Exclusive: Facebook seeks exec to build Hollywood, media ties (Reuters)

SAN FRANCISCO (Reuters) – Facebook is looking to hire a big-name executive to cultivate relationships and strike deals with the film and music industries to bolster its media offerings.

In recent months, Facebook had discussions with former MySpace co-President and former MTV executive Jason Hirschhorn about a job spearheading the company's outreach to media companies, according to several people familiar with the situation.

While the talks do not appear to have gone anywhere, and it wasn't clear whether Facebook had approached others about the position, the efforts signal Facebook's intention to take a more hands-on approach in helping media companies bring their content to the social network.

"They had held the media industry at arm's length for a while. It was: 'We are a platform, come use us all you want but we don't necessarily need to partner with you.' But now the attitude has changed," said one of the people familiar with the situation.

"They realize that one of the next phases in its evolution is to work with the media companies," the person added.

Facebook and Hirschhorn both declined to comment.

Facebook's media push comes as the company faces fresh competition from Google Inc, which launched a rival social networking service in June.

Twitter recruited former Creative Artists Agency executive Omid Ashtari to be its "L.A. person" last November, according to a report in AllThingsD.com, and the company recently appointed Chloe Sladden to a new role overseeing content and programing efforts.

"The view is they're looking at Twitter and Google and their outreach to the media community and they don't want to fall behind the curve," the source said. "They don't want the media companies to think they're uninterested."

Facebook has gradually gotten closer to the media world, with Chief Operating Office Sheryl Sandberg joining the Walt Disney Co board of directors in December 2009, and Netflix Inc Chief Executive Reed Hastings taking a seat on Facebook's board in June.

Several movie studios have released movies that can be rented and viewed on Facebook this year, including Warner Brothers' "Dark Knight" and Universal Pictures' "Big Lebowski."

Facebook was aggressively exploring recruiting a media point-person a few months ago, but has since shifted its attention to other strategic priorities, the sources said. But with the company increasingly interested in making media a key part of the social network, people expect the search to pick up again soon.

THE GAMING LESSON

Facebook's media ambitions will be on display on Thursday at its annual developer conference in San Francisco, where the company is expected to unveil new music features.

The music platform will integrate streaming music services from companies including Spotify, Rhapsody and Rdio, directly into users' home pages, said several other people familiar with the situation. Facebook users who subscribe to the music services will be able to share songs and playlists with each other and see what their friends are listening to, the people said.

Facebook will also unveil new flavors of its "Like" button at the event, allowing users to flag Web pages or other online content with specific recommendations, such as "Read," "Watched" or "Listened," according to a source with knowledge of the matter.

For Facebook, building a deeper integration with music, movies and other media into its service makes it more likely that users will spend more time on its site, allowing the company to generate more advertising dollars.

Media also fits well with Facebook Credits, the payment system that Facebook has introduced for its users to buy digital goods on its site. Facebook takes a 30 percent cut of transactions using Facebook Credits.

The template for Facebook's media push is social games, which more than 200 million of its users play on the website every month. Companies like Zynga and Electronic Arts Inc's Playfish have built successful businesses developing social games that can be played on Facebook.

But recreating that magic with the media industry could be trickier.

While technology-savvy social game companies are adept at quickly creating products that shine on various "platforms," such as social networks or smartphone applications, traditional content providers don't possess the same kinds of expertise, said another person familiar with the situation.

"You can't just drop platforms in Hollywood," the person said.

"They make content well," he said. But, he noted, creating media that really shines on a social networking platform requires hand-holding.

(Reporting by Alexei Oreskovic; Additional reporting by Peter Lauria and Yinka Adegoke in New York; Editing by Richard Chang)

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U.S. calls online poker site a "global Ponzi scheme" (Reuters)

NEW YORK (Reuters) – U.S. prosecutors accused poker website Full Tilt Poker on Tuesday of running a Ponzi scheme in which the company's owners and board members paid themselves nearly half a billion dollars while defrauding players.

The allegations were filed in a proposed amended civil complaint in Manhattan federal court, five months after a criminal indictment was unsealed on April 15.

That indictment accused three Internet poker companies -- Full Tilt Poker, Absolute Poker and PokerStars -- and 11 people, including Full Tilt director Raymond Bitar, of bank fraud, illegal gambling and money laundering offenses.

"In reality, Full Tilt Poker did not maintain funds sufficient to repay all players, and in addition, the company used player funds to pay board members and other owners more than $440 million since April 2007," the office of Manhattan U.S. Attorney Preet Bharara said in a statement.

Bharara said: "Full Tilt was not a legitimate poker company, but a global Ponzi scheme." A Ponzi scheme is usually one in which early investors are paid with the money of new clients, but collapses when funds run out.

The U.S. Attorney's previous civil complaint did not contain allegations of the company defrauding players or owners taking payments improperly.

Representatives of Full Tilt Poker could not immediately be reached to comment on the amended complaint, which has yet to be approved by a U.S. District Court judge. This type of filing is usually approved as a formality.

The prosecutors said Full Tilt Poker's board of directors, including Bitar, Howard Lederer, Christopher Ferguson and Rafael Furst, defrauded players by misrepresenting that their funds in accounts were safe, secure and available for withdrawal.

The case is USA v Pokerstars, et al, U.S. District Court for the Southern District of New York, No. 11-02564.

(Reporting by Grant McCool, editing by Gerald E. McCormick)

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FACT CHECK: Are rich taxed less than secretaries? (AP)

WASHINGTON – President Barack Obama says he wants to make sure millionaires are taxed at higher rates than their secretaries. The data say they already are.

"Warren Buffett's secretary shouldn't pay a higher tax rate than Warren Buffett. There is no justification for it," Obama said as he announced his deficit-reduction plan this week. "It is wrong that in the United States of America, a teacher or a nurse or a construction worker who earns $50,000 should pay higher tax rates than somebody pulling in $50 million."

On average, the wealthiest people in America pay a lot more taxes than the middle class or the poor, according to private and government data. They pay at a higher rate, and as a group, they contribute a much larger share of the overall taxes collected by the federal government.

The 10 percent of households with the highest incomes pay more than half of all federal taxes. They pay more than 70 percent of federal income taxes, according to the Congressional Budget Office.

In his White House address on Monday, Obama called on Congress to increase taxes by $1.5 trillion as part of a 10-year deficit reduction package totaling more than $3 trillion. He proposed that Congress overhaul the tax code and impose what he called the "Buffett rule," named for the billionaire investor.

The rule says, "People making more than $1 million a year should not pay a smaller share of their income in taxes than middle-class families pay." Buffett wrote in a recent piece for The New York Times that the tax rate he paid last year was lower than that paid by any of the other 20 people in his office.

"Middle-class families shouldn't pay higher taxes than millionaires and billionaires," Obama said. "That's pretty straightforward. It's hard to argue against that."

There may be individual millionaires who pay taxes at rates lower than middle-income workers. In 2009, 1,470 households filed tax returns with incomes above $1 million yet paid no federal income tax, according to the Internal Revenue Service. But that's less than 1 percent of the nearly 237,000 returns with incomes above $1 million.

This year, households making more than $1 million will pay an average of 29.1 percent of their income in federal taxes, including income taxes, payroll taxes and other taxes, according to the Tax Policy Center, a Washington think tank.

Households making between $50,000 and $75,000 will pay an average of 15 percent of their income in federal taxes.

Lower-income households will pay less. For example, households making between $40,000 and $50,000 will pay an average of 12.5 percent of their income in federal taxes. Households making between $20,000 and $30,000 will pay 5.7 percent.

The latest IRS figures are a few years older — and limited to federal income taxes — but show much the same thing. In 2009, taxpayers who made $1 million or more paid on average 24.4 percent of their income in federal income taxes, according to the IRS.

Those making $100,000 to $125,000 paid on average 9.9 percent in federal income taxes. Those making $50,000 to $60,000 paid an average of 6.3 percent.

Obama's claim hinges on the fact that, for high-income families and individuals, investment income is often taxed at a lower rate than wages. The top tax rate for dividends and capital gains is 15 percent. The top marginal tax rate for wages is 35 percent, though that is reserved for taxable income above $379,150.

With tax rates that high, why do so many people pay at lower rates? Because the tax code is riddled with more than $1 trillion in deductions, exemptions and credits, and they benefit people at every income level, according to data from the nonpartisan Joint Committee on Taxation, Congress' official scorekeeper on revenue issues.

The Tax Policy Center estimates that 46 percent of households, mostly low- and medium-income households, will pay no federal income taxes this year. Most, however, will pay other taxes, including Social Security payroll taxes.

"People who are doing quite well and worry about low-income people not paying any taxes bemoan the fact that they get so many tax breaks that they are zeroed out," said Roberton Williams, a senior fellow at the Tax Policy Center. "People at the bottom of the distribution say, `But all of those rich guys are getting bigger tax breaks than we're getting,' which is also the case."

Treasury Secretary Timothy Geithner was pressed at a White House briefing on the number of millionaires who pay taxes at a lower rate than middle-income families. He demurred, saying that people who make most of their money in wages pay taxes at a higher rate, while those who get most of their income from investments pay at lower rates.

"So it really depends on what is your profession, where's the source of your income, what's the specific circumstances you face, and the averages won't really capture that," Geithner said.

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GOP candidates assail Obama on Israel (AP)

By BETH FOUHY and KASIE HUNT, Associated Press Beth Fouhy And Kasie Hunt, Associated Press – 42?mins?ago

NEW YORK – Republican presidential hopeful Rick Perry on Tuesday criticized the Palestinian Authority's effort to seek formal recognition by the U.N. General Assembly and assailed the Obama administration's broader policies in the Middle East.

In a speech in New York, Perry pledged strong support for Israel and criticized President Barack Obama for demanding concessions from the Jewish state the Texas governor says emboldened the Palestinians to appeal for U.N. recognition.

"We would not be here today at this very precipice of such a dangerous move if the Obama policy in the Middle East wasn't naive and arrogant, misguided and dangerous," Perry said in a speech in New York. "The Obama policy of moral equivalency which gives equal standing to the grievances of Israelis and Palestinians, including the orchestrators of terrorism, is a very dangerous insult."

In a statement before Perry spoke, former Massachusetts Gov. Mitt Romney also waded into the tense foreign policy dispute over Mideast policy. He called the jockeying at the United Nations this week "an unmitigated disaster." He accused Obama's administration of "repeated efforts over three years to throw Israel under the bus and undermine its negotiating position."

Perry also criticized Obama's stated goal that any negotiations should be based on the borders Israel had before a 1967 war that expanded the Jewish state. While the 1967 borders have been the basis for diplomatic negotiations, they have never been embraced before by a U.S. president. Perry called that stance "insulting and naive."

Perry's remarks came as the Obama administration has redoubled its efforts to block the Palestinian bid. The U.S. has promised a veto in the Security Council, but the Palestinians can press for a more limited recognition of statehood before the full — and much more supportive — General Assembly.

Perry also expressed support for allowing Jewish settlements to be constructed on the West Bank, a practice Obama has asked the Israeli government to cease. And Perry said that the entire city of Jerusalem should be part of Israel, a move that would make key religious and historical sites part of the Jewish state. Israel captured East Jerusalem from Jordan in 1967.

Perry even suggested he would move American diplomatic personnel out of Tel Aviv and instead recognize Jerusalem as the capital of Israel. "As the president of the United States, if you want to work for the State Department, you will be working in Jerusalem," he said.

Romney said the policy of limiting Israel's negotiating flexibility "must stop now." He called on Obama to unequivocally reaffirm the U.S. commitment to Israel's security and a promise to cut foreign assistance to the Palestinians if they succeed in getting U.N. recognition.

Both Perry and Romney said the U.S. should reconsider funding for the U.N. itself if the global body votes to recognize the Palestinian Authority.

The GOP presidential hopefuls are intent on standing strongly behind Israel, an effort to appeal to Jewish voters and donors who play a pivotal role in presidential elections. It's also an effort to reach evangelical Christians, who play a key role in the Republican primary process and who support Israel for theological reasons.

Perry on Tuesday said that his own Christian faith is part of his support for Israel.

"I also as a Christian have a clear directive to support Israel, so from my perspective it's pretty easy," Perry said when a reporter asked if Perry's faith was driving his views. "Both as an American and as a Christian, I am going to stand with Israel."

Complaints about Obama's Israel policy helped a Republican, Bob Turner, win a special election in a heavily Jewish and Democratic New York congressional district last week. Turner appeared with Perry at the speech.

"It's vitally important for America to preserve alliances with leaders who seek to preserve peace and stability in the region," Perry said. "But today, neither adversaries nor allies know where America stands. Our muddle of a foreign policy has created great uncertainty in the midst of the Arab Spring."

Obama is also in New York on Tuesday for meetings on the sidelines of the General Assembly. He planned to meet later in the week with Israeli Prime Minister Benjamin Netanyahu.

____

Hunt reported from Washington. Associated Press writer Bradley Klapper contributed to this report.

.

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UBS loss exposes European trading loophole (Reuters)

LONDON (Reuters) – UBS's $2.3 billion loss has uncovered a gap in the oversight of widely-used investment products which allow traders to hide their dealings and will take regulators years to close.

Exchange Trade Funds (ETFs) -- the instruments at the heart of the alleged rogue trade debacle announced by UBS last week -- are not covered by European financial markets law.

This leaves dealers free to book trades without confirmation from a counterparty and means a bank's internal risk officers are essentially relying on the dealer's word when checking if price and delivery dates have been entered accurately -- and even whether a trade has actually been agreed or not.

"If (the alleged rogue trader) used some types of ETFs, currently there is no reporting obligation to regulators," a regulatory source with knowledge of the rules said.

The European Union's Markets in Financial Instruments Directive (MiFID) does not cover ETFs, and a rewrite of the law looking to include the rapidly growing sector will only come into force in 2014 at the earliest.

A draft version of the coming revision to close the loophole is due in October.

Large parts of the ETF markets in Europe are traded over the counter -- from bank to bank -- making them far less transparent than securities listed on exchanges, and subject to convention.

"Generally, orders are not displayed to regulators. MiFID demands execution confirmation for clients, but not for "in house" or similar activities," the regulatory source said.

That said, many market operators expressed surprise that a bank would put itself at risk by not asking for confirmation of a trade in its books, whether required to do so or not.

"When I found out banks were not confirming forward ETFs until settlement date, I was pretty surprised," Conrad Voldstad, chief executive of the International Swaps and Derivatives Association (ISDA) told reporters at a conference on Tuesday.

An ETF trader said it was common practice for banks to delay confirmation of forward trades until the settlement date.

"Often they will not do this unless someone has specifically requested them to do so," the trader said, speaking on the condition of anonymity.

OPAQUE

The UBS scandal reignites the debate about whether watchdogs are doing enough to control bets made on the trading floors of banks, many of whom were bailed out at a heavy cost to taxpayers during the credit crisis.

Only days before UBS announced its loss, Britain unveiled some of the world's toughest regulations, requiring its banks to insulate retail lending activities from investment banking operations and store up billions in extra capital.

Sales and trading is often the biggest money-spinner for investment banks, with the fixed income, currencies and commodities businesses (FICC) alone often generating roughly half of their revenues.

The banking community has been left guessing what exactly went wrong at UBS, which has declined to comment other than to say that an employee had faked positions in "forward-settling cash ETF positions" in order to appear to be hedged.

London trader Kweku Adoboli was charged on Friday with fraud and false accounting dating back to 2008.

ETFs were initially sold to retail investors as a cheap way to gain exposure to an underlying asset such as a stock exchange index, but have since come to play a large role in banks' hedging and other internal activities.

Rapid growth in the sector meant that profits have sometimes come first to the detriment of checks and balances, some of the people working in the market said.

"These markets are at an early stage and there simply hasn't been the investment in systems to keep up with the complexity of trading these products," said Hirander Misra, an advisor to Plus Markets, a small stock exchange.

"When new trading products emerge, often the links into risk and credit control systems are an afterthought."

(Additional reporting by Luke Jeffs; Editing by Sophie Walker)

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Afghan peace council head killed in Kabul (Reuters)

KABUL (Reuters) – A Taliban suicide bomber on Tuesday killed former Afghan President Burhanuddin Rabbani and head of a council tasked with trying to negotiate a political end to the war, in what analysts called a blow to peace efforts.

The killing underscored doubts over the ability of fledgling Afghan security forces to protect even the most prominent politicians as U.S.-led forces ready to pull out by 2014.

"A Taliban member who went to Rabbani's house (in the heavily guarded diplomatic enclave) for peace talks detonated a bomb hidden in his turban," a statement by the Kabul police chief's office said.

President Barack Obama called the killing of Rabbani, head of Afghanistan's High Peace Council, a tragic loss but said work needed to continue to bring elements of Afghan society together to end the years of violence.

A police source said Masoom Stanekzai, a senior adviser to President Hamid Karzai, was badly injured in the attack.

It was the highest profile assassination in Afghanistan since the younger half-brother of President Hamid Karzai, Ahmad Wali Karzai, was killed at his home in July by a highly trusted family security guard.

It also came just a week after a deadly 20-hour siege by militants in the fortified capital, which illustrated the strength of the Taliban after nearly a decade of war.

"The killing of Rabbani is a serious blow against President Karzai and the government's peace and reconciliations efforts. It also underscores the inability of the government to protect even the most prominent Afghan politicians," one diplomat said.

Taliban spokesman Zabihullah Mujahid claimed responsibility, saying that the killer had gone to Rabbani's home for talks.

"As soon as Rabbani came three steps forward to hug Mohammad Masoom, he triggered his explosive-filled jacket killing Rabbani, (another) Taliban militant Wahid Yar and four security guards present at the house," he told Reuters.

Commander of the International Security Assistance Force in Afghanistan, General John R. Allen, called the killing "another outrageous indicator that, regardless of what Taliban leadership outside the country say, they do not want peace, but rather war."

"WILL NOT DETER US"

President Karzai, at the start of talks with Obama on the sidelines of the U.N. General Assembly, said Rabbani's death "will not deter us" from continuing the quest for peace.

Karzai, meeting Obama for the first time since the U.S. president announced a troop drawdown plan earlier this year, planned to cut short his New York visit to return home.

"It is a tragic loss," Obama said with Karzai at his side. "We both believe that despite this incident, we will not be deterred from creating a path whereby Afghans can live in freedom, safety and security and prosperity."

"It is going to be important to continue the efforts to bring all of the elements in Afghanistan society together to end the senseless cycle of violence," he said.

Rabbani, a former leader of a powerful mujahideen party during the Soviet occupation of Afghanistan in the 1980s, was chosen last October by Karzai to head the High Peace Council.

His plan included offering amnesty and jobs to Taliban foot soldiers and asylum in third countries to leaders.

The assassination comes after a series of suicide bombings and other major attacks believed to be the work of the Haqqani network, a Taliban-allied insurgent faction based along the Afghanistan-Pakistan border.

One analyst said the peace council had not been seen as effective and that Rabbani himself was viewed by many as an impediment to a deal because he was so loathed by the Taliban.

"But, his assassination might mean that the networks Rabbani led or influenced within Afghanistan .... may resist a deal with the Taliban even more," said Caroline Wadhams, a security expert at the Center for American Progress in Washington.

"It could make it that much more difficult to get greater buy-in from key Afghan leaders, who have been deeply skeptical of talks with the Taliban for some time."

Vali Nasr, a former senior official in the State Department's Afghanistan/Pakistan office, said: "The Taliban wants to send a very powerful message that the Karzai government is not in charge."

"That is important because people begin to waver and shift their allegiances ... And it makes it very difficult to say the Taliban is serious about negotiations if they keep killing people they should be negotiating with," Nasr said.

Rabbani served as president in the 1990s when mujahideen factions waged war for control of the country after the Soviet withdrawal.

As a leading figure among Tajiks, the second largest ethnic group in Afghanistan, there were also concerns his death could worsen ethnic tensions.

The assassination comes a week after a 20-hour gun and grenade attack on Kabul's diplomatic enclave by insurgents, and three suicide bomb attacks on other parts of the city -- together the longest-lasting and most wide-ranging assault on the city.

Last week's siege was the third major attack on the Afghan capital since June.

All three of those attacks are believed to be the work of the Haqqani network, a Taliban-allied insurgent faction, based along the Afghanistan-Pakistan border.

(Additional reporting by Emma Graham-Harrison in Kabul, Laura MacInnis in New York, and Missy Ryan in Washington, Writing by Jonathan Thatcher; Editing by Sugita Katyal)

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NWS: Many in Joplin ignored 1st tornado warnings (AP)

KANSAS CITY, Mo. – Many Joplin, Mo., residents either ignored or were slow to react to the first warning sirens about a massive and deadly tornado this spring, partially because of years of false alarms, the government said Tuesday.

In assessing the communications and warning systems used in the storm that killed 162 people, the National Oceanic and Atmospheric Administration said many people waited for additional information.

"The majority of surveyed Joplin residents did not immediately go to shelter upon hearing the initial warning," the report stated, adding that they "did not take protective action until processing additional credible confirmation of the threat and its magnitude from a non-routine, extraordinary risk trigger."

While officials believe residents didn't respond quickly enough to sirens and warning systems, Richard Wagenmaker, a National Weather Service meteorologist in Detroit and leader of the assessment team, said it was unclear if the slow public response cost lives.

"It's really hard to tell how many people that perished in the tornado did not take shelter," Wagenmaker said during a conference call. "It was a very large tornado, so there were certainly a number of people who did all the right things, took shelter in the best available place, but still found themselves in situations that weren't survivable. So it's really hard to make that assessment."

Another key finding was that after the intensity of the storm was clear, the resulting warnings "lacked enhanced wording to accurately portray that immediate action was necessary to save lives with this tornado."

The National Weather Service was overall well-prepared and "performed in an exemplary manner" during the storm, NOAA said, adding that combined efforts from the weather service, emergency management and the public "saved many lives."

But the report said "the vast majority of Joplin residents" didn't respond to the first siren because of an apparent widespread disregard for tornado sirens.

"Relationships between false alarms, public complacency, and warning credibility are highly complex," the report stated.

Keith Stammer, Jasper County emergency manager, said Joplin is a "weather-ready community" and supported the NOAA assessment. He said the city has applied for federal funding 10,000 weather radios for Joplin households and for 4,000 in-place shelters for Joplin residents.

A team from the NWS examined warning and forecast services before the EF-5 tornado cut through the southwest Missouri city of about 50,000 residents and reduced much of the city's southern half to ruins.

Cleanup, recovery and rebuilding continues in Joplin. Four schools were destroyed and six other district buildings were damaged. Entire neighborhoods were leveled, as was much of the city's main commercial district.

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Poll woes don't slow Obama's campaign money train (Reuters)

CHICAGO/WASHINGTON (Reuters) – President Barack Obama is raising millions of dollars for his re-election campaign, keeping the support of big and small donors despite the sputtering economy and slumping opinion poll numbers.

Amid high unemployment and fears of a second recession, Obama has faced withering criticism from within his own party for seeming to give in too easily to Republicans in Congress and not taking a firmer stand on issues such as protecting the environment.

His approval ratings have been hovering at about 43 percent and polls show he would face a tough fight to defeat Texas Governor Rick Perry or former Massachusetts Governor Mitt Romney, the two top contenders for the Republican presidential nomination to oppose Obama in November 2012.

His campaign has indicated that fund-raising slipped in the June-September quarter. And there has been discontent among some 2008 donors, with some Wall Street cash shifting to Romney, co-founder of buyout firm Bain Capital, a sign of business unease with Obama's tenure.

But if Obama lacks the rock-star status he had four years ago, his events are still selling out and his fund-raising machine is outstripping 2008. Donors said the Obama camp is worried about the country's finances, not the campaign's.

"I haven't heard anyone outwardly worried. It seems like they are on track to hit their goals," said a top fund-raiser close to the campaign, requesting anonymity to speak freely.

"Put it this way: it is not money that they are worried about. They would trade all the money for better economic data," he said.

The Democratic president still attracts the army of low-dollar givers who helped push him to the White House in 2008, and the loyalty of enough big contributors that analysts anticipate he will amass a $1 billion campaign warchest.

"Some of these people may still be disappointed, but they're not going to be ready to write Barack Obama off," said Stuart Rothenberg, an independent political analyst in Washington.

Obama, the first black U.S. president, is a historic figure whose personal popularity outstrips his approval ratings. Known as a strong campaigner, he offers as president constant media attention and an access to power that appeals to big donors, many of whom are concerned that the Republican field is tacking too far toward the right.

'CLASS WARFARE'

"We've heard a lot of concern about the right wing Republican agenda, what many people refer to as 'taking the country backwards' or 'in the wrong direction,'" said Andrew Spahn, a Los Angeles based consultant who is advising DreamWorks CEO Jeffrey Katzenberg as he raises money for Obama's re-election campaign.

Katzenberg, who hosted two sold out, big-dollar fundraisers in the spring, has committed to pumping $500,000 for the Obama campaign, according to the Center for Responsive Politics.

Obama appealed to his base strongly on Monday by laying out a $3.6 trillion plan to cut U.S. budget deficits partly by raising taxes on the rich, which Republicans rejected as "class warfare" and a political stunt.

Some major Democratic supporters, including big labor unions, have responded positively to the plan. Opinion polls also show voter misgivings about Washington's handling of the economy extend to Republicans in Congress, as well as Obama.

"In the end, every American is frustrated with the economy and the way governance works, but that all doesn't fall on the president's shoulders," said Howard Bragman, a Hollywood publicist and longtime Democratic activist.

"His base hasn't left him and they're the ones who are the organizational spine of this campaign," he said.

Obama raised up to $2.8 million at fundraisers in Washington on Thursday and millions more on Monday in New York, where he warned donors of a "very perilous path" if his debt reduction plan is not passed. More fundraisers are on tap in New York and California in the coming days.

Member of his team stress that Obama's campaign had more than 520,000 individual donors in the second quarter of 2011, more than it had for all of 2007, and of those 260,000 had never given before.

Obama's fundraising far outstripped any of his Republican rivals in the second quarter of 2011, as he and the Democratic National Committee raked in $86 million. Romney, who led all Republicans, raised $18 million.

Campaigns do not have to release their third-quarter fundraising totals until October 15, but Obama's set a goal on September 9 of raising $55 million between June and September, to benefit the re-election efforts and the Democratic National Committee.

Presidential fundraising typically wanes in the summer the year before the election, and it was hit more this year because Obama canceled a series of events in July during protracted debt negotiations with Republicans in Congress.

(Additional reporting by Kim Dixon, writing by Patricia Zengerle; editing by Alistair Bell)

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Obama deficit plan: Is there ever a good time for a tax increase? (The Christian Science Monitor)

New York – Would President Obama's tax-the-rich proposal, part of a plan to raise some revenue for deficit reduction, actually harm the economy?

Critics say it would, but economists suggest a major part of the equation involves the state of the economy itself. By 2013, the earliest Mr. Obama's tax reform policies would go into effect, no one knows if the economy will be humming along, muddling through, or in a recession.

To that, economists suggest it's anyone's guess. Yes, the economic outlook is that uncertain, leaving any analysis of the economic impact of a potential $1.5 trillion in tax hikes equally uncertain. Congress, Greece, and the housing market could all play significant roles – but what those roles might be are yet to be determined, experts say.

RECOMMENDED: Unemployment, Inc.: Six reasons why America can't create jobs

The optimists believe the US housing market, suffering since 2008, will revive, giving the economy a significant boost.

Those who are less optimistic, think the economy will be moving ahead at a snail’s pace – not much different than today.

And the pessimists think the financial problems in Europe could send the US economy back into recession – assuming it’s not there already.

“Next year is probably more uncertain than 2013,” says economist Joel Naroff of Naroff Economic Advisors in Holland, Pa. “If we get through 2012 OK, then 2013 will be good. But if not, then 2013 will be a disaster.”

newslook

What Congress doesSome economists say that Congress could play a significant role in what happens next. It has already agreed to cut spending, but that will actually reduce economic activity, says Mark Zandi of Moody’s Analytics.com.

He estimates the impact of the fiscal austerity will cost the economy 1.7 percentage points of economic activity unless Congress does something such as renewing the reduction in payroll taxes (think Social Security and Medicare taxes). In 2013, the belt-tightening will cost the economy 1.5 percentage points.

It’s also not clear if Congress will agree to any of Obama’s job-creation plans – a combination of some tax reductions, some spending on new schools, and direct grants to the states. If Congress does nothing, it could mean the economy just “muddles along for the next two years,” says economist Richard DeKaser of the Parthenon Group, a Boston-based strategy consulting firm.

What Greece doesThe economy next year could also be adversely affected by events in Europe, says Mr. Zandi. If the Greek government were to default on its loans, he expects Europe will have a mild and short recession. However, if the debt woes were to spread to other countries, he predicts that would drag the US into a recession as well.

If the bankers reach some accommodation on Greece, then the US economy may start to get a lift from the housing market, predicts Mr. Naroff. “A year from now you will have worked off the inventory in the housing market,” he says.

Zandi, also a housing optimist, expects the housing market to increase from a current rate of building 600,000 new homes a year to 1.7 million homes a year. “That is a lot of growth,” he says, “and it begins in 2013 in earnest.”

What the economy doesThe shape of the economy may well have a lot of bearing on what Congress does – if anything. If the economy is suffering, lawmakers are less likely to make any significant changes in tax policy. No one wants to run for reelection right after raising constituents’ taxes. However, if the economy has its swagger back, they might be more inclined to act.

a€?The worst time to raise taxes is during a recession,a€

That’s because tax hikes tend to take money out of the economy at a time when consumers are already in a funk. Ms. Villarreal, who supports some form of tax reform, such as a consumption tax, argues that even tax increases on the wealthy could have an adverse impact on the economy.

“If they have less to invest in job creation that trickles down to the rest of the economy,” she says. “What they do to the top earners will effect the rest of us.”

However, Naroff argues that tax changes on the well-to-do probably won’t change their spending habits. “The Obama proposals are not aimed at people who are likely to dramatically or even at all change their spending behavior,” he says.

Changing the tax codeOne of the biggest battles of the year is likely to be whether to extend the so-called “Bush tax cuts” for high-income earners. Those tax cuts expire at the end of 2012 and Obama has vowed to veto any legislation that extends them again.

“I am assuming the Bush tax cuts expire but are replaced with something else,” says Mr. DeKaser. “Maybe there is a change in the tax brackets, a gradual introduction of a more stringent tax policy.”

If the economy is not a recession, tax changes might be good, argues Zandi. He particularly endorses some form of broadening the tax base, which is usually means shutting down loopholes and making the tax code less complex.

“If tax reform means the flattening of the tax base and it stays that way for a lengthy period of time, the economy could easily digest that and perhaps even benefit from it,” he says. “If you are talking about scaling back many of the deductions and tax credits in the tax code and it becomes less complex, that could be therapeutic.”

No matter what happens in terms of tax reform, Zandi expects it will be phased in. “We could not do it all cold turkey,” he warns. “Households and businesses have made decisions based on those loopholes.”

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Housing starts drop underscores economic woes (Reuters)

WASHINGTON (Reuters) – New construction of homes fell more than expected in August, dragging on economic growth and keeping pressure on President Barack Obama to do more to help the sputtering economy.

Housing starts dropped 5 percent, the most since April, to a seasonally adjusted annual rate of 571,000 units, the Commerce Department said on Tuesday.

Economists polled by Reuters had forecast groundbreaking activity would fall to only a 590,000-unit rate in August. Housing starts are at less than a third of their peak during the housing boom.

"The housing market is not only bad, but still missing low expectations," said Sal Catrini, a managing director for equities at Cantor Fitzgerald & Co in New York.

An overhang of previously owned homes on the market has left builders with little appetite to break ground on new projects and is frustrating the economy's recovery from the 2007-09 recession.

The housing market "won't improve until the labor market improves substantially and that doesn't look like that would happen this year," said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.

Housing has been a persistent headwind to the U.S. recovery, although now it only accounts for about 2.4 percent of gross domestic product, down from about 6.1 percent reached during the housing boom.

U.S. stock prices rose as investors shook off the data and turned their focus to a two-day meeting the Federal Reserve that kicked off on Tuesday. The Fed is expected to end its meeting with a decision to take further steps to aid the economy. U.S. Treasury debt prices were little changed.

The ongoing weakness in housing keeps pressure on the White House to provide more support.

Obama, who is struggling with a 9.1 percent unemployment rate that imperils his re-election bid next year, has proposed a $447 billion stimulus package combining tax cuts with infrastructure spending and extended jobless benefits.

The administration is also working with the Federal Housing Finance Agency, a regulator, to try to expand a program that helps distressed borrowers with government-backed loans.

Some other government props for the sector, however, are set to fall away. At the end of this month, the size of the loans federal housing agencies can purchase will fall, and next year government-controlled mortgage companies Fannie Mae and Freddie Mac will begin to raise fees on the loans they purchase.

RECESSION WATCH

The fall in new residential construction in August may have been fueled in part by tropical storms, including Hurricane Irene, which pummeled the East Coast at the end of the month. Starts in the Northeast fell 29.1 percent.

Most of the weakness in new construction nationwide was concentrated in the multi-family housing sector, where starts dropped 13.5 percent.

Single-family home construction -- which accounts for a larger share of the market -- slipped 1.4 percent.

With overall economic growth looking less steady, the International Monetary Fund warned on Tuesday the United States could slip back into recession.

However, the consensus view among economists is that the country will dodge that bullet.

Heavy manufacturer Caterpillar Inc on Tuesday reported a slight acceleration in machinery sales to North American dealers in the three months through August, a sign demand remains steady.

In another upbeat sign, General Motors reached a tentative deal to create more than 6,000 U.S. factory jobs, union officials said.

The housing sector also saw a glimmer of hope in Tuesday's data, with permits for future construction up 3.2 percent in August. A day earlier, home-builder Lennar Corp had forecast a strong fourth quarter.

Still, the sector does not look ready to provide much support to economic growth anytime soon.

"Housing isn't going anywhere fast," said Sean Incremona, an economist at 4Cast in New York. "The permits side is a little bit more positive looking, but it doesn't look like things are really finding their way off the ground."

(Additional reporting by Caroline Valetkevitch and Richard Leong in New York, Editing by Andrea Ricci and Neil Stempleman)

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Obama to offer his own deficit reduction package (AP)

WASHINGTON – Even as President Barack Obama prepares his opening bid on long-term deficit reduction, the White House wants to keep the focus on jobs and is determined to avoid getting sucked into another budget fight with lawmakers.

Administration officials see the task of attending to deficits as necessary but not necessarily urgent, compared with the need to revive the economy and increase employment.

The White House also sees this as the time to draw sharp contrasts with congressional Republicans, whose public approval ratings are lower than Obama's.

As a result, when Obama announces at least $2 trillion in deficit reduction measures Monday, he is not expected to offer all the compromises he reached with House Speaker John Boehner, R-Ohio, in July before those talks broke off.

"I would view this as the president's vision for how we achieve deficit reduction, which makes it inherently different than the sorts of legislative negotiations we were undertaking with the speaker over the summer," said the White House communications director, Dan Pfeiffer.

The plan represents an economic bookend to the $447 billion in tax cuts and new public works spending that Obama has proposed to as a short-term measure to stimulate the economy and create jobs. He's submitting it to a special joint committee of Congress given the task of recommending how to reduce deficits by $1.2 trillion to $1.5 trillion over 10 years.

The White House signaled its approach Saturday by highlighting a proposal in the president's plan that would set a minimum tax rate for taxpayers earning more than $1 million.

The measure — Obama is going to call it the "Buffett Rule" for billionaire investor Warren Buffett — is designed to prevent millionaires from using tax-avoidance schemes to pay lower rates than middle-income taxpayers. Buffett has complained that he and other wealthy people have been "coddled long enough" and shouldn't be paying a smaller share of their income in federal taxes than middle-class taxpayers.

However, the proposal is a certain dead-letter with Republicans, who have pledged to oppose any increase in taxes.

"It adds further instability to our system more uncertainty and it punishes job creation and those people who create jobs," said GOP Rep. Paul Ryan of Wisconsin, the House Budget Committee chairman. "Class warfare may make for really good politics but it makes for rotten economics," he told "Fox News Sunday."

Senate Republican leader Mitch McConnell, noting that a similar effort to raise taxes on the wealthy failed a few years ago, continued to push for revising the tax code and looking to increasing revenue through economic activity rather than taxes. He was dismissive of Obama's so-called Buffett Rule.

"With regard to his tax rate, if he's feeling guilty about it, I think he should send in a check," McConnell said of Buffett while appearing on "Meet the Press" on NBC. "But we don't want to stagnate this economy by raising taxes."

The White House also has said that Obama will not offer any proposals to reduce long-term spending in Social Security, even though Obama had suggested to Boehner reducing annual cost-of-living adjustments for Social Security recipients. The idea drew loud objections from Democrats.

Now Democrats are waiting to see what Obama proposes to do with Medicare, the government health care program for older people.

In his talks with Boehner, Obama was willing to go along with gradually increasing the eligibility age for Medicare beneficiaries from 65 to 67. That idea has run into opposition from Democrats, and the White House was deciding whether or not to leave it in the president's new deficit plan.

"Potentially raising the retirement age for Medicare is something that deserves a lot of consideration," said Christina Romer, the former head of Obama's Council of Economic Advisers. She said such an increase in the eligibility age is more conceivable with Obama's health care law because guaranteed private health insurance would be available to middle-class early retirees starting in 2014.

Still, an analysis by the nonpartisan Kaiser Family Foundation found that two-thirds of 65- and 66-year-olds would pay more for their new coverage than they would have under Medicare.

Raising the eligibility age is "bad policy and bad politics," said Nancy Altman, one of the leaders of Strengthen Social Security Campaign, a coalition of advocacy organizations.

"What the president proposes on Monday, especially if the Republicans were to embrace it, would be harder for Democrats in Congress to separate themselves from it," she said.

Overall, the president's proposal could help reduce long-term deficits by about $4 trillion.

Under a compromise in early August that averted a threatened government default, Congress agreed to cut nearly $1 trillion from some programs. The president's proposal would reduce deficits by an extra $2 trillion. On top of that, drawing down military forces in Afghanistan and Iraq is estimated to reduce projected deficits by $1 trillion over 10 years.

Republicans have ridiculed the war savings as gimmicky, but House Republicans included them in their budget proposal this year and Boehner had agreed to count them in his talks with Obama.

In addition to the new minimum tax rate for millionaires, Obama's proposal will include revenue increases that Obama has identified to pay for his $447 billion jobs plan. Those include limiting deductions for wealthier taxpayers, closing corporate loopholes and eliminating tax subsidies to oil and gas companies. Boehner last week ruled out many of the tax increases Obama has proposed.

William Galston, a former economic adviser to President Bill Clinton, said it would have been better if Obama had presented his jobs plan and his deficit reduction proposal sooner and as one package.

"The president has generated a problem for himself by giving the appearance of not being forthcoming enough with regard to his own fiscal plan," Galston said. "He feels the need, as he should, to lean forward a bit more. It's a shame this didn't happen a whole lot earlier."

Senior administration officials say that in pushing for his jobs plan, Obama will highlight the need for long-term deficit reduction and the need to achieve it through spending cuts and tax revenue. In so doing, they will try to create sharp differences with Republicans that could serve him in the 2012 presidential campaign.

To that end, some Democrats say it would be foolish for Obama to offer a deficit reduction plan that embraces some of the deals he was prepared to strike with Boehner.

"I don't think he is bound by the compromise they were working on," said Rob Shapiro, a former undersecretary of commerce in the Clinton administration Shapiro. "It has always been the president's position that in a compromise, he was prepared to support entitlement reform if the Republicans were prepared to support revenue increases."

Still, the White House considers passing the jobs bill far more pressing and Obama has been looking for every opportunity to bring it to the public's attention.

In his Saturday radio and Internet address, Obama said he would lay down a plan that would show how to pay down the nation's debt and pay for his employment legislation.

"But right now," he said, "we've got to get Congress to pass this jobs bill."

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Assault on Gaddafi bastion ends in chaotic retreat (Reuters)

By Maria Golovnina and Alexander Dziadosz Maria Golovnina And Alexander Dziadosz – Sun?Sep?18, 12:13?pm?ET

BANI WALID/SIRTE, Libya (Reuters) – Libyan interim government forces fled on Sunday in a chaotic retreat from the town of Bani Walid, after failing in yet another attempt to storm the final bastions of loyalists of ousted leader Muammar Gaddafi.

Since taking the capital Tripoli last month, motley forces of the ruling National Transitional Council have met stiff resistance in Bani Walid and Gaddafi's birthplace Sirte, which they must capture before they can declare Libya "liberated."

Anti-Gaddafi fighters have tried several times to storm Bani Walid, 150 km (95 miles) southeast of Tripoli, in recent days only to retreat in disorder under fire from defenders. Sunday's failed attempt appeared to be among the worst yet, setting off angry recriminations among the attackers.

NTC fighters said they had planned for tanks and pickup trucks with anti-aircraft guns and rocket launchers to lead Sunday's attack, but foot soldiers had piled in first.

"There is a lack of organization so far. Infantry men are running in all directions," said Zakaria Tuham, a senior fighter with a Tripoli-based unit. "Our commanders had been told that heavy artillery units had already gone ahead, but when we advanced into Bani Walid they were nowhere to be seen.

"Gaddafi forces were hitting us heavily with rockets and mortars, so we have pulled out."

A Reuters reporter saw fighters withdraw around two km (more than a mile) after they had stormed into the town.

Anti-Gaddafi fighters from Bani Walid blamed comrades from elsewhere in Libya for being unwilling to coordinate. Those from elsewhere accused some local fighters of being traitors and passing information to Gaddafi loyalists.

"Commanders who are from the Warfalla tribe, they tell us one thing and then commanders from the other cities say something else. We do not understand anything," said pro-NTC fighter Mohamed Saleh.

"So we are just going in and pulling back without a single purpose. It's impossible to take this city this way. It will continue like this until they send more experienced troops who know how to use their weapons."

Some fighters openly disobeyed orders. In one incident, an officer from Bani Walid was heckled by troops from Tripoli after he tried to order them to stop randomly shooting in the air as they celebrated seizing a mortar from Gaddafi forces.

"You are not my boss. Don't tell me what to do," one of the Tripoli fighters snapped back at him.

Shells whistled above anti-Gaddafi positions and exploded across the desert valley as invisible snipers sprayed bullets from Bani Walid's rooftops and smoke rose above the town.

NTC fighters helped some families evacuate from the town, driving them out in military pickup trucks.

"The past two weeks been awful but last night was particularly bad," said Zamzam al-Taher, a 38-year-old mother of four. "We have been trapped here without a car and with no food. Snipers are everywhere."

"The biggest mistake by the rebels is that they come in and leave without setting up checkpoints. When they leave, Gaddafi militiamen come in with their own checkpoints and flags and terrorise local people," she added.

BATTLE FOR SIRTE

NTC forces and NATO warplanes also attacked Sirte, Gaddafi's birthplace. Fighters launched rockets from the city's southern entrance and traded fire with Gaddafi loyalists holed up in a conference center.

"The situation is very dangerous. There are so many snipers and all the types of weapons you can imagine," said fighter Mohamed Abdullah as rockets whooshed through the air and black smoke rose above the city.

Medics mopped the floor of a small field hospital on Sirte's western outskirts as they prepared for more casualties, following bloody but inconclusive clashes a day earlier. A doctor said 16 NTC fighters and an ambulance driver had died in Saturday's fighting. He had also received 62 wounded.

As in many episodes during Libya's conflict, the frontlines at Sirte and Bani Walid have ebbed back and forth, with shows of bravado colliding with the reality of battle.

An incoming shell landed within 200 metres of NTC-held lines only to be met with return fire from NTC fighters shouting "God is greatest!"

Speaking against the roar of NATO jets overhead, one anti-Gaddafi fighter at Sirte, Mahmoud Othman, said his men were helping families who had fled ahead of the next assault.

"We don't want any more bloodshed between us. But if the Gaddafa want more blood, we are ready," he said, referring to the deposed leader's tribe. "In the end we want Gaddafi."

Scores of civilian cars and pickup trucks poured out of the city, with residents describing water and electricity shortages amid street fighting. Gaddafi forces were patrolling the streets in the center, they said, making their lives a misery.

"People are living in terror," resident Taher al-Menseli, 33, said as NTC fighters searched his car at a checkpoint. "Gaddafi supporters are trying to convince people the revolutionaries are criminals and that you have to kill them. Even if you don't believe this, you have to appear convinced."

Nearby, three young men knelt in the sand beside the road, their hands tied behind their backs. NTC fighters said they had found two assault rifles and ammunition in their car.

Gaddafi's spokesman, Moussa Ibrahim, said NATO air raids had killed 354 people in Sirte on Friday night, an accusation Reuters could not verify without access to the city. A NATO spokesman in Naples said previous such reports had been false.

"We will be able to continue this fight and we have enough arms for months and months to come," Ibrahim said in a call to Reuters via satellite telephone on Saturday.

British warplanes, operating under NATO's U.N. mandate to protect Libyan civilians, bombed a Gaddafi ammunition dump west of Sirte on Sunday, after destroying an armoured troop carrier and two armoured pickup trucks in the Sirte area the day before, a British military spokesman said.

More NTC fighters were advancing from the east to reinforce those assaulting Sirte. The slow and cautious advance met resistance from pro-Gaddafi fighters who fired Grad rockets and machine guns rounds, sending plumes of smoke into the air.

"We will not retreat. God willing we will reach Sirte either tonight or tomorrow," fighter Ali Hassan al-Jaber said.

Outside Bani Walid, NTC fighters captured a man hailing from neighbouring Chad, accusing him of being a Gaddafi gunman.

Shaking with fear, the man, who gave his name as Mohamed Ezzein, whispered that he had nothing to do with the war.

"I'm just a shepherd. What fighting? What fighting?" he repeated from the back of a pickup truck as anti-Gaddafi fighters pushed him around saying: "Don't lie, don't lie."

(Additional reporting by William MacLean and Joseph Logan in Tripoli, Sherine El Madany in Herawa, Emma Farge in Benghazi, Barry Malone and Sylvia Westall in Tunis and Juliane von Reppert-Bismarck in Brussels; Writing by Alistair Lyon; Editing by Peter Graff and Myra MacDonald)

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AP Enterprise: GOP not always against entitlements (AP)

By RICARDO ALONSO-ZALDIVAR, Associated Press Ricardo Alonso-zaldivar, Associated Press – 1?hr?39?mins?ago

WASHINGTON – It's a massive health care entitlement with unfunded future costs over $7 trillion. Many conservatives are still upset at the way it was rammed through Congress.

But when the Republican presidential candidates were asked last week asked if they would repeal the Medicare drug benefit, they said no way. After all, Republicans created it.

Republicans want to pull the plug on the health care overhaul they call "Obamacare," but that law is arguably less a deficit driver than the Medicare drug plan they are defending.

Debt and deficit are the focus of the Republican Party as the 2012 presidential campaign moves through the nominating process and looks ahead to the general election. Yet the reluctance of GOP candidates to renounce a costly entitlement program that voters like shows how politics can come into play when critiquing the federal ledger.

Passed by a GOP-led Congress in 2003 under President George W. Bush, the prescription program is immensely popular with older people, faithful voters who lately have been trending Republican.

Medicare recipients pay only one-fourth of the cost of the drug benefit. Because there's no dedicated tax to support the program, the other three-fourths comes from the government's general fund. That's the same leaky pot used for defense, law enforcement, education and other priorities. It's regularly refilled with borrowed dollars that balloon the deficit.

Although the health care law costs far more than the drug benefit, it's paid for, at least on paper. It includes unpopular Medicare cuts as well as tax increases on insurers, drug and medical device companies, upper-income people, and even indoor tanning devotees.

Asked last week at the Tea Party debate if they would repeal the prescription program, GOP candidates would hear nothing of it.

Texas Gov. Rick Perry said he would not, even though he said he's concerned about its cost. Cracking down on waste and fraud might be the answer, he suggested.

"I wouldn't repeal it," said former Massachusetts Gov. Mitt Romney. He said he would restructure Medicare, but not for those now in the program or nearing retirement. The re-engineering supported by House Republicans this year and praised by Romney at the time would give future retirees a voucher-like payment to buy insurance from a range of private plans.

Texas Rep. Ron Paul noted that he'd voted against the prescription benefit, but said repeal "sure wouldn't be on my high list. I would find a lot of cuts (in) a lot of other places."

Budget hawks scoff.

"I'm an equal opportunity critic here," said David Walker, a former head of the congressional watchdog agency. "I think the Republicans were irresponsible for passing the Medicare prescription program in 2003 and I think the Democrats were irresponsible for passing" Obama's health overhaul.

As comptroller general of the Government Accountability Office for most of the past decade, Walker used his position to call attention to the nation's long-term budget problems at a time when the debt wasn't front-page news. He now leads the Comeback America Initiative, a nonpartisan group promoting fiscal responsibility.

"There was no attempt to offset the cost of the Medicare prescription bill," Walker said. "It's fair to say that at least there was an attempt to pay" for the health law through a mix of spending cuts and tax increases.

How big is the hole left by the prescription program? Over the next 75 years, its $7.5 trillion "unfunded obligation" exceeds the $6.7 trillion gap attributable to Social Security.

"When they were designing the new health care law, the experience of the Medicare prescription bill was very much in their minds," said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group advocating fiscal discipline. "They didn't want to have another unfunded expansion."

Experts can debate whether future Congresses will suspend Obama's Medicare cuts and whether the long-range cost of extending coverage to more than 30 million uninsured will outpace the revenue to pay for it.

As the reactions of the GOP candidates at the debate demonstrated, no one is seriously considering repeal of the prescription program.

Thanks to taxpayers, about 90 percent of older people now have affordable access to medications that help keep them out of the hospital. Roughly two-thirds of those are enrolled in Medicare's benefit; many others are in former employers' prescription plans.

Ironically, repealing Obama's overhaul would take away the most important improvement to the program since it was created. Obama's law gradually eliminates the dreaded coverage gap known as the doughnut hole. Millions of people will each save thousands of dollars as a result.

Republicans like to point out that the cost of the prescription program is well below original estimates. They attribute that to competition among the private insurers providing the benefit.

While competition is part of the story, experts say it's not the only reason. The shift to cheaper generic drugs among people of all ages has been a powerful contributor. That may not last forever. The trustees who oversee Medicare's finances warn in their latest report that spending on drugs will rise more rapidly in the future.

Said Walker: "Basically what's happening is we're mortgaging the future of our children and grandchildren, and borrowing the money from China."

____

Online:

Medicare prescription drug plan: http://tinyurl.com/24xy54j

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Reno crash raises questions about the future of air races (The Christian Science Monitor)

[UPDATE: The number of people killed in the Reno Air Races crash Friday has risen to nine, according to the Reno police. Also, a T-28 aircraft crashed on the runway during a six-aircraft routine Saturday at an airshow in Martinsburg, West Virginia, killing the pilot. There were no other casualties, according to initial reports.]

The crash at the Reno Air Races in Nevada Friday afternoon – the worst accident in the history of the event – raises questions about the future of what’s billed as “the world’s fastest motorsport.”

Have the capabilities of the high-speed aircraft flown at very low level exceeded the abilities of even the best pilots? Should age be a consideration in allowing pilots to compete? Should the race course be moved farther away from the tens of thousands of spectators who gather there each September.

Sometimes likened to the top race cars as “Formula One with wings,” racing aircraft fly at up to 500 miles an hour and less than 100 feet above the ground. The fastest categories fly an 8-mile oval course around pylons.

The Monitor's weekly news quiz for Sept. 11-16, 2011

Many of the competing aircraft started out as vintage World War II fighters, such as the P-51 Mustang and the F8F Bearcat. But they are highly modified, with larger engines and aerodynamic characteristics that have been altered to increase performance during high-G turns that can stress airframes.

Jimmy Leeward, the pilot in the crash, was flying a P-51 named the "Galloping Ghost."

Mr. Leeward, a real estate developer and owner of the Leeward Air Ranch Racing Team in Ocala, Fla., was a veteran pilot who’d flown 250 types of aircraft. He was a long-time racer who’d flown at Reno since 1975, and he’d flown as a stunt pilot in such films as "Amelia," Cloud Dancer," and "The Tuskegee Airmen."

In an interview with the Ocala Star-Banner last year, Leeward talked about the P-51 – the aircraft flown in combat in World War II by famed pilot Chuck Yeager, who once shot down five enemy aircraft on a single mission.

"They're more fun. More speed, more challenge,” Leeward said of the P-51. “Speed, speed and more speed.”

Initial reports indicated that the pilot had pulled up and called a€?maydaya€

At this writing, three people (including the pilot) have died as a result of the crash and 56 were taken to local hospitals, many of them critically injured.

But given the total destruction of the aircraft, former NTSB investigator Greg Feith told MSNBC, the exact cause of the accident – perhaps a mechanical failure or a medical situation experienced by the pilot – may never be known.

Some have raised questions about Leeward’s age, initially reported as 80 but then corrected to 74. Those who knew him well reject the suggestion that he was too old to participate in such a stressful and potentially dangerous sport requiring physical strength, extraordinary reflexes, and the ability to react instantly to emergency situations including engine failure at low level.

Leeward's aviation medical records were up-to-date, and he was "a very qualified, very experienced pilot," said Reno Air Races President and CEO Mike Houghton.

Some witnesses to the crash suggested that Leeward may have maneuvered his aircraft away from the grandstands where the casualties could have been higher.

Four pilots have been killed in recent years. Over the years, there have been 19 deaths due to crashes and collisions at Reno, but none until this week had involved spectators.

Two pilots died at the event in 1994, and organizers softened two of the curves pilots negotiate after two more pilots crashed into nearby neighborhoods in 1998 and 1999, according to an Associated Press report. In 2007 and 2008, four pilots were killed at the races, prompting local school officials to consider barring student field trips to the event.

Air shows not involving races also have a long record of accidents involving pilots and spectators. There have been eight so far this year, five involving fatalities. The worst was in 2002 when a Ukrainian Air Force fighter crashed during an air show near Lviv, Ukraine, killing 77 people and injuring 543.

National Transportation Safety Board (NTSB) officials have taken over the investigation in Reno. The Federal Aviation Administration (FAA) is involved as well.

The Monitor's weekly news quiz for Sept. 11-16, 2011

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Greek cabinet meets to decide more austerity steps (Reuters)

By George Georgiopoulos and Renee Maltezou George Georgiopoulos And Renee Maltezou – Sun?Sep?18, 10:32?am?ET

ATHENS (Reuters) – Greek Prime Minister George Papandreou chairs a cabinet meeting on Sunday to decide on more austerity measures to secure continued funding under an international bailout.

EU and IMF inspectors are holding a conference call with Finance Minister Evangelos Venizelos on Monday to hear what measures Greece will take to plug this year's shortfall in the budget before they release an 8 billion euro ($11 billion) loan tranche it needs by October before it runs out of money.

Papandreou canceled a planned visit to the United States on Saturday to deal with the deepening crisis at home as euro zone partners made clear further funding for the debt-ridden country would hinge on adhering to agreed fiscal targets.

"The meeting is set to examine measures from public sector layoffs to more pension cuts," said a government official on condition of anonymity.

Last week, the government blamed the shortfall on a deeper-than-expected recession and decided to put a new tax on real estate in the hope of collecting about 2 billion euros annually.

But international inspectors, known as the troika, expressed doubts this one-off tax measure would work and demanded more details on how the government hoped to catch up this year and the next.

"The troika thinks the recently announced property levy will not suffice to plug the budget hole and is pressing for measures on the spending side -- cuts in public sector wages and employment," said a second government official who asked not to be named.

The conservative New Democracy opposition has criticized the government for overtaxing the economy and driving it into a tail spin.

Its leader, Antonis Samaras, called for snap elections on Saturday saying the policy mix was wrong and was not yielding any results despite peoples' sacrifices.

"A renegotiation with our lenders to restart the economy is a condition to get out of this crisis," Samaras told a news conference on Sunday.

International lenders are also concerned with the lack of political consensus in Greece on the measures needed to emerge from the crisis.

The conservatives have been buoyed by growing public discontent after two years of austerity measures and are proposing tax cuts and growth boosting measures instead.

Papandreou's socialists have a majority in parliament but political analysts say internal dissent and public unrest, such as strikes and violent protests, may force snap elections.

Lenders have long warned against one-off measures and more taxes as a way out of the crisis shaking the euro.

They have asked for urgent reforms and privatizations to make the economy more competitive and a reduction in the bloated public sector.

($1 = 0.725 Euros)

(Writing by George Georgiopoulos; editing by Elizabeth Piper)

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NTSB probes plane's tail in Reno air race crash (Reuters)

RENO, Nevada (Reuters) – Federal investigators trying to determine why a World War II-era fighter crashed at a Nevada air race, killing nine people, said on Saturday they would focus in part on the plane's tail assembly.

A photograph of the modified P-51 Mustang in the seconds before it slammed into an airfield at the 48th Annual National Air Championship Races on Friday afternoon appears to show a component of the plane's tail section falling off.

"We have seen the photos and the video and clearly that is one aspect of this that will be investigated intensely," National Transportation Safety Board member Mark Rosenkind said at a press briefing.

"Clearly that is a focused area for us to look at," Rosenkind said, adding that parts of the tail section had been recovered from the crash site, which left a 3-foot deep crater on the tarmac of Reno Stead Airport.

Seven people were killed at the site when pilot Jimmy Leeward slammed the sleek silver fighter plane, which was dubbed "The Galloping Ghost" in the 1940s, into a box seat area in front of the grandstand.

Leeward, a 74-year-old real estate developer who was well known in air racing circles and had worked as a stunt pilot in movies, was among the dead.

A total of 54 other people were transported to area hospitals, where two died of their injuries, Evans said.

Astronaut Mark Kelly, husband of wounded U.S. Rep. Gabrielle Giffords, had been scheduled to fly in a P-51 Mustang in the Reno air show on Saturday, a Giffords spokesman said.

Kelly was in Reno the day of the deadly accident, but Giffords spokesman Mark Kindle said he was going back to Houston after the plane crash resulted in the cancellation of the races, originally scheduled to run through the weekend.

Giffords was shot in the head during a meeting with constituents in Tucson, Arizona in January in an attack by a gunman that killed six people.

The NTSB investigation in Nevada began on the same day that a vintage plane crashed in a fireball at a Martinsburg, West Virginia air show, killing the pilot.

NTSB TO PROBE RACE SAFETY

The incidents raised questions about the safety of air shows and races, and Rosenkind said investigators would evaluate the Reno Air Races to see if proper safety protocols were followed.

On August 20, the pilot of an aerobatic airplane died in a fiery crash in front of onlookers at a weekend air show in Kansas City. The following day a wingwalker fell to his death at an air show near Detroit as he tried to climb onto a helicopter in midair.

But proximity to the planes is clearly a draw for the annual Reno race, which advises on its website, "Always remember to fly low, fly fast and turn left."

Mike Draper, a spokesman for the races, said the planes sometimes fly at high speeds "about 50 feet off the ground and it's an exciting, exciting sight."

The thrill has been a deadly one on occasion, with the nine deaths on Friday marking 28 people killed in the history of the race, flown every year in Reno since 1964, Draper confirmed.

Reno Mayor Bob Cashell told reporters this year marked the first time that spectators had been killed, saying that past fatalities had been limited to pilots.

In an interview for the May issue of Sport Aviation magazine Leeward, who bought the plane in 1983, described the modifications he made to the fighter, saying he had trimmed the wings by 10 feet, among other things.

The magazine said it was built during World War II and named after Chicago Bears running back Red Grange, who went by the nickname "The Galloping Ghost."

Asked by the magazine how fast his plane could go, he said: "There are some things you never tell the competition and that's one of them. But it's fast. Really fast."

A website for Leeward Air Ranch Racing Team features pictures of "The Galloping Ghost" and says such planes can race at more than 500 miles per hour.

"These (pilots) are always on the edge knowing one wrong move, in one split second, could mean the end," the site says.

By Saturday afternoon, makeshift memorials had sprung up at the airfield north of Reno, including flowers and tiny white, wooden crosses memorializing the dead.

A wooden sign leaning against a fence read: "To the men, women, and children who lost their lives on 16 September 2011 you're in God's hands now. Rest in peace. galloping ghost #177 clear for take off ... fly to the angels."

(Additional reporting by Dan Whitcomb and Mary Slosson; Writing by Dan Whitcomb; Editing by Ellen Wulfhorst)

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Boehner says US must be strong partner for Israel (AP)

WASHINGTON – House Speaker John Boehner says the U.S. commitment to Israel should be stronger now as the American ally faces challenges to its existence in the volatile Middle East.

In an address Sunday to the Jewish National Fund conference in Cincinnati, the Ohio Republican dismissed suggestions that Israel has isolated itself and he argued that the Jewish state stands above others as the "one true beacon of freedom and opportunity" in the region.

The U.S., he said, must stand by Israel's side "not just as a broker or observer — but as a strong partner and reliable ally."

A text of Boehner's address was made available in advance.

Boehner's remarks come on the eve of the U.N. General Assembly session in New York, which is shaping up as a difficult diplomatic period for Israel.

The Palestinian Authority intends to seek recognition of statehood despite a threat of a U.S. veto in the Security Council and the strong objections of the United States and Israel.

Boehner also noted that the U.N. will highlight the Durban Declaration, viewed by many as an anti-Semitic statement, and that Iranian President Mahmoud Ahmadinejad, a foe of Israel, will address the General Assembly.

Boehner's speech comes amid renewed attention to President Barack Obama's policies toward Israel. Republicans say the president isn't forceful enough on behalf of Israel, and political questions have been raised on whether the GOP can capitalize on the discontent and make inroads with Jewish voters.

Last Tuesday, Republican Bob Turner scored a surprising win in a historically Democratic New York congressional district in part because of complaints about Obama's Mideast policies. The district also has a large concentration of Orthodox Jews.

In May, Obama called for Israel's 1967 borders with mutually agreed land swaps to serve as the starting point in Israeli-Palestinian negotiations. That proposal was rejected by Israeli Prime Minister Benjamin Netanyahu.

Boehner, in his speech, did not mention Obama, but did recall his invitation to Netanyahu to address a joint session of Congress, also in May, and the message the prime minister delivered.

"The American people deserved to hear from him — and Washington, quite frankly, needed to hear what he had to say," Boehner said. "I invite the people in this room — and anyone as concerned as I am about the future of Israel — to speak out. Washington needs to hear from you, too."

Boehner said Israel has shown that it seeks "nothing more than peace ... a peace agreed to by the two states and only the two states." The speaker said Netanyahu understands that peace will require compromise.

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Republicans criticize tax on millionaires idea (Reuters)

WASHINGTON (Reuters) – Republican leaders on Sunday criticized President Barack Obama's proposal for a new tax on millionaires, calling it "class warfare" and predicting it will face heavy opposition in Congress.

Obama is expected to propose a "Buffett Tax" on Monday on people making more than $1 million a year as part of his recommendations to a congressional super committee seeking long-term deficit savings.

Paul Ryan, chairman of the House of Representatives Budget Committee, and Mitch McConnell, Senate Republican leader, said the proposal would limit growth and hurt corporate investment in an already stagnating economy.

"It adds further instability to our system, more uncertainty and it punishes job creation and those people who create jobs," Ryan said on Fox News Sunday. "Class warfare may make for good politics but it makes for rotten economics."

McConnell said Congress had already debated the issue last year, when Obama and Republicans forged a compromise that extended the reduced tax rates, approved during the administration of George W. Bush, for high-earners for two years.

"It's a bad thing to do in the middle of an economic downturn," McConnell said on NBC's Meet the Press. "There is bipartisan opposition to what the president is recommending already."

The "Buffett Tax" refers to billionaire U.S. investor Warren Buffett, who wrote last month that rich people like him often pay less in tax than those who work for them because of loopholes in the tax code, and can afford to pay more.

Obama will lay out his recommendations in White House Rose Garden remarks at 10.30 a.m. EDT on Monday and is expected to urge steps to raise tax revenue as well as cuts in spending.

MANDATE TO SEEK SAVINGS

The super committee of six Democratic and six Republican lawmakers must find at least $1.2 trillion in deficit savings before the end of the year to avoid painful automatic cuts, and is mandated to seek savings of up to $1.5 trillion.

Those savings are on top of $917 billion in deficit reduction agreed to in an August deal to raise the U.S. debt limit and Obama wants it to go further.

The populist proposal for a millionaire tax would appeal to Obama's Democratic base heading into the 2012 election, setting the stage for a battle with Republicans over tax and spending priorities.

"I just think that's a political move by the president," Republican U.S. Senator Lindsey Graham of South Carolina said of the millionaire tax on CNN's State of the Union.

"When you pick one area of the economy and you say, we're going to tax those people because most people are not those people, that's class warfare," he said.

Senator Dick Durbin of Illinois said on CNN that the proposal to raise taxes would be a good idea as long as it targeted "the wealthy and comfortable and those who wouldn't even notice it."

Congress also is considering Obama's jobs-creation proposal sent to them earlier this month. Durbin, the No. 2 Senate Democrat, said a Senate vote on Obama's jobs plan would likely come in October.

(Writing by John Whitesides; Editing by Philip Barbara)

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UBS raises rogue equity trade losses to $2.3 billion (Reuters)

ZURICH (Reuters) – Swiss bank UBS increased the amount it said it had lost on rogue equity trades to $2.3 billion on Sunday and Chief Executive Oswald Gruebel said the alleged fraud would have consequences for strategy and possibly also for himself.

"It is obvious that these incidents will have an influence on the strategy of the investment bank," a visibly chastened Gruebel told Swiss television, adding that the firm would present a new strategy for its investment bank soon.

"I will bear all the consequences of the incident. They will be announced as soon as we put them in practice," he said.

UBS stunned markets on Thursday when it announced unauthorised trades had lost it some $2 billion. London trader Kweku Adoboli was charged on Friday with fraud and false accounting dating back to 2008.

UBS said in a statement on Sunday the trader concealed "unauthorised speculative trading in various S&P 500, DAX, and EuroStoxx index futures over the last three months" by creating fictitious hedging positions in internal systems.

"The loss arising from this matter is $2.3 billion. As previously stated, no client positions were affected," it said.

Global stock markets have been extremely volatile in recent months, plunging on concerns over euro zone and U.S. debt crises and then rebounding on hopes for their resolution.

BUCK STOPS WITH GRUEBEL?

The loss is a disaster for the reputation of Switzerland's biggest bank, which had just started to recover after it almost collapsed during the financial crisis and faced a damaging U.S. investigation into aiding wealthy Americans to dodge taxes.

"Loss even more. Reads like they're making excuses," Helvea analyst Peter Thorne said of the UBS statement in an e-mail.

The new scandal has prompted calls for UBS's top managers to step down and for its investment bank to be split into a separate unit from its core wealth management business.

Chris Wheeler, bank analyst at Mediobanca, said there would be pressure on UBS to address the investment bank fast.

"That had been planned anyway for the investor day on November 17 and there may be pressure on them to accelerate that."

Gruebel, who was brought out of retirement in 2009 to turn the bank around, was quoted in a newspaper on Sunday as saying he was not considering quitting over the crisis, but said it was up to the board to decide.

In a memo to staff on Sunday, he said: "Ultimately, the buck stops with me. I and the rest of senior management are responsible for dealing with wrongdoing."

Swiss newspapers quoted unnamed insiders as saying the UBS board and important shareholders such as the Singapore sovereign wealth fund still backed Gruebel, with immediate changes the last thing the bank needs and an obvious successor lacking.

CONFIDENCE, SECURITY, DISCRETION?

The bank, whose three keys logo symbolise "confidence, security, discretion," has for now pulled its "We will not rest" global advertising campaign that was designed by advertising agency Publicis to try to rebuild its image.

Meanwhile, UBS client advisers have been writing to customers to reassure them of the underlying financial strength of the bank despite the trading loss, a spokesman said.

"That we now suffer this setback at this point in our efforts to improve our reputation is very disappointing. This incident also sets us back somewhat in our capital-building efforts," Gruebel said in his memo to staff.

"However, I wish to remind you that our fundamental strengths as a firm remain intact... we remain one of the best-capitalised banks in the industry.

UBS said its board of directors had set up a committee chaired by independent director David Sidwell, former chief financial officer at Morgan Stanley, to conduct an independent investigation into the trades and the bank's control systems.

A source close to the bank said the trades involved positions with a notional value of about $10 billion.

The bank said it had covered the risk resulting from the unauthorised trades, and its equities business was again operating normally within previously defined risk limits.

It said the trader had allegedly concealed the fact his trades violated UBS risk limits by executing fake exchange-traded fund (ETFs) positions.

"Following inquiries directed to him by UBS control functions that were reviewing his positions, the trader revealed his unauthorised activity," the bank said.

ETFs are index funds listed on an exchange and can be traded just like regular stocks. They try to replicate index performances and offer lower costs than actively managed funds, but regulators have warned about risks from some complex ETFs.

The instruments involved in the UBS case are similar to those that Jerome Kerviel, the rogue trader at Societe Generale, traded when he racked up a $6.7 billion loss in unauthorised deals in 2008.

Christoph Blocher, vice-president of the right-wing Swiss People's Party (SVP) -- the country's biggest -- renewed his calls for a splitting off of the investment bank.

"One has to seriously examine a ban on investment banking for commercial banks," he told the SonntagsZeitung newspaper, adding his party might team up with the center-left Social Democrats to push for such a move.

(Reporting by Emma Thomasson and Silke Koltrowitz; Additional reporting by Steve Slater in London; Editing by David Hulmes and Peter Graff)

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UBS CEO not resigning, loss mounts to $2.3 billion (AP)

GENEVA – Oswald Gruebel, the chief executive of UBS, has dismissed calls for his resignation as politically motivated, even as the Swiss banking giant raised its rogue trading loss to $2.3 billion.

UBS AG had previously put the loss at $2 billion when news of the scandal first broke Thursday.

In a bid to reassure investors, the Zurich-based bank said Sunday it has "now covered the risk resulting from the unauthorized trading" and its equities business "is again operating normally within its previously defined risk limits."

UBS also confirmed for the first time that the trader, 31-year-old Kweku Adoboli, was already under investigation by the bank when he revealed his actions to authorities Wednesday.

"The loss resulted from unauthorized speculative trading in various S&P 500, DAX, and EuroStoxx index futures over the last three months," UBS said, adding that the magnitude of the bank's risk exposure was hidden by fake trades.

Adoboli remains in custody in London, charged Friday with acts of fraud and false accounting dating back to 2008. His next court appearance is Thursday.

The fact that the fraud took place over three years raises serious questions about the bank's ability to manage its risk. UBS said it has set up a special committee chaired by David Sidwell, the bank's senior independent director, to investigate the incident.

Speaking for the first time since UBS revealed the loss, Gruebel told the Swiss weekly Der Sonntag that the loss couldn't have been prevented.

"If someone acts with criminal energy, then you can't do anything. That will always be the case in our business," the former trader said in the interview published Sunday.

But some Swiss politicians and commentators have called for Gruebel's head to roll over the loss, which is likely to put UBS's third-quarter results deep in the red. Such a move would signal defeat for the gravel-voiced German, who was brought in more than two years ago to revive the bank's fortunes after a series of missteps that included vast losses in the U.S. subprime mortgage market and an embarrassing U.S. tax evasion case.

Gruebel told Der Sonntag that he has no intentions of resigning.

"I'm responsible for everything that happens at the bank," Gruebel told the paper. "But if you ask me whether I feel guilty, then I would say no."

Gruebel pledged to stamp out risky business practices at UBS when he came out of retirement in early 2009 to take the helm of Switzerland's biggest bank. UBS had just suffered its biggest losses ever due to mistakes by the very investment unit that is now making headlines again, and had to take a $60 billion bailout from the Swiss government to stay afloat.

Swiss media on Sunday cited unnamed UBS board members saying the 67-year-old Gruebel retains the confidence of major shareholders, including the Government of Singapore Investment Corp. The sovereign wealth fund holds more than 6.4 percent of UBS's stock, whose value dropped almost 10 percent following the announcement about the fraud.

Gruebel is expected to survive until at least Nov. 17, when he presents investors with an update on the bank's activities. Banking experts in Switzerland have suggested the investors day may be used to announce a downsizing or even a spin-off of the investment unit.

In a previous case of rogue trading causing massive losses, the chairman of French bank Societe Generale, Daniel Bouton, stepped down more than a year after the bank revealed that a single trader lost euro4.9 billion ($6.7 billion). Bouton said that repeated attacks on him were becoming a threat to the bank's health.

So far, it is unclear who could even replace Gruebel.

The only name that has been mentioned is that of Sergio P. Ermotti, chief executive of the bank's Europe, Middle East and Africa business. Promoting Ermotti would satisfy those who want to see a Swiss at the head of the country's most important financial institution, to counterbalance incoming chairman Axel Weber, another German and a former president of Deutsche Bank.

Meanwhile, UBS has sent a letter to major clients seeking to reassure them that the bank remains on solid financial footing.

The letter, confirmed by UBS spokesman Dominik von Arx, also claims that UBS "is taking the matter extremely seriously and is doing everything possible to get to the bottom of it as quickly as possible."

"Your assets are safe with us," the Sunday Times of London quoted the letter as saying.

____

Raphael G. Satter in London contributed to this report.

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Merkel and euroskeptic allies beaten in Berlin (Reuters)

BERLIN (Reuters) – Germany's Social Democrats beat Angela Merkel's conservatives in a regional vote in Berlin on Sunday, handing the chancellor her sixth election defeat this year ahead of a key euro zone vote in parliament in two weeks' time.

Merkel's center-right coalition suffered a further setback when their junior coalition partners at the national level, the Free Democrats (FDP), failed to clear the five percent threshold needed to win seats -- for the fifth time this year.

The beleaguered FDP, which had attempted to attract voters in Berlin with its increasingly euro-skeptic tactics, plunged to 1.8 percent from 7.6 percent in 2006, preliminary results showed.

Their eroding support nationwide could destabilise Merkel's center-right coalition, analysts said.

Merkel, under fire for her hesitant leadership in the euro zone crisis, is halfway through a four-year term. But election setbacks for her CDU have hurt her standing before the vote on euro zone measures in parliament on September 29.

"We would be wise to show humility about this result," said a visibly stunned FDP deputy party leader, Christian Lindner. "It's a low-point but also a wake up call. We knew it was going to be a difficult year and that's been dramatically confirmed."

The SPD won 28.2 percent of the vote in Berlin, down from 30.8 percent in 2006 in Germany's largest city with 3.4 million inhabitants, according to an exit poll on ARD television.

SPD Mayor Klaus Wowereit appeared to be headed for a third five-year term, with the Greens as his most likely coalition partner.

"The best part of the result tonight is that the voters showed the FDP they won't get anywhere with populist attacks against Europe," said SPD leader Sigmar Gabriel, celebrating his center-left party's sixth win in seven regional votes this year.

"It shows the voters are smarter than the FDP campaign strategists and that you can't win an election by campaigning against Europe. The FDP tried that and failed."

EUROSCEPTIC MESSAGE FAILS

The CDU won 23.3 percent, up slightly from 21.3 percent in 2006 but well below the 40 percent the party used to win in Berlin in the 1980s and 1990s. The Greens won 17.6 percent, up from 13.1 percent in 2006, and the Left party fell to 11.7 percent from 13.4 percent.

The SPD and Greens have pledged support for boosting the euro zone bailout fund for countries like Greece in a crucial vote in parliament vote on September 29, when Merkel may face a revolt from more eurosceptic members of her coalition.

Greens leader Cem Oezdemir said the FDP had "tried to turn this election into an anti-European plebiscite" after its party leader, Economy Minister Philipp Roesler, said it should not be taboo to debate an "orderly" Greek debt default.

"Losing the election with 2 percent is a dramatic setback for the FDP and I hope they draw the right lessons," Oezdemir said. "Anti-European populism has no support in Europe and in Germany, thank goodness, and that's good news for our country."

The Pirate Party, running on a campaign for reform of copyright and better privacy in the Internet age, came out of nowhere to win a stunning 9.0 percent.

The SPD, in opposition at the national level since 2009, hopes their re-election in Berlin will help build up momentum to oust Merkel in the next federal election in 2013 -- or possibly sooner, if her government were to collapse.

"We're not the successors to the FDP," said Gabriel, when asked if the SPD would be ready to replace the FDP if the government were to fail before 2013.

The SPD has ousted or helped defeat the CDU in Hamburg and Baden-Wuerttemberg this year and remained in power elsewhere.

The CDU has lost six of seven regional votes this year, holding onto power only in the eastern state of Saxony-Anhalt. The fresh loss in Berlin will add to Merkel's woes before a Bundestag vote on September 29 to give the European Financial Stability Fund (EFSF) more powers.

Merkel did not make any comments on the Berlin election. But senior CDU lieutenants tried to put a positive spin on the result, noting that it was slightly improved from 2006.

Peter Altmaier, conservative parliamentary floor leader, said the CDU's gains had helped prevent a renewal of the SPD-Left coalition that has ruled in Berlin under Wowereit for the last 10 years.

"This is solid backing ... for Angela Merkel's policies," Altmaier said, adding that Merkel has spoken out unambiguously in favor of euro zone rescue measures.

"Merkel has made it very clear in recent weeks that the CDU stands by its pro European profile and vocation," Altmaier said. "We link stability with European consciousness and that has been honoured by the voters. Some euro skeptic posters were put up in Berlin at the last moment but they had no impact."

(Reporting by Erik Kirschbaum, Stephen Brown, Alexandra Hudson and Natalia Drozdiak)

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