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Whats AheadMonday, Oct. 12n The Nobel Prize in econom-ics is due to be announced.

Tuesday, Oct. 13

n Secretary of State HillaryClinton meets in Moscowwith Russian Foreign Minis-ter Sergei Lavrov.

n Johnson & Johnson, Inteland CSX are slated to postfinancial results.

Wednesday, Oct. 14

n The Federal Reserve re-leases minutes of the Sept.22-23 Federal Open MarketCommittee meeting.

n President Barack Obamamakes recommendations to

Congress on the nuclear ar-senals of various countries.

n Abbott Labs, J.P. MorganChase and Morgan Stanleyare among companies ex-pected to report earnings.

Thursday, Oct. 15

n The consumer price indexis released. Both CPI andcore CPI, excluding food andenergy prices, are expectedto show a 0.1% increase.

n A heavy earnings day, withGoldman Sachs, Citigroup,IBM, Google and AMD on tap.

Friday, Oct. 16

n Bank of America, GeneralElectric and Halliburton arescheduled to report results.

7 7

n Obamawon support foranenhanced Afghan mission.Lawmakersacross a broadpo-liticalspectrum,speaking onSunday newsshows, agreedtheU.S. couldnt turnawayfrom theeight-yearwar andmust continueto goafter theTaliban.Republicans havegen-erally backedGen.McChrys-tals callfor moretroops,whilemanyDemocrats in Congressareincreasingly leery. A6

Theheadof theU.N.mission

in Afghanistan acknowledged

therewas widespreadfraud

duringthe presidentialvote.

n A spate of carbombingskilled 19 peoplein IraqsAnbarprovince,once a scene of heavyfighting againstthe insurgency.n Iraqilegislators face aThursdaydeadlineto approveanelectionlaw as oppositiongrows toa closed-list ballot. A8

n Turkey said Armenia mustmovetowardresolvinga ter-ritorial conflict withAzer-baijanbeforea historic ac-cord can be implemented. A6n Turkey called offaninternational military drillbecause it opposedIsraelsparticipation, Israel said. A15

n ThemilitantattackonPaki-

stans army headquartersthat left 20deadsetsthestage for a Pakistani assaultona Talibanstronghold. A1

n Gay-rights supportersmarchedin Washingtonto de-mandthatObamalet gaysserve openlyin themilitary andworkto enddiscrimination. A3

n TheU.S.Mideast envoy lefttheregionwithoutpersuadingtheIsraelisand Palestinians toresume peacenegotiations. A11

n ChinesePremierWencalledonthe U.S.and NorthKoreato pave theway formul-tinationalnuclear talks. A8

n U.S.Marine helicoptersde-livered aidto a Philippinemountaincity where landslides

buried dozensof residents. A15n Pope BenedictcanonizedFatherDamien, a 19thcenturypriest whoworked withlep-rosy patients in Hawaii. A15

n Mexicos president sentriot policetotakeovera powercompany, setting the stage fora showdownwith a union. A12

n A manwantedfor hijackinga flight out ofNewYorkin1968was arrested afterarrivingatJFK airportfromCuba. A5

n An IRAsplinter group re-sponsiblefor decadesof kill-ingsin theNorthernIrelandconflict renouncedviolence.

Option Grants Draw ScrutinyExecutives Receive Unusual Awards During Negotiations in Spate of Large Mergers

7 7

ChinaNurturesFuturesMarketsInBid toSwayCommodityPrices

s Copyright 2009 Dow Jones & Company. All Rights Reserved

Hawaiianpilgrimsattenda canonizationceremonyat theVatican,wherePope BenedictXVI namedfivenew saints.

One,a 19th-centuryBelgianpriest,caredfor leprosy victimsin Hawaii before thediseasekilledhim.A15

By Matthew Rosenberg

And Zahid Hussain

ISLAMABAD, PakistanThe

brazen militant attack on Paki-stans military headquartersthat left 20 people dead thisweekendsetsthestagefora Paki-stani assault on the countrysmost entrenchedTalibans trong-hold.

The Pakistani army is ex-pected to target the Mehsud fac-tion of the Taliban, which oper-ates in the countrys mountain-ous South Waziristan tribalarea.

The Mehsud faction claimedresponsibility for the weekendsattackin Rawalpindi, outside Is-lamabad,in which10 gunmendis-guised as soldiers infiltratedtheheadquarters of the military, ar-guably Pakistans mostpowerfuland respected institution, in a45-minutegun battle.A 22-hour

standoff between militants andPakistani army commandosended Sunday morning when 39hostages held by the militantswere freed.

Theattackis likelytoacceler-ate p lan s fo r a Waz iristanground offensive the govern-menthas longwarnedis coming,say Pakistani civilian and mili-tary officials. We are going tocome heavy on you, InteriorMinister Rehman Malik warnedtheTalibanin televisedremarks.

But any offensive is likely tohighlight the gap between Paki-stan and the U.S. on how to dealwiththe Pakistan-basedTaliban,the loose confederation of eth-nic Pashtun militant groups thatoperates in rugged tribal areasalong the Pakistan-Afghanistanborder and often serves as a de

facto government.TheU.S.has longadvocateda

broadcrackdownon allPakistan-based Taliban. Washington ar-guesthatthemost powerfulTali-ban factions here are providingsupport to those fighting in Af-ghanistanagainstU.S.andNorthAtlantic Treaty Organizationforces. The U.S.is currently con-sidering a plan to deploy up to60,000 additional troops to Af-ghanistan to counter the threat

Please turn to page A11

n Americas got the disap-pearing rail-car blues.U.S. freight railroads origi-nated a weekly average of276,137 carloads of grain, coal,lumber and other materialsin September, down 14.2%from 321,704 a year earlier.Rail-car loadings began drop-ping sharply last fall, as tradeworld-wide lurched lower.Septembers decline was thesmallest in percentage termssince December, howeverevidence that the economyis gathering some steam.

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Whats News

7 7

CONTENTS

Abreast of the Market ..C 1

Corporate News .... B2-4

Deals & Deal Makers ..C3

Heard on the Street ..C10

International Finance .... C7

Managing ...................... B5

Media & Marketing ... B6,7

Opinion .................. A17-19

Sports ............................... B8

Weather Watch ...... C 10

Wor ld N ews ......... A6- 15

By Stephanie Simon

ALBUQUERQUE,N.M.When he gears up for theannual battle of the hot-air bal-loons here, pilot Mike Kellypacks his wicker basket with aGPS system, a two-wayradioandsophisti-cated gauges to mea-sure his altitude, hisrate of climb and thetemperature insidethe balloon.

Buthis mostimpor-tant tool might be hisbottle of water.

Ispitoverthesideofthebas-

ket all the time so I can watchwhichway thespittlegoes inthewind, Mr. Kelly explains. Icarry water so I wont dry up.

Thats competitive balloon-ingone part science, one partskilland,apparently,onepartsa-liva.

The alchemy is on display

here each fall in the worlds big-gest ballooning festival, a nine-day affair that draws nearly 650pilots from around the globeand an estimated 800,000 fansprimed to ooh and aah. The fi-esta features breathtaking mass

ascensionsatdawn andan aerial parade of bal-loons that have beensewn into fanciful car-toon shapes.

But the heart andsoul of the festival arethe tests of skill, inwhich pilots struggleto mane uver the ir

bulky, balkycraft toward targets

spread across a big grassy field.Thechallenges,centralto the

fiestasinceitbeganin1972, playout overfive days.They test notspeed,butaccuracy:Dropa bean-bag at the center of a plastic X.Score21 by droppingmarkersongiant playing cards in an aerial

Please turn to page A16

Extreme Ballooning FeaturesHigh Drama (and Hot Air)

i i i

Atthe Worlds Biggest Festival, Unruly WindsMess Up Pole Grab; Kissing, Not Colliding

i i i

Business & Finance

By James T. Areddy

ZHENGZHOU, ChinaChi-nese leaders are concerned thattheir nations enormous eco-nomicexpansion is becominganexcusefor foreignsupplierstoin-flate commodity costs. So, theyhopeto usetheirthreefutures ex-changes to fight back.

Government officials say thecountryis positioning itsfuturesmarkets to be major players in

setting world prices for metal,energy and farm commodities.By letting the world know howmuch its companies and inves-tors think goods are worth,China hopes to be less at themercy of markets elsewhere.

It is true we have a long-termgoalof increasingourinflu-ence in terms of pricing, but todo that we have to create condi-tions and do it step by step,Jiang Yang, chief futures-indus-try policy maker and assistant

chairman of theChina SecuritiesRegulatory Commission, said inan interview. But as the West-erners say: Rome was not builtin a day.

Now in Chinas scopes: the$130 billion it spent importingoil last year.

Globally, crude oil is the big-

gest and most important tradedcommodity, andChinais thesec-ond-largest importer after theU.S. TheNewYorkMercantileEx-changes contract for light,sweet oila grade of crude eas-ily refined into gasolineis theworldsmost actively traded oneandis thusthe dominantmecha-nismfor setting theglobal price.

But as early as next year, theShanghai Futures Exchangemaymuscle in with its own contractincrude oil,possiblymodeled onNewYorksglobalbenchmark,ac-cording to people familiar withthe situation. That would, for

thefirsttime,giveChinesetrad-ers a direct role in valuing thecommodity. We are activelythinking about crude oil now,says one of the people involvedin the planning.

The emergence of majorstock,bond andcommoditymar-kets in nominally communistChinais oneofthe starkestexam-

Please turn to page A16

By Mark Maremont

Numerous companies haveawarded stock options to theirtop executives while engaged innegotiations to be acquired, ac-cording to academic researchanda WallStreetJournalreviewof company filings.

The practice, which expertssayappearsto belegalunderfed-eral law, typically results in thetarget firms executives receiv-ing a bigger payout when thetakeover is later announced.

An examination of securitiesfilings found unusual pre-dealoptions grants in a half-dozenlarge mergers since 2007. The

companies generally say the op-tions awards werent timed totake advantage of the mergertalks, but instead were routineor stemmedfrom unrelatedone-time events.

For share ho lde rs, suchgrants can cut two ways. Criticssaythat insidersat somecompa-niesare unfairly benefitingfromnonpublic information, and thatissuing extra shares to execu-tivesdilutesthevalue ofexistingshares. On the other hand, suchoptionscouldprovidefurtherin-centive to executives to enter-taintakeoverbids, benefitingallshareholders.

Top executives at Omniture

Inc.exchanged someold optionsfor lower-priced new ones inJune 2009, weeks after the soft-warefirmreceivedtakeover feel-ersfrom Adobe Systems Inc.,ac-cording to regulatory filings.The talks ended last month withAdobe agreeingto buy Omniturein a $1.8 billion cash deal, hand-ing the executives paper profitsof$9.7millionontheir 1.1millionnewly minted options.

Omnituresaysthe optionsex-changehad beendiscussed byitsboard for many months and wasunconnected to the takeovertalks, which at that stage werevery preliminary. Filings show

Please turn to page A2

Last week: DJIA 9864.94 s 377.27 4.0% NASDAQ 2139.28 s 4.5% NIKKEI 10016.39 s 2.9% DJ STOXX 50 2440.59 s 3.0% 10-YR TREASURY t 1 10/32, yield 3.384% OIL $71.77 s $1.82 EURO $1.4709 YEN 89.78

The Journal Report:Why Email No Longer Rules

Source: Federal Reserve

Year-over-year percentagechange in total U.S. rail carloads

080705 06 09

30

20

0%

10

i i i

World-Wide

Source: company filings

Favorable TimingOmniture let top executives

exchange old stock options

after receiving takeover feelers

from Adobe Systems.

M2009

M J J S OA A

4

8

12

16

$20Sept. 15:

Deal announced

March 31:

Talks begin

Options granted

Source: Futures Industry Association

Rising InfluenceChinas futures exchanges rank

among the worlds most active,

by contracts traded

Zhengzhou Commodity Exchange

Shanghai Futures Exchange

Dalian Commodity Exchange

08070605040302

10th place

15th

20th

25th

30th

35th

L ON G MA R C HLONG MARCH

The Revolution atThe Revolution at 60

New Saint Inspires a Splash of Tropical Color

Associated

Press

PakistanisVow RevengeFor AssaultBy Taliban

nChina firm may challenge Exxon

for stake in Ghana oil field ...... B1

C noocis in advanced talkswith GhanaNationalPe-troleum to make a rival bidchallenging ExxonMobils $4billion offer for a stakein agiantoil discoveryoff WestAfrica.The movereflectsbothChinas desireto secureaccessto more of theworldsoil andthe Ghanaian govern-ments wish tobe a larger par-ticipant in the discovery. B1

n Europeanstocksare seen

by bullish investors as partic-ularlywell-positioned to ben-efitfrom a rebound over thenext oneto twoyears. C1n China increased the maxi-mumamount a qualifiedfor-eigninstitutional investorcanput into domestic stockmarkets to$1 billion. C7

n TheU.K. is expected toan-nounce plans to trim $25.4billion from its debt by sell-ing off a portfolio of state as-sets and real estate. A12

n Microsoftsaid a technicalproblemhas likely caused theloss of contacts,photos andotherpersonaldata forusersof the T-Mobile Sidekick. B4

n Hedge-fundgains are put-tingsome managers above

high-water marks, levelstheymust clear toresumecol-lecting incentive fees. C1

n A Shell pension fund has anewinvestment planallocat-ing 5% toalternative assets,potentially including hedgefundsfor thefirst time. C8

n A criminal trial involvingtwo former BearStearnsmoneymanagers couldhelpdefinethe boundary betweenpositive spinand fraud.C1

n Lufthansa will unveilplansto provide passengerswith an array of cellphoneandWeb services, in partner-ship withPanasonic. B4

n KB Homes disclosurethat theSEC is investigating

itsaccountingis thelatest ina series of regulatory scrapesfor the homebuilder. B4

n Foreclosuresare rising inthe moreexpensivehousingmarkets, newdata suggest. A2

n Potential rescuers oftheunfinished Las Vegas Fon-tainebleau projectfacethe pos-sibilitythat it maynot beworththecostto completeit.B1

n LazardsWasserstein washospitalizedwith an irregularheartbeat,the investmentbanksaid, calling his conditionseriousbut saying he wasstable and recovering.C3

Vital Signs

>

fuel for thought

Oil and gas industry: leading ininvestments to reduce emissions.

The U.S. oil and natural gas industry invested morethan $58 billion in new low-emissions technologies

from 2000 to 2008, according to a recent study.Thats 44 percent of the total spent by all U.S.industries and the federal government combined.

To learn more, go t owww.exxonmobil.com.

$58.4 billion

44% 42%

14%

$55.3 billion

$19.2 billion

oil and naturalgas industry

other privateindustries

federalgovernment

* * * * * M O N D AY, O C T O B E R 1 2 , 2 0 0 9 ~ V O L . C C L I V N O . 8 7 HHHH $ 2 . 0 0

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U.S. NEWS

Omnitures CEO will be able tocash in 75% of his options whenthe deal closes, but other execu-tives will have to wait to do so,unless they leave the mergedfirm under certain circum-stances.

As previously reported, Mar-vel Entertainment Inc. Chief Ex-ecutive Isaac Perlmutter standsto reap more than $34 million

from options he was granted inthe weeks after a subordinateopened discussions with WaltDisney Co. that ultimately led toa merger agreement.

Marvel has said some of theoptions were an annual grantandtherestwereconnectedto anew employment agreementwith Mr. Perlmutter.

Its very selfish behavior bytheseCEOs,arguesEliezerFich,anassociateprofessorof financeat Drexel Universitys LeBowbusinessschool andco-author ofa research paper on the topicwith Jie Cai and Anh L. Tran.Theywantto get thelastnickelfrom thecompany, regardless ofwhats in the best interests ofshareholders.

Their paper, which has been

presented at academic confer-ences but not yet published, ex-amined 110 deals between 1999and 2006 in which target com-pany CEOs were given unsched-uled stock-option grants whiletakeover discussions hadstartedbut hadnt yetbeenmadepublic. The authors defined un-scheduled grants as thoseawarded more than two weeksaway from the anniversary ofany grant in the prior threeyears.

The researchers concludedthatthe grants weresystemati-

callytimedto benefit theCEOs,and that companies that en-gaged in the practice on averagegot lower takeover premiumsthan thosethat didnt. Theaver-age CEO received an extra $5.7millionfrom thesegrants,the re-searchers said.

A key form of compensationatmanyfirms,stockoptionstypi-callygive executives theright tobuy their companys stock for adecade, at a strike price usu-ally equalto themarket priceonthe day of issuance.

Executives canreap profits ifthe shares rise. Options oftencanbe immediately cashedinfora profitif a company isacquired,although sometimes executiveswho stay at the merged firm getequivalent replacementoptions.

Issuing premerger options isrelated to a controversial prac-

tice known as springloading,in which a company grants op-tions just ahead of releasinggood news that is expected tobuoy its stock price.

After internal debate, the Se-curities and Exchange Commis-sionlastyeardeclinedtotakeen-

forcement action against a com-pany that engaged in the prac-tice.

But the agency issued a rulerequiring companies to disclosein theirannualproxystatementswhether they had engaged insuch options timing.

Alan L. Dye, a securities law-yer at Hogan & Hartson LLP inWashington,says premerger op-tions grants likely would escapedisclosure under the new rules.Thetargetcompanyusually getsswallowed by its new parent be-foreanyannualproxyfilingis re-

quired.Usually, the only way share-

holders candiscoverthata com-pany has awarded options amidtakeover talks is by piecing to-gether information in multipleregulatory filings.

Steven N. Kaplan, a Univer-

sity of Chicago finance profes-sor, says one argument for issu-ing unscheduled pre-deal op-tions would be if a CEO has sucha small equity stake that hewould rather hold on to his jobthan listen to a reasonable take-over offer. He says a well-de-signed pay plan should previ-ously have provided incentivefor a CEO to consider a sale, andshareholders shouldaska lotofquestions about why new op-tions are needed.

Late this month, sharehold-ersof TeppcoPartnersLP,a pub-licly traded oil-and-gas pipelineconcern based in Houston, arescheduledto voteon anall-stockbid by a related company, Enter-prise Products Partners LP, ini-tially valued at $3.3 billion. Ac-cording to a regulatory filing,

talks started Feb. 17, 2009.Teppco traditionally grants

options in May, and indeed didso this year. But it also grantedan extra batch on Feb. 23, thesame day merger talks reachedthe point that a confidentialityagreement was signed. Six topexecutives received a total of154,000 options.

The companies first dis-

closed the talks in April, and inlateJuneannouncedan all-stockdealthat initially valuedTeppcoat 48% above the strike price ofthe February options. Based onTeppcos closing priceon Friday,the executives currently have acollective paper profit of $2.3

million on those options.RickRainey,a Teppcospokes-man, says the timing of its op-tions awards is discretionary,and Feb. 23 happened to be thedate of a quarterly board-com-mittee meeting. He says it waspurely coincidental the confi-dentialityagreement wasstruckon the same day.

Mr. Rainey alsosays theexec-utivesoptionswill convertto En-terprise options and vest fouryears after being awarded.

Oftentopexecutives cancashout their newly issued optionswhen deals close. That was thecase at Birmingham, Ala.-basedCompass BancsharesInc., whichwas purchased for $9.6 billiontwo years ago by Spains BancoBilbao Vizcaya Argentaria SA.

According to Compasss fil-

ings, its then-CEO, D. Paul JonesJr., traveled to Spain for initialdiscussions in mid-January2 0 07. O n J a n . 2 3 , he w a sawarded188,000new options at$59.80,less thaneight monthsaf-ter his prior grant. Nine otherCompass executives weregranted options.

The deal was announced inmid-February. When it closed,

Mr. Jones received $68.11 pershare incash,or $1.6 million,forhis new options, filings show,while other Compass executivesreceived a total of $2.2 million.

A BBVA Compassspokesman,Ed Bilek, says takeover discus-sions were very preliminary atthe time of the options grants.You dont stop doing whatyoure doing because you mightbe in talks, he says. Mr. Bilek

says the company had no settime for issuing options, butgrants in January werentunique in the prior 25 years.

Electronic Data SystemsCorp. issued its CEO a large op-tions grant early last year, dur-ing negotiations that led to its$13.25 billion takeover byHewlett-Packard Co.

According to EDSs filings,the talks started in late Decem-ber 2007, and in early February2008 the firms entered into aconfidentiality agreement. OnFeb.13,2008,EDSissuedtwomil-lion new options at $18.30 to itsrecently named CEO, Ronald A.Rittenmeyer, and a total of onemillionmoreto other topexecu-tives.

We didnt issue options be-

cause we were in merger talks,says Mr. Rittenmeyer. He saysEDS already had planned tomove up its normal option-awarddatebya monthto closelyfollow the annual earnings re-lease, and had no idea whetherthe talks would lead to a deal.

In its March 200 8 proxy, EDSsaid that the object of awardingoptions was to motivate execu-tives to achieve long-term goalsdesigned to create sustainableshareholder value and rewardthem to the extent they achievesuch goals.

Whenthe $25-per-sharecashdeal was announced in May2008, Mr. Rittenmeyer was sit-ting on a $13.4 million profit onhis three-month-old options. Hereceived the cash when the dealclosed that August. I did my

job, says Mr. Rittenmeyer, andI did the right thing for share-holders.

Continued from Page One

WSJ.com

With theholiday-shoppingseason approaching,

many retailers, investors and pol-iticians are hoping American con-sumers animal spirits will re-turn in force. They should becareful what they wish for.

Americans have good reasonto be confused about what theyshould be doing to help the econ-omy. On one hand, the Obamaadministration is crafting poli-cies designed to make them savemore and be more responsibleabout their finances. On theother, the same government isoffering them incentives tospend, such as tax rebates andthe cash for clunkers program.

To a large extent, the mixedsignals reflect a conflict be-tween the stimulus the econ-omy needs now and whatsgood for it in the longer term.As Mark Iwry, a senior adviserto Treasury Secretary TimothyGeithner puts it: If you suffer aheart attack, your doctors ad-vice will probably include get-ting lots of regular exercise inthe futurebut first youve gotto get back on your feet.

In recent months, Americanshave been recovering prettywell. In August, consumerspending logged its biggest one-month jump in nearly eightyears, and last week many re-tailers reported better-than-ex-pected sales for September.That helps bolster optimismamong businesses, and it alsobenefits China, Germany andother major exporters, for

which U.S. consumers are a cru-cial source of demand.

But theres a rub: Unless a re-

surgence in jobs or wages boostspeoples income, any sustainedrebound in spending will requirethem to cut back on savings at atime when theyre still strug-gling with a massive debt bur-den. That, in turn, could revivethe profligate pattern of U.S. bor-rowing from abroad that helpedget the world in such trouble inthe first place.

Economists have long fret-ted about the dangers inherentin the large gap between whatthe U.S. spends and what it earns.Known as the current-accountdeficit, the gap requires theU.S. to make ends meet by bor-rowing large amounts of money

from abroad, typically from bigexporters such as China. Theflow of money encourages bub-bles in financial markets, whilethe rising debts put downwardpressure on the dollar.

U.S. policy makers recognizethe need to close the gap. Theadministration of PresidentBarack Obama has proposed ex-panding a tax credit for low-in-come savers, as well as a require-ment that employers who dontoffer 401(k) or similar programsautomatically put a share of

their workers paychecks into in-dividual retirement accounts.The Group of 20 developed na-

tions has called for policies thatwould stimulate consumer spend-ing in places such as China,while encouraging more savingin big consumers like the U.S.

So far, though, nothing hasbeen implemented. As a result, ifU.S. consumers return to theirborrow-and-spend ways, theycould easily reverse a trend thathas seen the imbalances shrinkin recent months. That would beparticularly dangerous now, asthe U.S. governments vast bud-get deficit is already adding tojitters about the dollar.

We are more vulnerable,which of course means theworld is more vulnerable, too,says Catherine Mann, a profes-sor at Brandeis Universitys In-ternational Business School whospecializes in internationaltrade and finance. A devaluationof the U.S. currency, for exam-ple, would not only hit the mas-sive dollar-denominated invest-ments of China and other export-ers but make their products lesscompetitive in their most impor-tant export market.

The recentevidence on thedirection of U.S. household

saving and the current-accountdeficit is mixed. After peaking at5.9% of disposable income inMay, the U.S. household-savingsrate fell to 3% in Augustwellabove the 0.8% low hit in April2008 but not enough to make abig dent in household debt,which stood at about 125% of dis-posable income as of June. The

U.S. current-account deficitshrank to 2.8% of gross domesticproduct in the second quarter

from a peak of 6.5% in late 2005.But in a sign that it could be ex-panding again, the U.S. trade def-icit was widening in the thirdquarter, the latest data suggest.

Some economists believeAmerican consumers will be ableto save and spend at the sametime, buoyed by a new wave ofhiring as companies gear up fora recovery. Stephen Stanley,chief U.S. economist at RoyalBank of Scotland, estimates thatAmerican consumer spendingwill grow an inflation-adjusted3% in 2010, while the savingsrate will rise as high as 6% andunemployment will fall to about9%, from 9.8% as of September.

If, however,hiring proves asslow as it has been in the

two previous U.S. recoveries,there will be little incomegrowth to support consumerspending. Many economists seea bleak job outlook, togetherwith tight credit, as reason tobelieve the recent rise in spend-ing will prove short-lived. Inone sign that borrowing isntgetting any easier, the FederalReserve reported last weekthat U.S. consumers outstand-ing credit dropped for the sev-enth straight month in August.

In many ways, a period ofmeager growth as peoplehunker down and put their fi-nances back into order wouldbe the best possible outcomeparticularly if businesses usethe savings to make the kindsof investments that wouldboost their productivity and

make the economy stronger inthe future. Putting off the painwill only make it worse.

MixedMantra: Consumers Urged to SaveMoreand ShopMore

Foreclosures Grow in Housing Markets Top Tiers

Corrections&Amplifications

Readers can alert The Wall StreetJournalto any errors in news articlesby emailing wsjcontact@wsj.comor by

calling 888-410-2667.

OptionGrants CoincidingWithMerger Talks DrawScrutiny

By Nick Timiraos

New data suggest that fore-closures are rising in more ex-pensive housing markets.

About 30% of foreclosures inJune involved homes in the topthird of local housing values, upfrom 16% when the foreclosurecrisis began three years ago, ac-cordingtonew datafromreal-es-tate Web site Zillow.com. Thebottom one-third of housing

markets,by home value,nowac-count for 35% of foreclosures,down from 55% in 2006.

Thereportshows thatforeclo-sures, after declining earlier this

year, began to accelerate in thelatespringand thatmore expen-sivehomeshave morerecentlyac-countedfora growingshareof allforeclosures. The slope of thatcurve in recent months is muchsharper than it was recently,saidStanHumphries,chiefecono-mist for Zillow. Rising foreclo-sures among more-expensivehomes could create added pres-sure for a housing market thathas shown signs of stabilizing inrecent months as sales of lower-priced homes pick up.

The Zillow research com-pared homesagainstthe medianvaluesfortheirlocalmarketand

broke each market into threetiers by value. Zillow thenlooked at the share of monthlyforeclosuresin eachtierover thepast decade.

Foreclosures are rising inmore expensive markets ashome values in those areas fall,leaving more homeowners withmortgagesthat exceed the valueof their properties. Prime loansaccountedfor58% offoreclosurestarts in the second quarter, upfrom 44% last year, according tothe Mortgage Bankers Associa-tion. Subprime mortgages ac-counted forone-thirdof foreclo-sure starts, down from one-half

last year.The prime category includes

so-called exotic mortgages thatwere increasingly used to buymore expensive homes, includ-inginterest-only mortgagesthatallowedborrowers todeferprin-cipal payments during an initialperiod. Borrowers often arentable to refinance out of theseproducts because the drop inhome values has left them withlittle equity in their homes.

Default rates are particularlyhigh and expected to rise on op-tion adjustable-rate mortgages,which allow borrowers to makeminimum payments that may

not cover the interest due.Monthly payments can increaseto sharply higher levels afterfiveyears orwhenthe outstand-ing balance reaches a certainlevel. A study by Fitch Ratingsfound that 46% of option ARMswere 30 days past due lastmonth, even though just 12% ofsuch loans have reset to highermonthly payments.

Zillow estimated that nearlyonein fourhomeswith mortgageswas worth less than the value ofthe property at the end of June.Mr. Humphries said he didnt ex-pect to see foreclosure volumeslevel off until later in 2010.

The Monitoring Money-

Market Fundstable that ran inthe Oct. 5 Journal Report on In-vesting in Funds had several en-tries in which 0% investor re-turnswereincorrectlydisplayedas unchanged. A corrected tableappears on page C8.

*Exchange of old options for new ones at a lower strike price Company filings say mid-January Sources: company filings; the companies

In the MoneyIn several large mergers, target companies awarded options to top executives before talks became public and their shares rose.

Omniture

Adobe Systems

Marvel Entertainment

Walt Disney

Teppco PartnersEnterprise Products Partners

EDS

Hewlett-Packard

Compass Bancshares

Banco Bilbao Vizcaya Argentaria

Investors Financial Services

State Street

Target / Acquirer Company commentTalks start Options granted Deal announced

Options exchange was considered for

months; no connection with deal talks.

One grant was annual, the other

associated with CEO's new contract.

Grant timing was purely coincidentalwith merger talks.

Timing had nothing to do with merger

talks.

Talks very preliminary at time of grant;

grants early in year not unusual.

Nobody available to comment.

Feb. 18,2009 March 3, 23 Aug. 31

March 31,2009 June 15* Sept. 15

Feb. 17,2009 Feb. 23 June 29

Dec. 30,2007 Feb. 13, 2008 May 13

Jan. 15,2007 Jan. 23 Feb. 16

Jan. 15,2007 Jan. 19 Feb. 5

Source: Bureau of Economic Analysis

Spending Strains

As consumers open their wallets

Consumer spending, annualized,in trillions

they are saving less.

Household savings rate as apercentage of disposable income

9.5

10.0

$10.5

0

2

4

6%

2008 2009 2008 2009

The mixed signals reflecta conflict between whatthe economy needs nowversus the long term.

ONLINE TODAY:Read theresearch paper by Messrs. Fich,Cai and Tran atWSJ.com/Business.

THEOUTLOOK |By Mark Whitehouse

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2003 05 07 090

10

20

30

40

50

60%

Bottom tier

Middle tier

Top tier

Moving UpShare of foreclosures by price

tier, based on median price in

the local market

Source: Zillow.com

* * * *A2 Monday, October 12, 2009 THE WALL STREET JOURNAL.