall Street and not enough to the American middle class.

The price of oil has fallen from its $145 peak in recent weeks, as the dollar has strengthened on expectations that maybe the Fed's bender is over. But that decline also shows how even a little backbone from Mr. Bernanke could go a long way to breaking the commodity bubble.

The U.S. economy is resilient, but it remains a long way from a return to robust expansion (as today's July employment report may well show). The weak stock market is pointing to slow growth ahead, and the policy portents from Washington are negative. What the economy needs is financial and regulatory discipline for wayward banks, stable money, lower taxes, and policies to reduce energy prices by encouraging more supply (see here).

Instead, the Beltway has promoted a weak dollar, a spending blowout, and government guarantees for the worst mistakes by Wall Street. Meanwhile, the Presidential front-runner is promising to impose the biggest tax increase in history next year. The miracle is the economy is growing at all -- which is a credit to the low tax rates still in place, and especially to the energy and resourcefulness of the American people.

Pelosi's Energy Stonewall

Hell -- otherwise known as Congress -- has officially frozen over. For the first time since the 1950s, Members will skip town today for the August recess without either chamber having passed a single appropriations bill. Then again, Democrats appear ready to sacrifice their whole agenda, even spending, rather than allow new domestic energy production.

Or even a mere debate about energy. The Democratic leadership is stonewalling any measure that might possibly relax the Congressional ban on offshore drilling. Nancy Pelosi and Harry Reid know that they would lose if a vote ever came to the floor, and they're desperate to suppress an insurrection among those Democrats who are pragmatic about one of the top economic issues. Behind this whatever-it-takes obstructionism is an ideological commitment to high energy prices. The rulers of the Democratic Party want prices to keep rising.

A good gauge of the radicalism of their energy blockade is the lowest common denominator of this energy fight: The effort to blame "speculators" for $4 gas was promoted by both Barack Obama and John McCain, as well as nearly everybody else in Washington. Sure enough, the House voted 276-151 on Wednesday for a bill that would have driven oil futures trading overseas.

But the legislation actually failed to become law -- by design. It needed a two-thirds majority because Speaker Pelosi suspended the rules to prevent Republicans from offering amendments, drilling among them. Ms. Pelosi had decreed that she would not permit a roll-call vote under any circumstances, even if it stopped her own goal of wrecking the U.S. futures market.

Meanwhile, the Senate is locked down over its own antispeculation bill. Majority Leader Reid briefly agreed to allow four amendments on GOP policy alternatives, but he withdrew the offer after he was subjected to the fury of the environmental lobby and Ms. Pelosi. To prevent a vote on offshore drilling this week, Senate Democrats also let fail a bill providing home heating assistance for the poor. Same thing for tax subsidies for wind and solar energy.

Other liberal inspirations, including suing OPEC and a windfall profits tax on the oil industry, also ended up in the Congressional dumpster. And of course Democrats long ago shut down the normal budget process in both the Senate and the House to avoid any vote.

Normally, the spending hiatus would be a useful byproduct of Congressional bickering. But in this case the shutdown is malign neglect. Surging energy prices act like a huge tax increase on the economy, since energy demand is relatively fixed over the short term. The price spike is imposing genuine hardships on middle-income and working-class voters across the country.

The Democratic leadership isn't oblivious to this man-at-the-pump reality. But Al Gore's vision of the apocalyptic tides of climate change perfectly expresses their mentality: Ms. Pelosi and Mr. Reid see soaring prices as a public good -- the mechanism that will force energy enlightenment on the U.S. If anything, they think the price of gas is too low. As recently as June, the Senate debated a multitrillion-dollar carbon tax-and-regulation scheme that was designed to boost energy costs. A new version will be a priority in the next Administration.

If nothing else, this summer's oil drilling stonewall is giving voters an insight into this ideology, which recoils at any oil, natural gas or coal production -- oh, and nuclear besides. That puts 93% of all U.S. energy off limits for expansion. Back in the real world, and barring a cold fusion or other miracle, the U.S. will remain dependent on fossil fuels for decades. A fresh round of domestic oil-and-gas exploration would ease the long-term pressures that supply and demand are exerting on prices, plus bolster energy security.

And those not bound by anticarbon theology are coming around. Broad margins of the American public -- now even a slim majority of Californians -- favor increasing domestic production. Many Congressional Democrats are working below the radar to craft a compromise that couples drilling with conservation and programs to prop up renewable alternatives.

But the leadership won't bend even a bit, and so Ms. Pelosi and Mr. Reid have spent the summer using every parliamentary deception to evade debating the issue that the American public cares most about. Short of cutting off the air conditioning on Capitol Hill, Democrats won't get the message until voters make them -- perhaps in November.

Obama's Bad Turn

Is there a way that Barack Obama and John McCain could reboot the Presidential campaign? Both men this week have locked up in modes that surely have little interest to voters.

Senator McCain's latest "inexperience" TV ad about his opponent opened with fleeting images of celeb babes Britney Spears and Paris Hilton, who likely don't know who he is. The celebrity link was a leap that fell flat.

If that was silly, Senator Obama's verbal crackback at his opponent's criticism was more troubling. Campaigning in Missouri, he said: "So what they're going to try to do is make you scared of me. You know, 'He's not patriotic enough, he's got a funny name,' you know, 'He doesn't look like all those other Presidents on the dollar bills.'"

The Obama camp says the reference to dollar-bill portraits wasn't meant to suggest that all of them are white and he is black. We might give him the benefit of the doubt on this were it not that it's the second time Mr. Obama has used this device. In late June in Florida he said: "They're going to try to make you afraid. They're going to try to make you afraid of me. 'He's young and inexperienced and he's got a funny name. And did I mention he's black?'"

For starters, this sounds Clintonesque, almost literally so. Recall how the Obama camp went ballistic at the former President's racial insinuations after the South Carolina primary this year. For the record, Senator McCain at no time has said anything remotely touching on his opponent's race.

It would be not only good for this campaign but also in Senator Obama's political self-interest if he dropped this unattractive implication about his opposition. The more he tries to use race as a shield from criticism, the less he'll look like a potential leader of the entire country and more like a traditional liberal playing racial politics.

Challenging Spitzerism at the Polls

Kimberley Strassel

Take one part ego, one part ambition and one part lawyer, mix it with an office that has few restraints on power, and you'll end up with the worst sort of state attorney general. Take Dan Greear, and you'll have a man at the front of a nascent electoral movement to change the formula.

Mr. Greear is the 40-year-old Republican lawyer working to unseat West Virginia's entrenched top prosecutor, Darrell McGraw. His quest has become a case study in the opportunities, and pitfalls, of an upstart reformer challenging an incumbent attorney general who, like New York's Eliot Spitzer, has cemented his position through populism and political patronage.

Ken Fallin

Darrell McGraw

It's also an insight into a new wave of reformist candidates across the country. As state attorneys general have become more brazen with their power, and as outside groups have started shining a light on their backroom practices, voters have become uneasy. It's this sense of disquiet that candidates like Mr. Greear are tapping into as they promise to refocus lawsuits, rein in the tort bar and restore a sense of justice to prosecutorial office.

In Indiana, Greg Zoeller, the chief deputy for the current attorney general, is running for the top slot and touting the fact his office has never been close to trial lawyers. His opponent, Democrat Linda Pence, is a trial attorney. In Missouri, GOP state Sen. Michael Gibbons is fighting for an open seat and promising transparency in office. In North Carolina, in a strange twist, a pro-business Democrat is defending his seat against a trial-lawyer Republican. Ethics is also figuring in attorney general races in Pennsylvania and Ohio.

To Mr. Greear's advantage, his opponent is a case study of abuse in office. Mr. McGraw, in more than 14 years as West Virginia's attorney general, has been a pioneer in the practice of filing questionable lawsuits against big companies, secretly doling out the legal work to outside trial lawyer friends who reap millions in fees. Those lawyers then turn around and donate heavily to Mr. McGraw's re-election.

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Polls show the public, in theory, disapproves. In a Tarrance Group survey last year, 75% of West Virginians think an attorney general should publicly disclose outside contracts with lawyers. Nearly 60% think attorneys should have to competitively bid for those jobs.

It's this that motivates Mr. Greear. "I've watched what's going on and thought: 'If I were doing this to a client, I'd lose my law license.' I don't think any fair-thinking person can think this is good government, or good solid legal representation for West Virginia," he tells me.

Also helping is that Mr. McGraw's own sense of political immortality has recently landed him, and his state, in hot water. In 2001, he appointed four private law firms to sue drug companies for alleged deceptive advertising of OxyContin. Having forced a settlement in 2004, he handed his tort allies $3.3 million of the $10 million haul. Mr. McGraw had sued on behalf of state agencies (including the state's Medicaid program) -- yet his office kept the rest of the settlement money.

The federal government, which pays a significant portion of the state's Medicaid bills, remains furious the program received none of the settlement, and is now threatening to withhold millions in Medicaid money. Mr. Greear is hitting hard on the uproar, using it to suggest Mr. McGraw has lost sight of why he's suing companies, other than for the headlines.

That's the upside. On the downside, Mr. McGraw remains relatively popular in the state, in part because one of his greatest innovations has been the art (as with the OxyContin suit) of turning settlement proceeds into political patronage. When the West Virginia attorney general crafts a settlement, he makes sure it goes to his own office, where he doles it out with great fanfare to universities, health-care centers and county commissions. In January, he grandly announced that a $12 million settlement he'd negotiated with Visa and MasterCard would be going to fund statewide sales-tax holidays.

His other main asset is fear. Mr. Greear admits a big hurdle is fund raising, even among a business community that is desperate to throw out Mr. McGraw. "I go to so many people and hear the same thing: 'I sure hope you beat him, but I can't afford to have my name on your records. He might come after me next.'" This is a frightening example of how the power of an attorney general can corrupt even the electoral process.

For now, Mr. Greear's strategy has been to gin up grassroots support, hoping to reach a "tipping point" at which more people in the corporate community will believe he can win. Up and down the state, he hits on the ethical points, and he recently signed a model "Attorney General Transparency Code" that is being circulated by the American Tort Reform Association.

Mr. McGraw is still tipped to win, but the difference this time is that he's being asked to justify his methods. That's a change, and it's overdue.

Obama’s Peace Dreams

By P. David Hornik

The War at Home and Abroad

Barack Obama has yet to be elected president, but already the presumptuous Democratic nominee has decided that he will “solve” the Israeli-Palestinian conflict.

“We’re going to make sure that the Palestinians have a state that allows them to prosper as long as we also have certainty that Israel’s security is not being compromised,” Obama told NBC’s Meet the Press earlier this week. “I think it’s in the interest of both parties, but we are the critical ingredient in terms of making sure that a deal actually gets done.” He added that if the U.S. can “solve” the Israeli-Palestinian conflict, “then that will make it easier for Arab states and the Gulf States to support us when it comes to issues like Iraq and Afghanistan.”

Continued Obama: “It also will weaken Iran, which has been using Hamas and Hezbollah as a way to stir up mischief in the region. If we’ve gotten an Israeli-Palestinian peace deal, maybe at the same time peeling Syria out of the Iranian orbit, that makes it easier to isolate Iran so that they have a tougher time developing a nuclear weapon.”

And he said that while he “give[s] the Bush administration credit that the Annapolis process has gotten Prime Minister [Ehud] Olmert…and President [Mahmoud] Abbas…to have very serious…discussions…they may not be able to finish the job. They certainly can’t finish it without serious participation by the next administration, and we’ve got to start early.”

In asserting that the key to unlocking all sorts of Middle Eastern problems is to create an Arab state between the Jordan River and the Mediterranean—which, given the current Palestinian leadership, could not be done without squeezing Israel back into something very similar to its pre-1967 deathtrap borders, in which its heavily populated coastal strip was all of nine miles wide a little north of Tel Aviv—Obama wasn’t saying anything very different than the current U.S. administration. “The Middle East is not going to get better without the creation of a Palestinian state to live side by side with Israel in peace, security and democracy,” Secretary of State Condoleezza Rice also said just this week.

It was Bush who, in 2002, became the first U.S. president to call for a fully sovereign Palestinian state in the West Bank and Gaza, breaking a long tradition in which the U.S. refrained from defining the nature of a prospective Palestinian entity. Since then, Bush and Rice’s zeal for Palestinian democracy has led to the Palestinians’ election of a Hamas government in 2006. Undeterred, the Bush administration has kept on building up Abbas’s Fatah faction as a supposed “moderate” foil to Hamas while turning a blind eye to Fatah/Palestinian Authority’s ongoing inculcation of anti-Semitic and anti-American hatred in schools, mosques, and media, glorification of terrorism, negation of Israel, grave human rights violations, and so on.

Now along comes Obama—whose foreign policy experience wouldn’t cover the head of a pin—saying an Obama administration will “start early” to get this conflict wrapped up.

It also emerged this week, though, that Arab states may not share Obama’s sense of urgency when it comes to helping Palestinians. Reuters reports that “Palestinian Prime Minister Salam Fayyad has appealed to the World Bank to help him secure emergency financing to bridge a shortfall in donor funds and pay public workers.” The PA is in a “budget crisis despite billions of dollars in aid pledged last year to support a U.S.-backed peace drive.”

It’s not that the U.S. itself has been remiss in its payments; “the State Department said the [U.S.] had already surpassed its $555 million in pledged support for 2008 to the [PA] and urged other donors to help out.”

But “many Arab states have not met their financial commitments despite pressure from Washington.” Meanwhile “workers in Gaza say Hamas, which receives support from Iran and other Islamist allies, has been paying salaries on time despite the Western boycott….”

Why would that be? If boosting Fatah, beating Hamas, and solving the Palestinian problem is so crucial to the “moderate” Arab states, why would they be laggard in their PA payments even as Iran and company keep giving Hamas all it needs? Part of the answer, aside from stinginess, requires looking at the real Middle East and not the version of it painted by Western guilt.

Take Jordan, for instance. Last month it was reported that “Jordan has quietly let the Bush White House know it is concerned over the prospect of an independent Palestinian state in the West Bank…. [Jordanian] officials said Jordan’s King Abdullah has warned the administration that [such a] state…would fuel the Islamic opposition and could lead to an attempt to overthrow the kingdom.”

Indeed, in the real Middle East—despite de rigueur public statements by Abdullah and his father-predecessor King Hussein about the desirability of a Palestinian state—Jordan has long feared such an outcome. Jordan has both a large Palestinian population and a simmering Islamist movement, and knows a Palestinian state across the river is just the thing that would light the spark of insurrection.

As for Syria, to assume that creating a Palestinian state would soften it is to ignore the fact that for decades Syria has hosted in Damascus precisely those Palestinian terrorist organizations like Hamas, Islamic Jihad, the PFLP-GC, and others that are most openly contemptuous of any “solution” other than Israel’s eradication. For believing the regime can be wooed away from this posture there’s a Middle Eastern word—chutzpah.

Then there are the Saudis, still believed by many to be the linchpin of a more Western-aligned, America-accepting Middle East. Yet their much-touted 2002 peace plan calls for a “return” of Palestinian refugees to Israel—code for its demographic demise.

Some of the reasons, then, for the lack of Arab eagerness to aid the PA are: fear of a Palestinian state; ideological rejection of a Palestinian state on only part of the land; and ideological rejection of Israel.

If such nuances tend to escape the Bush administration, they’re even less likely to register with Obama. It’s very possible, though, that by the time he would be president, there will be a different Israeli government that’s more security-conscious and less pliant than Olmert’s government was. If so, expect to see Obama square off against what he would perceive as the real obstacle to peace and harmony: Israel. It’s a grim prospect.

Sarkozy's Club Med Experiment Is Sure to Fail: Michael R. Sesit

Commentary by Michael R. Sesit

Aug. 1 (Bloomberg) -- Beware of French presidents seeking grand projects.

Amid great fanfare, Nicolas Sarkozy last month unveiled the Mediterranean Union of 43 countries, consisting of the European Union's 27 members, 14 non-EU member countries that border the Mediterranean Sea, as well as Jordan and Mauritania.

The ostensible goal is to improve the economic lot of Europe's poorer neighbors, curb terrorism, stem illegal immigration, clean up the polluted Mediterranean, prevent the proliferation of chemical, biological and nuclear weapons, improve maritime and land transport and promote human rights.

The experiment -- Sarkozy's attempt to establish a legacy for his presidency -- is doomed to fail, not the least because it attempts to accomplish too much, with too few resources among too disparate a group of countries. The project is also rife with hidden agendas, including the promotion of French national interests, while ignoring some of the biggest dangers in the former European colonies in the Middle East and Africa.

The founding of the Mediterranean Union three weeks ago was accompanied by grandiose language saluting human rights, praising democratic principles and condemning terrorism. ``We must surmount all the hatreds to make space for a great dream of peace and civilization,'' Sarkozy said. France's real motive, though, is to establish a French southern sphere of influence to counter Germany's dominant position in central and eastern Europe.

German Resistance

The Germans caught on quick. Not wanting to see the EU divided, nor German funds used to finance contracts awarded to French companies, Chancellor Angela Merkel objected. Sarkozy retreated and agreed to include the entire EU, instead of just the countries bordering the Mediterranean Sea. It was also agreed to frame the effort somewhat as a successor to the ill-fated Barcelona process, a 1995 plan to promote economic development and conflict resolution among Mediterranean states.

Still, even in a watered-down version, French companies are well positioned. The union's initial projects in energy, water systems and transport all play to French industrial strengths.

Any doubts that the Mediterranean Union isn't a venture dedicated to the greater glory of France should be dispelled by the date chosen for its launch, July 13 -- the eve of Bastille Day, France's national holiday. That way, the assembled heads of state and other senior dignitaries could be treated to a parade that a Wall Street Journal editorial once called the most ostentatious display of military might west of Moscow.

French Armory

Replete with everything from a marching unit of the French Foreign Legion -- which for decades was France's instrument of repression of its North African colonies -- to armored tanks and a flyover by fighter jets spewing out the tricolor in smoky trails, the celebrations seemed to be a cross between a photo opportunity and an armaments bazaar.

At the political level, Turkey sees the union as a consolation prize for its eventual denial of EU membership. ``It would send a very bad message to the world's 1.5 billion Muslims,'' Egeman Bagis, chief foreign-policy adviser to Turkish Prime Minister Recep Tayyip Erdogan, told the New York Times. Sarkozy has said that Turkey doesn't belong in the EU.

Meanwhile, Senegalese President Abdoulaye Wade on July 17 said that Europe wants Algerian and Libyan oil-and-gas reserves and accused the EU of deliberately choosing to isolate Africa through the new union. Libyan strongman Muammar al-Qaddafi denounced the project.

Hodgepodge of States

Alain Leroy, the French diplomat who was overseeing the Mediterranean effort, said today's EU began as the European Coal and Steel Community in 1951. The comparison is a weak one. The ECSC had only six members, all European, all true democracies. None was a theocracy, nor was any infected by terrorism.

By contrast, the Mediterranean region is a hodgepodge of European, Arab and African states consisting of democratic regimes, monarchies and dictatorships -- some with a strong religious orientation -- and made up of Christians, Muslims and Jews, most of whom don't get along.

The region is mired in strife between Israel and the Arab world generally and Israel and the Palestinians specifically. Israel and Syria remain technically at war. Syria doesn't recognize Lebanon. At odds over the Western Sahara, Algeria and Morocco have had closed borders for more than 13 years. Cyprus remains divided; the Balkans lack stability; and Turkey and Greece have disputes that date back to the successors of Alexander the Great.

Iran's Ambitions

What's more, the experiment ignores the majority of the African continent, and the presumed debt Europe's one-time colonial masters owe it. Although North Africa's former French colonies seek freer access to Europe's food markets, France, eager to protect its farmers, opposes granting it.

By restricting itself to the countries bordering the Mediterranean Sea, the project also ignores the area's most dangerous problem: Iran's nuclear ambitions.

Should Sarkozy's efforts bring peace to the Middle East, succeed in cleaning up the Mediterranean Sea, persuade the region's populations to abandon terrorism and help boost living standards from Algiers to Amman, he and his union will have earned their place in history.

But don't bet on it.

GM Has $15.5 Billion Loss on U.S. Sales Drop, Leases (Update4)

Aug. 1 (Bloomberg) -- General Motors Corp. reported a second-quarter loss of $15.5 billion, the third biggest in its 100-year history, because of plunging U.S. sales and the declining value of truck leases. The shares fell as much as 11 percent.

The deficit of $27.33 a share compares with a profit of $891 million, or $1.56, a year earlier. Excluding costs GM considers one-time, the per-share loss was 4 times bigger than analysts projected. Labor strikes contributed to a $9.9 billion drop in North American revenue, and sales worldwide tumbled 18 percent to $38.2 billion.

The results step up pressure on Chief Executive Officer Rick Wagoner, 55, to show he can revive the largest U.S. automaker. Wagoner, in his 9th year as CEO, has posted $69.8 billion in losses since 2004 and is trying to raise as much as $17 billion in cash while speeding the development of fuel-saving cars to replace the sport-utility vehicles being shunned by U.S. buyers.

``They really need those external fund-raising measures to get through to 2010,'' said Brian Johnson, a Chicago-based Lehman Brothers analyst, in a Bloomberg Television interview. ``We cannot count on an economic rebound.''

GM's fourth straight quarterly loss comes as a weakened U.S. economy and soaring gasoline prices drag U.S. auto sales to 15- year lows. Demand for GM products dropped 16 percent through June, and analysts expect the automaker to report a decline in that range when July sales are released today.

``The second quarter has been one of the fastest-changing quarters I've ever seen'' in terms of consumers switching from pickup trucks and SUVs to cars and small SUVs, Chief Financial Officer Ray Young told reporters in Detroit today.

Nissan, BMW Decline

The soft U.S. market is buffeting automakers worldwide. Ford Motor Co., the second-biggest U.S. car company behind GM, posted a record quarterly loss of $8.7 billion last week. Tokyo-based Nissan Motor Co. reported a 43 percent decline in profit today, while Germany's Bayerische Motoren Werke AG said earnings slid by a third.

GM burned through $3.6 billion in the quarter and said today its supply of cash, marketable securities and other funds available fell to $21 billion on June 30, from $23.9 billion at the end of the first quarter.

GM fell 74 cents, or 6.7 percent, to $10.33 at 10.37 a.m. in New York Stock Exchange composite trading, after dropping to $9.90 earlier. The shares plunged 56 percent this year through yesterday, for the worst decline among the 30 companies in the Dow Jones Industrial Average.

Residual Values

The Detroit-based automaker reported a $2 billion charge in the quarter because of the decline in residual values for leased vehicles.

Excluding costs such as a charge for an attrition program and an adjustment to its reserve for Delphi Corp. considered by GM to be one-time expenses, the loss was $6.3 billion, or $11.21 a share. On that basis, the company was forecast to lose $2.40 a share, the average of 12 analysts surveyed by Bloomberg.

GM was profitable in both its European and Latin America- Africa-Middle East region, posting profits of $20 million and $445 million, respectively. The automaker's loss grew to $9.3 billion in North America, from a deficit of $88 million. In its Asia-Pacific region, GM had a loss of $163 million after a profit of $280 million a year earlier.

GMAC

About $1.2 billion of GM's loss was related to the automaker's partly owned GMAC finance unit.

GMAC yesterday reported a $716 million pretax expense for residual-value losses as part of a $2.5 billion second-quarter net loss. GMAC said it was able to reduce that cost because of $1.55 billion that the finance and mortgage company expects to receive from GM through risk-sharing and other agreements and $350 million in payments already made.

GMAC said it has $30 billion in North American leases. That includes $12 billion in SUVs and $6 billion in other trucks, vehicle types that are losing sales because of $4 gasoline.

The residual value is what a vehicle is worth when a customer returns it at the end of a lease. The lender's residual losses average $11,000 a vehicle for GM models, GMAC Chief Financial Officer Robert Hull said yesterday.

The cost of protecting GM debt from default rose. The upfront cost of credit-default swaps on GM rose 3.5 percentage points to 45.5 percentage points, according to broker Phoenix Partners Group. as of 10:23 a.m. in New York. That means it costs $4.55 million initially and $500,000 a year to protect $10 million of bonds from default for five years.

Swaps

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country, or company, fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

GM's 8.375 percent bond due July 2033 fell 1 cent on the dollar to 48 cents on the dollar, according to Trace, the bond- price reporting system of the Financial Industry Regulary Authority. The yield rose to 17.7 percent.

Standard & Poor's yesterday cut GM's credit rating one level to B-, or six steps below investment grade, because falling U.S. sales are causing the automaker to use more cash than anticipated. With the U.S. auto slump expected to carry into next year, GM faces a risk of further cuts, said Robert Schulz, an S&P debt analyst. GM had the highest rating, AAA, from 1953 until 1981.

Largest Losses

GM in 2007 reported its largest annual loss, $38.7 billion, after a tax-accounting change. The biggest quarterly loss, $39 billion in last year's third quarter, topped a $21 billion deficit for an accounting change in the first quarter of 1992.

The automaker telegraphed today's losses July 15 when it outlined plans to increase liquidity by as much as $17 billion by the end of next year by trimming salary payroll costs 20 percent, delaying some products and scrapping a 25-cent-a-share quarterly dividend.

Eliminating the dividend and an unspecified number of salaried jobs will help GM save $10 billion a year. GM plans to generate $4 billion to $7 billion by selling as yet unidentified assets and borrowing from banks.

Wagoner's Scenario

The increased cash means the automaker will have enough to operate should U.S. sales fall to 14 million cars and trucks this year and next, lower than analysts expect, Wagoner told employees last month. GM also figures on oil costing $130 to $150 a barrel, compared with $124 currently.

GM has said the three-month walkout at former subsidiary American Axle & Manufacturing Holdings Inc. and a smaller strike at two vehicle plants cut first-half pretax earnings by $2.8 billion.

July auto sales, to be released after noon New York time, will match June's annual selling rate of 13.6 million vehicles, according to a Bloomberg survey of 40 analysts and economists. That was the lowest level since 1993, when the industry was emerging from a recession.

``You can kind of look at July as a preview for the rest of the year,'' S&P's Schulz said. ``We just expect sales to be weak.''

U.S. Stocks Fall on GM, NYSE Euronext Results, Oil's Advance

Aug. 1 (Bloomberg) -- U.S. stocks fell, adding to two months of losses for the Standard & Poor's 500 Index, after results at General Motors Corp. and NYSE Euronext disappointed investors and oil prices jumped by $4 a barrel.

GM, the biggest U.S. automaker, slumped after posting a $15.5 billion loss on plunging U.S. sales. NYSE Euronext dropped the most since June, sending financial shares to a second straight retreat, after record trading at European exchanges failed to boost earnings above analysts' projections. Macy's Inc. and Expedia Inc. led retailers lower after the jobless rate climbed to 5.7 percent in July and oil rallied.

The Standard & Poor's 500 Index declined 5.64 points, or 0.5 percent, to 1,261.74 at 11:01 a.m. in New York. The Dow Jones Industrial Average lost 46.24, or 0.4 percent, to 11,331.78 and the Nasdaq Composite Index slipped 19.1 to 2,306.45. Four stocks retreated for every three that rose on the New York Stock Exchange.

``The economy is slowly rolling over,'' said Charles Knott, who oversees $800 million as chief investment officer at Knott Capital Management in Exton, Pennsylvania. ``We're prepared for more on the downside and continue to be very cautious. If we have a sustained recession, GM and Ford are in a heck of a lot of trouble.''

The S&P 500 trimmed its rebound from an almost three-year low on July 15 to 3.9 percent as all of its 10 industry groups retreated except for energy producers. The decline left the benchmark for U.S. equities little changed this week after it fell in eight of the previous 10 weeks.

Earnings Watch

Earnings have slumped by an average 20 percent in the second quarter for the 352 companies in the S&P 500 that have reported results so far, data compiled by Bloomberg show. Companies have trailed analysts' estimates by an average of 5.2 percent, even as the majority beat projections.

Still, only two industry groups have reported a decrease in average earnings. Profits have slumped an 82 percent at financial companies and 5.4 percent at companies that sell consumer goods, according to the Bloomberg data.

Stocks tumbled yesterday after economic growth trailed forecasts, jobless claims rose and Exxon Mobil Corp.'s profit missed analysts' estimates.

GM's deficit of $27.33 a share marks the company's fourth straight quarterly loss and compares with a profit of $891 million, or $1.56, a year earlier. Sales fell 18 percent to $38.2 billion, the Detroit-based automaker said in a statement today. The shares lost 1.8 percent to $10.87.

NYSE Euronext fell $5.81, or 12 percent, to $41.43. The world's largest owner of stock exchanges said profit excluding some costs was 75 cents a share, missing the 78-cent average estimate of analysts surveyed by Bloomberg.

Retailers Retreat

Macy's slumped 1.4 percent to $18.54. Expedia lost 4.7 percent to $18.65.

The jobless rate rose to 5.7 percent in July from 5.5 percent the prior month as employers cut 51,000 jobs, the Labor Department said. Economists had forecast an unemployment rate of 5.6 percent.

``We're losing jobs and haven't fully resolved the issues in the housing market,'' said John Davidson, president of PartnerRe Asset Management, which oversees $12 billion in Greenwich, Connecticut. ``There's still a lot for equity markets to deal with.''

Crude's Rally

Crude oil rallied after Israeli Deputy Prime Minister Shaul Mofaz said that Iran is on a path toward a ``major breakthrough'' in its nuclear program. Crude for September delivery rose $4.10, or 3.4 percent, to $128.26 a barrel at 10:07 a.m. on the New York Mercantile Exchange.

Banks slumped as Citigroup Inc. said its sale of auction- rate securities is being formally investigated by the U.S. Securities and Exchange Commission after the market froze in February, leaving investors stuck with bonds they couldn't sell.

Citigroup and other firms that sold the securities have received subpoenas and information requests from state, federal and industry regulators, the bank said today in an SEC filing.

Citigroup slumped 1.9 percent to $18.33. The S&P 500 Financials Index lost 0.7 percent, its third drop of the week.

Bear Markets

All of the 23 developed nations in the MSCI World Index except for Canada have experienced bear-market plunges of 20 percent or more since September as credit losses surged and record commodity prices stoked inflation. Brazil last week became the 23rd out of 25 developing countries in the MSCI Emerging Markets Index to enter a bear market. Only Jordan and Morocco avoided such slumps.

The S&P 500 has declined 19 percent since its October record as financial institutions worldwide posted $480 billion in writedowns and credit losses stemming from the collapse of the subprime mortgage market. Equities also retreated as inflation increased, giving the U.S. consumer price index the steepest gain since 1991.