The housing crisis is creating ghost towns of once-bustling communities like Merced. In largely abandoned neighborhoods, paved sidewalks and driveways lead to empty lots strewn with utility coils. Unfinished frames with rotting rafters and rusted hinges sit alongside occupied homes. Roughly 40% of the homes in Merced are considered distressed, meaning owners are behind on their mortgage payments or can&&9;t make them at all. The toll is expected to rise, even though California extended its moratorium on foreclosures for another 90 days.

Merced, situated in Central California&&9;s San Joaquin Valley, is an extreme example of what&&9;s happening across the country. As the economy tanks, foreclosures are soaring. Roughly one out of four subprime mortgages nationally is in trouble. Even so-called prime borrowers, who had good credit when they got their loans, now are having trouble keeping up; about 5% of these loans are in foreclosure, up from less than 1% in 2007, according to the Mortgage Bankers Assn. Rates are even higher in cities like Merced, Fort Myers, Fla., and Bakersfield, Calif., where the bust has been brutal.

Such markets will continue to suffer as they work through the inventory of foreclosed properties. In Merced, property values have dropped 70% in some cases. With banks and borrowers dumping distressed homes, prices could fall by 30% more, according to Karen Weaver, a Deutsche Bank (NYSE:DB - News) analyst. Merced, say analysts, will hit bottom by mid- to late 2010 -- after the rest of the country. In places like Bloomington, Ind., and Fayetteville, N.C., where homeowners are in better shape, the markets should be more resilient.

Foreclosure does present opportunities: Buyers and investors are scooping up distressed properties at cut-rate prices. Those purchases are helping jump-start sales in hard-hit states like California, Nevada, and Florida -- the first signs of life in otherwise moribund markets. Jillian Mendoza, a high school teacher in Merced, bought her first home out of foreclosure in September. She paid $143,000 for the three-bedroom home, which the previous owner had bought for $325,000 several years ago. "I never thought I&&9;d be able to buy a house at 25," says Mendoza. "I got such a deal on it that I&&9;m not that worried about it losing value."

Like many former boom towns, Merced is paying the price for unsustainable growth. The University of California announced in 2001 that it would open its first new campus in more than 40 years on 84 acres in northern Merced. In anticipation of the potential demand, builders flocked to the area, and real estate investors bid up prices.

But they were overly optimistic. The school projected only modest admission rates and faculty hires -- and housing supply far exceeded demand. Now the market lies in ruins, as unemployment tops 20%. Says Janet Young, assistant chancellor at UC Merced, which opened in 2005: "The housing boom was a huge surprise to us."

Merced, California

The housing crisis is hitting some cities harder than others. Merced, Calif., is a long way from recovery

Population 245,658

2007 Median Home Price $230,440

2008 Median Home Price $144,000

All numbers refer to metro area; Data: Fiserv

Merced: Ghost Town, USA

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NEW YORK (Reuters) – Oil rose on Wednesday, supported by government data showing a drop in U.S. crude supplies, gains in the stock market and a weaker dollar.

Further gains came after the oil minister from Qatar said the Organization of the Petroleum Exporting Countries was unlikely to hike output soon.

U.S. crude settled 56 cents higher at &&6;71.03 a barrel, having earlier traded down to &&6;69.00. Brent crude rose 61 cents to settle at &&6;70.85 a barrel.

U.S. crude inventories fell 3.9 million barrels in the week to June 12, according to data released by the U.S. Energy Information Administration, well above analysts expectations.

Gasoline demand in the world&&9;s top consumer, which has been battered by the economic crisis, rose over the four-week period ending last week, adding further support for prices.

"Demand is up 1.1 percent against a year ago -- that&&9;s almost normal demand growth," said Phil Flynn, analyst for Alaron Trading in Chicago

A steep 3.4-million barrel rise in U.S. gasoline stocks in the midst of the summer driving season earlier dragged crude markets lower.

Support also came as gains in technology and biotech stocks helped push up the U.S. stock market. (.N) Hopes that the economic crisis may soon find bottom has raised expectations fuel demand could begin to rebound, pushing up crude prices.

"The crude oil market is getting price guidance cooperation from a weak dollar and equities, which has taken off some early losses," said Tom Knight, trader for Truman Arnold in Texarkana, Texas.

The U.S. dollar fell after tame U.S. inflation data dampened speculation the Federal Reserve would raise interest rates any time soon. The weaker dollar makes oil and other commodities cheaper for holders of other currencies.

Slumping demand sent oil off record peaks over &&6;147 a barrel hit last July, prompting OPEC last year to agree to a series of production cuts to prop up prices.

Qatari Oil Minister Abdullah al-Attiyah told Reuters price gains in recent months were due to speculators more than fundamentals. He added that OPEC was unlikely to increase output soon despite concerns from some analysts that higher fuel costs could stall any global economic recovery.

"When you have a major player like Qatar saying we&&9;re going to keep production steady, that&&9;s supportive of the price and it&&9;s also a sign OPEC thinks the economy can handle &&6;70 a barrel oil," said Alaron&&9;s Flynn.

U.S. President Barack Obama on Wednesday laid out his vision for reshaping U.S. financial regulation, including imposing regulation on over-the-counter derivatives.

(Reporting by Richard Valdmanis, Matthew Robinson, Gene Ramos and Robert Gibbons in New York; Joe Brock and Alex Lawler in London)

Oil rises on stock market, U.S. inventory data

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SAN FRANCISCO (MarketWatch) -- American Capital Ltd. shares were active Thursday amid hopes that the investment firm may be able to renegotiate debt agreements with creditors.

However, the Bethesda, Md.-based company remains in default on debt covenants and faces a tough challenge to get covenant waivers from different groups of lenders.

An American Capital spokeswoman declined to comment.

American Capital shares closed at $3.18 on Thursday as more than nine million shares changed hands. The stock closed at $3.54 on Wednesday, according to FactSet data.

The stock has slumped 89% in the past year, but it's rebounded more than fivefold since hitting a low of 58 cents on March 6.

American Capital is in default under its unsecured credit facility and its unsecured public and private debt. While it hasn't missed any payments on the debt, the company said in a recent regulatory filing that it breached some financial covenants earlier this year.

It has $4.4 billion of debt outstanding, with $2.3 billion of that in the three credit facilities. A total of $1.25 billion of the debt matures in March 2011, according to analysts at Stifel Nicolaus & Co.

American Capital is also paying most of a dividend of more than $200 million in stock rather than cash.

"We have very good odds of reaching a satisfactory resolution with our creditors that will be universal and global in terms of solving all three creditor defaults," said Chief Executive Malon Wilkus during a June 4 analyst conference.

After the company fixes the default problem, it will likely raise capital to invest, he added.

"This is a great time to invest when you have capital," Wilkus noted, according to a transcript of the conference.

'Desire'

Several investors have argued that the banks which have lent money to American Capital won't want to see the company descend into bankruptcy. However, that decision isn't just up to the banks, according to Troy Ward and his analyst colleagues at Stifel, Nicolaus.

There are three different groups of lenders: the banks behind the revolving credit facility, public bond holders, and private bond holders, the analysts said in a note to investors earlier this week.

If one group moves to accelerate required debt payments, the other two groups would too, they noted, citing a recent speech by Wilkus.

"We remain concerned that the public debt holders don't have the desire like the bank holders to keep American Capital out of bankruptcy," Ward and his colleagues wrote.

"Based on recent trading in the public debt some of the new holders now own the debt at 30-60 cents on the dollar. Their desire for bankruptcy or covenant waivers is potentially different than the bank holders," they wrote.

Wilkus confirmed on June 4 that unsecured lenders would probably like to become secured creditors and that American Capital has roughly $4 billion in assets that could be used as collateral.

However, Wilkus also said that if American Capital arranged secured loans, the company could be left more vulnerable.

Provisions in typical secured loan agreements could include tangible net worth covenants and requirements that the market for mergers and acquisitions remains active, he explained.

"We have to be highly concerned on behalf of our shareholders to enter into a secured agreement that has provisions that we think we might trip out of no fault of our own," Wilkus said, according to the transcript of the June 4 meeting.

American Capital active on debt negotiation hopes

Hot News: American Capital jumps on debt negotiation hopes

ANSHAN, Liaoning, June 16 (Xinhua) -- An official with the Ministry of Industry and Information Technology (MIIT) said Tuesday that the proposed alliance of Rio Tinto and BHP Billiton had a "strong monopolistic color" and Chinese firms would watch it closely and find ways to cope with it.

Last year, China imported 440 million tonnes of iron ore, half of the world's total, so any slight market changes would affect Chinese steel makers. China's anti-monopoly law should apply in the proposed deal, said Chen Yanhai, head of the raw material department of MIIT at an industry meeting held in the northeastern city of Anshan, Liaoning Province.

If the tie-up proved to be monopolistic, "we have to seek new policies and regulations to allow Chinese companies have a bigger say in iron ore pricing," said Chen without elaborating.

Rio Tinto scrapped a proposed 19.5-billion-U.S.-dollar investment by Aluminum Corp. of China, or Chinalco, on June 5, and turned to rival BHP Billiton, which would pay Rio Tinto 5.8 billion U.S. dollars to set up a joint venture to run the iron ore resources of both companies in west Australia.

On Monday, spokesman of the Ministry of Commerce Yao Jian said if the revenue of the joint venture reached "a certain amount," China's anti-monopoly law would apply.

That law requires a company to get government approval before consolidation if its global revenue exceeds 10 billion yuan (1.47 billion U.S. dollars) and its revenue in China exceeds 2 billion yuan.

An anti-monopoly review is also necessary if two or more parties in the company had more than 400 million yuan of revenue in China in the previous fiscal year.

In the year ended 30 June, BHP Billiton's revenue in China was 11.7 billion U.S. dollars, while that for Rio Tinto was 10.8 billion U.S. dollars, according to the companies' websites.

It was unclear what actions China would take if the case was determined to be covered by the Chinese anti-monopoly law.

At the meeting Tuesday, Chen also said domestic steel makers should beef up technology and innovation to cut energy consumption and raise efficiency. Also, he said, China "should increase exploration of domestic mines to reduce reliance on imports."

Chinese official says proposed Rio, BHP tie-up has "strong monopolistic color"

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WASHINGTON (MarketWatch) -- President Barack Obama will formally propose on Wednesday a sweeping revamp of the U.S. financial regulatory system which rivals the reform that was enacted in the aftermath of the Great Depression in the 1930's.

The plan would empower the Federal Reserve and make it the supervisor of large, systemically vital financial institutions, granting it the authority to be a lender of last resort in "unusual and exigent circumstances," to mega-banks if the department first receives approval from the Treasury Department.

Big financial institutions will need to have greater capital on hand and will be scrutinized more thoroughly by the central bank, according to the administration plan released Tuesday.

The 85-page proposal will begin to be scrutinized Thursday with hearings in both the House and Senate. Lawmakers are expected to draft legislation reforming the bank regulatory system by the end of the year.

The proposal also calls for the elimination of the Office of Thrift Supervision and the Federal Thrift Charter, subsuming the agency into a new "National Bank Supervisor," agency based on the Office of Comptroller of the Currency that will supervise all federally chartered depository institutions.

The large, systemically significant financial institutions will be regulated by the Fed as Tier 1 financial holding companies, although the proposal also calls for all financial institutions to raise more capital.

The proposal does not provide details about which banks would be considered "systemically important," with the decision likely to be left to legislators on Capitol Hill.

The proposal calls for the creation of a financial services oversight council, which will be chaired by the Treasury Department and include the heads of bank regulators. The council, which would maintain a permanent staff at the Treasury, will seek to fill gaps in supervision, coordinate data collection and coordination among bank regulators so that the Fed is aware of any emerging risks.

The Obama administration will also seek to have hedge-fund managers register with the Securities and Exchange Commission, so agency officials can examine their books.

Unwinding insolvent banks?

The Obama administration also endorsed the creation of a controversial process to unwind large, interconnected insolvent financial institutions whose collapse would cause a systemic impact to the markets. Conservative leaders on Capitol Hill oppose such an entity, preferring instead to revise the bankruptcy code to expedite restructuring through the Chapter 11 process.

However, the plan seeks to set up a process to unwind an insolvent institution, with appropriate protections for taxpayers. Presumably, that means that large financial institutions would pay fees to set up an insurance pool that would go to pay off creditors and counterparties of a failing financial institution. Large financial institutions could also be asked to pay a large one-time fee roughly at the time of the collapse of a big institution to help unwind it.

The proposal does not provide details about whether that government authority would reside with the Fed, the Federal Deposit Insurance Corp. or another entity.

"We propose a new authority, modeled on the existing authority of the FDIC, that should allow the government to address the potential failure of a bank holding company or other non--bank financial firm when the stability of the financial system is at risk," according to the proposal.

The White House may experience opposition if it seeks to grant the Fed the authority to unwind insolvent mega-institutions. Many approaches by Congress are expected to seek giving that authority to the FDIC.

In an interview Tuesday on Bloomberg TV, Obama indicated that his proposal may call for the Fed to have resolution authority to unwind insolvent financial institutions so their collapse doesn't pose collateral damage to the markets overall.

"The other thing that [the Fed is] lacking right now is the resolution authority so that when a bank holding company breaks down, there is an ability to unwind that individual institution without bringing down the entire system," Obama said.

Consumer protection

The new regulatory blueprint also seeks to set up a Consumer Financial Protection Agency, which will approve or reject mortgage products and set up new disclosure rules for home-loan lending, the official said.

The CFPA, an independent agency, will write rules for banks and other institutions that limits what kind of mortgage products they can make available for consumers.

The proposal seeks to expand disclosure responsibilities by requiring lenders to define standard mortgage products and promote these along with all other legal products they choose to offer.

According to the proposal, consumers should, in some cases, be able to "opt out" of standard products before they could be offered alternative products.

The plan also seeks to give the agency the ability to enforce compliance through fines and penalties. The agency could prohibit lenders from offering mortgage products which it deems unsafe to consumers.

The official added that compensation practices at firms will be reformed so that pay plans don't provide incentives that threaten safety and soundness of institutions.

Securitization

The new regulatory system will also bring the largely unregulated securitization system under federal oversight.

The senior administration official said Obama will call for issuers of complex mortgage-backed securities and other similar financial products to be required to have a 5% unhedged stake in the securities they market.

House Financial Services Chairman Barney Frank, D-Mass., has pressed for such a "skin in the game" securitization process to make sure that loan originators have an incentive to make loans they believe will be repaid.

However, it is likely Treasury Secretary Tim Geithner will endorse a provision in Frank's bill that would exempt loan issuers from maintaining a financial stake in securitizations involving packaged 30-year loan mortgages. Bank lobbyists worry that by keeping a financial stake in mortgages they package and sell, they will need to hold a large amount of collateral on hand, limiting their lending power.

Credit-rating agencies

Obama's proposal is expected to seek additional requirements for credit-rating agencies, considered a key contributor to the financial crisis because of their high ratings for a wide-range of securitized subprime mortgages.

Specifically, the proposal is expected to require agencies to differentiate between structured products, such as securitized mortgages, and unstructured debt products, such as corporate bonds. Details about risks associated with ratings, methodologies and non-public rating data will need to be disclosed in an easy-to-understand manner.

Credit rating agencies will also need to disclose their performance measures for structured products so buyers of ratings can better compare agencies.

Derivatives

The official said there would be comprehensive regulation for credit default swaps, considered a key contributor to the financial crisis. He said that tailored CDS products sold on the opaque over-the-counter market will have higher capital standards and they will not be marketed to unsophisticated investors.

The White House plans to propose having all derivatives dealers, who structure transactions on the over-the-counter derivatives market to be regulated more heavily. The proposal seeks to have standardized over-the-counter derivatives moved through clearinghouses and exchanges, but does not require this for all derivatives as supported by some academics and lawmakers on Capitol Hill.

Roughly half of the trillions of dollars in derivative deals are customized swaps that would not need to go through clearinghouses. However, the proposal also seeks to have investors in tailored derivatives contracts to report their transactions to regulators.

The proposal also will call on the SEC and CFTC to harmonize regulation of derivatives through the proposed council of regulators.

Obama plan to reform financial rules empowers Fed

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Oil wellOil prices on the world market have risen steadily during the past two months, going above $70 a barrel and causing concern that high energy costs could slow the economic recovery from recession. Slowing production has contributed to the price increase, but weakness in the U.S. dollar may be the main cause.At the beginning of this year, energy analysts say consumers in the United States were paying $600 million a day to fuel their vehicles. Today, they are paying around $1 billion a day.  That is still better than the $1.5 billion a day they were paying a year ago, when the price of oil was around $147 a barrel, but many people are worried that the price may return to that level in the weeks ahead.Economist and energy analyst Ken Medlock at Rice University's Baker Institute believes that is unlikely. He says prices have been going up in part because market traders are overreacting to any sign of increasing demand. "The International Energy Agency last week issued a report that projected 2009 demand to be down by 2.47-million barrels a day, rather than 2.56," Medlock said. "The oil market rallied by something on the order of $2 when that news hit the wires." Medlock says much of the price rise has been caused by the U.S. dollar's slide in value. Crude oil prices on the world market are set in dollars. Medlock says the fundamentals in the market do not justify much more of an increase in oil prices. "There is a lot of supply being withheld from the market right now. OPEC spare capacity is very high right now," Medlock said. "Demand has not recovered, it is still down, and yet we have seen the price rise by $20 to $25 in the past couple of months." What could be a problem, Medlock says, is inflation, which would weaken the dollar further and cause the price of oil to go much higher just as the economy is struggling to improve. "I think that is a really important one to watch, especially in light of the massive amount of spending being done by the U.S. government. Because, at the end of the day, absent some really radical adjustment by the Fed, I think that is going to have to be inflationary," Medlock said. "That does not bode well for the strength of the dollar on international currency markets or the price of oil." Production cutbacks by the Organization of Petroleum Exporting Countries have helped move the crude price higher, according to Ken Medlock, but the Rice University economist says demand remains much lower than it was a year ago. As for predictions that there may be oil shortages ahead, Medlock is skeptical, but, even if there is a crunch, he says the United States can deal with it as it has in the past. "One thing we have learned through the history of humankind is that we are very innovative when we need to be," Medlock said. "That is something that has happened since the first and second oil price shocks of the early 1970s and 1980s. We have actually become much more productive from a given quantity of oil and I think that will continue to happen, both from efficiency gains and just simple innovation." Medlock and other energy analysts note that Americans are not driving as much as they did last year at this time, keeping demand for fuel in check. They say it may be some time before the worldwide economy has revived enough to push up demand and thereby drive another spike in energy prices.

 

Oil Prices Rise as Dollar Weakens

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LONDON (MarketWatch) -- European shares edged lower on Tuesday, extending sharp losses from the previous session, as investors pulled out of firms perceived as more exposed to economic trends such as banks.

The pan-European Dow Jones Stoxx 600 index edged down 0.2% to 208.66, after ending Monday's session with a 2.5% drop.

European shares have risen sharply since March, led by commodity-price-sensitive firms and financials as investors picked up on signs that the economic backdrop could be stabilizing.

On Monday, oil producers and mineral extractors fell and on Tuesday financial stocks declined notably, with German insurance giant Allianz down 1.5% and French bank BNP Paribas down 1.6%.

Investors in the financial sector were likely still weighing news out Monday afternoon from the European Central Bank which warned that the stability of the euro-zone's financial sector remains under threat. See full story.

A downgrade by Moody's of the financial-strength ratings of 30 Spanish lenders after the market close on Monday wouldn't have helped sentiment much although the agency said that the many of the downgrades were "moderate."

Moody's also said that it could lower credit ratings for Swiss bank UBS , down 2.6%.

Still, Santander shares advanced after Goldman Sachs upgraded the lender to buy from neutral to reflect near-term profit potential stemming from a repricing of its U.K. loan book.

The lender's "ability to accommodate deteriorating credit is among the more resilient in the sector," the broker said.

On a regional basis, the U.K. FTSE 100 index climbed 0.5% to 4,344.51, the German DAX 30 index rose 0.1% to 4,892.65 while the French CAC-40 index rose 0.1% to 3,224.18.

U.S. futures were also lower, with Dow Jones Industrial Average futures down 14 points. Asian stocks were also lower. Read Asia Markets.

Investors were buying up stocks that are perceived to be less sensitive to economic trends on Tuesday, with drugmaker Sanofi-Aventis up 1.1%. Rival GlaxoSmithKline advanced 1.1%.

Tobacco firms and telecoms such as Vodafone Group , up 1%, were also higher.

BT Group shares climbed 3.5% after it was upgraded to overweight from equalweight at Morgan Stanley with the broker saying it believes free cash flow should rise.

Meanwhile, Britain's biggest supermarket group Tesco advanced 1% after it reported a 4.3% rise in its U.K. first-quarter comparable sales. The rise broadly met analyst forecasts.

Europe Markets: Banks offset gains for drugmakers in Europe

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MOSCOW (Reuters) – The leaders of the world&&9;s biggest emerging markets -- Brazil, Russia, India and China -- meet next week for their first formal summit, seeking a louder voice on the global stage.

Leaders of the so-called BRIC nations will discuss ways to reshape the global financial system after the worst economic crisis for decades and ideas for a new reserve currency to reduce dependency on the U.S. dollar may be on the agenda.

"The good news is that rich countries are in crisis and that emerging countries are making a huge contribution to save the economy and, consequently, save the rich countries," Brazilian President Luiz Inacio Lula da Silva told Reuters on Wednesday.

"Wealthy countries are no longer the only ones that account for the world&&9;s production capacity and consumption," he added, saying the BRICs should work together to "change the political and trade geography of the world.

The BRIC term was coined by Goldman Sachs economist Jim O&&9;Neill in 2001 to describe the growing power of emerging market economies. The June 16 summit in the Russian Urals city of Yekaterinburg marks a step toward cooperation as a group.

BRIC countries account for 15 percent of the &&6;60.7 trillion global economy but Goldman Sachs predicts that in 20 years time, the four countries could together dwarf the G7 and China&&9;s economy will overtake the United States in total size.

"BRIC is a myth but a myth that is slowly becoming a reality," said Alexei Pushkov, a professor of international relations and a leading Russian journalist.

"This summit shows there is a tentative community taking root. The question is whether it can become a political institution or whether it will be dormant."

Behind the bluster, divisions abound.

Chinese President Hu Jintao brings as much GDP to the table in Yekaterinburg as the three other BRIC countries combined and Beijing is wary of being seen to confront the United States.

It is Russia and Brazil -- arguably the weakest BRIC members -- that have been most vocal about pushing for discussions on reducing dollar dependence.

China, the world&&9;s largest holder of U.S. Treasuries, says the dollar will retain its dominant role and analysts said there is unlikely to be substantial agreement on major issues at the summit.

"This meeting shows the growing influence and voice of the emerging world, something that the Obama administration is also paying attention to," said Qin Yaqing, vice president of China Foreign Affairs University in Beijing.

"But there are also big differences between them. So complete cooperation between them would be extremely difficult, but partial cooperation is possible, and a meeting like this will help amplify their shared voice," said Qin.

Russian President Dmitry Medvedev has made proposals on giving a greater role to the International Monetary Fund&&9;s Special Drawing Rights that echo ideas from Chinese central bank chief Zhou Xiaochuan.

Russia said it would reduce the share of U.S. Treasuries in its &&6;400 billion reserves and buy IMF bonds. China, Russia and Brazil have pledged to help capitalize the IMF as they seek more influence at the fund.

(Additional reporting by Chris Buckley in Beijing and Raymond Colitt in Brasilia; editing by Janet McBride)

BRIC seeks global voice at first summit

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WASCO, Ore. &<51; For decades, most of the nation&S217;s renewable power has come from dams, which supplied cheap electricity without requiring fossil fuels. But the federal agencies running the dams often compiled woeful track records on other environmental issues.

Now, with the focus in Washington on clean power, some dam agencies are starting to go green, embracing wind power and energy conservation. The most aggressive is the Bonneville Power Administration, whose power lines carry much of the electricity in the Pacific Northwest. The agency also provides a third of the region&S217;s power supply, drawn mostly from generators inside big dams.

The amount of wind power on the Bonneville transmission system quadrupled in the last three years and is expected to double again in another two. The turbines are making an electricity system with low carbon emissions even greener &<51; already, in Seattle, more than 90 percent of the power comes from renewable sources.

Yet the shift of emphasis at the dam agencies is proving far from simple. It could end up pitting one environmental goal against another, a tension that is emerging in renewable-power projects across the country.

Environmental groups contend that the Bonneville Power Administration&S217;s shift to wind turbines buttresses their case for tearing down dams in the agency&S217;s territory, particularly four along the lower Snake River in Washington State that helped decimate one of North America&S217;s great runs of wild salmon.

Bonneville wants to keep all the dams, arguing that they not only provide cheap power but they also make an ideal complement to large-scale installation of wind power. When the wind slows and power production drops, the agency argues, it can compensate quickly by telling the Army Corps of Engineers and the Bureau of Reclamation, which operate the dams, to release more water from reservoirs to turn the huge generators. When the wind picks up, dam operations can be slowed.

The dams help alleviate a need for natural-gas-fired power plants, which are used in other regions as a backup power source when the wind stops blowing, but which release carbon dioxide that contributes to global warming.

By balancing wind power with hydropower, the Bonneville Power Administration says it believes it can limit the use of natural gas and coal plants across the West, even as the region&S217;s demand for electricity rises. Around the country, dams provide 6 percent of electricity generation &<51; double the amount from other renewable sources like wind, solar power and biomass &<51; and much of that is concentrated in the West.

The influx of wind on Bonneville&S217;s system has come as a result of renewable power goals set by governments in the Western states, which aim to reduce their output of greenhouse gases. Bonneville says that when the wind is blowing most strongly, 18 percent of the power in its control area now comes from wind, and that number may rise to 30 percent next year. (Not all of that is consumed in the Pacific Northwest; some is sold to California.)

The rise in wind power means that the dam agency has emerged as a national test case for how to integrate large amounts of intermittent wind power into a regional electric grid. &S220;I&S217;ve described this as a grand experiment,&S221; said Stephen J. Wright, the administrator of the 72-year-old Bonneville Power Administration.

The agency stresses the challenge it faces, making sure the lights stay on despite the ups and downs of the wind. Many new wind farms lie along the gusty Columbia River corridor, and their concentration means that changes in the wind can bring sudden dips and spikes in the power they generate.

&S220;We can have periods that go from full, maximum wind output to zero across an hour,&S221; Mr. Wright said.

Because of its erratic nature, wind power &<51; and the need for dams or other backup systems &<51; has become intertwined with the fate of salmon, perhaps the biggest environmental controversy in the Pacific Northwest.

For decades, environmentalists, fishermen and some local politicians, who want to save the endangered salmon, have fought Bonneville and the Army Corps of Engineers, which want to keep the lower Snake River dams. A federal judge overseeing the dispute has accused the federal agencies of not working hard enough to save the salmon and had raised the possibility of breaching those dams to aid the fish.

Wild salmon ride the river in two directions. They spawn far upstream, and the young fish swim downriver to the Pacific Ocean. They spend several years there, feeding and growing quite large, before swimming back upstream to spawn and die.

The large reservoirs created over the decades as the dams were built have slowed and complicated their journeys, and slashed survival rates. Fish ladders help on the way back upstream, but those salmon that get through in both directions end up traumatized and weakened, biologists say.

When it comes to helping salmon, Bonneville has &S220;been dragged kicking and screaming every inch of the way,&S221; said Bill Arthur, a Sierra Club representative in the Northwest. Mr. Arthur praised the agency&S217;s efforts to add wind power, but he argued that the four lower Snake River dams, which are far smaller than major dams like Grand Coulee, were not needed to back up wind power.

Instead, he proposed putting wind turbines in more places, to help balance power generation by ensuring that some are always in an area where the wind is blowing, or relying more on the Northwest&S217;s natural gas plants in combination with energy-saving measures. He also noted that if the dams came down, dismantling them could take six or more years, allowing plenty of time to plan the transition to new power sources.

Elliot Mainzer, vice president for corporate strategy at the Bonneville Power Administration, said that tearing down the Snake River dams would &S220;unequivocally&S221; hurt the ability of the agency to assimilate wind power into its system, because of the dams&S217; role in balancing up-and-down wind generation.

Even as the salmon controversy plays out, the agency is seeking to build more power lines to speed wind-farm development in remote, windy areas.

The economic stimulus package passed in February will help: it sharply increased the maximum amount that the agency can borrow from the United States Treasury to $7.7 billion, from $4.45 billion. (Another dam agency, the Western Area Power Administration, got a similar boost and also plans more transmission lines to aid wind and other renewables.)

Bonneville says that the stimulus injection will enable it to build a $246 million transmission project along the Columbia River, allowing developers to put up wind turbines in additional areas of eastern Oregon, and that more planned transmission lines will also help harness the wind

All of that is good news for the area&S217;s farmers, some of whom welcome a new source of income.

John Hildebrand, an animated 82-year-old wheat farmer, has allowed a Spanish developer, Iberdrola, to put wind turbines on his land in Wasco, not far from the Columbia River. Power from his turbines feeds into the Bonneville system.

He and his brother Gordon sat in the front row when Franklin D. Roosevelt dedicated the Bonneville Dam in 1937, before the region even had public power &<51; so they have seen the future of energy, twice.

&S220;All we had is sky out there,&S221; John Hildebrand said, looking out toward the tall structures twirling high above his rolling land. &S220;Now I&S217;ve got turbines.&S221;

As Wind Power Grows, a Push to Tear Down Dams

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HSINCHU, Taiwan &<51; Taiwan Semiconductor Manufacturing, or TSMC, has seen the light and now wants to make some.

The world&S217;s largest for-hire chip maker could soon start manufacturing solar cells and LED lights. The company&S217;s entry into these nascent industries will catch the attention of existing makers, which could find themselves battling one of the most formidable manufacturers on the planet. Taiwan Semiconductor could drive down prices, as it did for computer chips. But the lower prices could also stimulate demand for what are now expensive technologies.

For the company, the move far afield from semiconductors signals a sweeping change and a need to find growth in less-mature markets. &S220;Their foundation that has been so successful over the last couple of decades is starting to slow,&S221; said Michael McConnell, an equities analyst with Pacific Crest Securities. &S220;It&S217;s natural for them to want to branch out.&S221;

Earlier this week, the company declared its new intentions with a bold gesture. It stripped Rick Tsai of his chief executive title and placed him in charge of a new unit created to look into fresh business opportunities. Morris Chang, the company&S217;s 78-year-old chairman and founder, has returned as chief executive.

In an interview ahead of the management shuffle at Taiwan Semiconductor&S217;s headquarters in Hsinchu, Mr. Tsai highlighted solar cells and LEDs as the most likely markets it would enter.

&S220;I would expect we will make some decision before the end of the year,&S221; Mr. Tsai said. &S220;We have people who are working pretty hard on those areas.&S221;

The manufacturer, with revenue of slightly more than $10 billion last year, hopes to make at least $2 billion in revenue a year from its new businesses by 2018. The company produces more chips than any other &S220;foundry,&S221; or contract chip manufacturer. It takes chip designs from companies like Nvidia and Qualcomm, both based in the United States, and turns them into the finished products that end up in personal computers and cellphones. This arrangement places the burden of building chip plants that cost $3 billion or more on Taiwan Semiconductor, while affording customers the chance to concentrate on engineering.

The foundry model has grown in popularity as fewer and fewer companies have been able to stomach the costs of building cutting-edge plants that can churn out chips using their latest technologies. Only a couple of giants remain, like Intel and Samsung, which are willing to design and produce their own processors for personal computers and cellphones.

TSMC&S217;s business model puts it under constant pressure to keep its factories humming at full capacity. With demand for computing products slowing down during the global economic downturn, its business has declined at unprecedented rates. Net income in its first quarter dropped 94.5 percent compared with the year-ago quarter as revenue dropped 54.8 percent. &S220;We have never seen this phenomenon before,&S221; Mr. Tsai said. &S220;It is more severe than any of the recessions or downturns or corrections before.&S221;

So chip makers are looking for other things to do. Intel has moved to counter slowing PC sales by building chips that can power cellphones and provide the brains in products like cars, televisions and set-top boxes. Its former executive Andrew S. Grove has also called on Intel to begin making batteries, suggesting that its manufacturing expertise could improve the technology. So far, Intel has rejected this idea.

Built to look like a dragon, Taiwan Semiconductor&S217;s sprawling main office located in one of Taiwan&S217;s many science parks stands as a testament to the country&S217;s rise as a technology powerhouse. The company has managed to outpace all of its rivals by building the most advanced chip plants, Mr. McConnell said.

&S220;Their main rivals have slipped,&S221; he said. &S220;TSMC will never publicly admit this, but they will be able to force their hand on the pricing side, and this will give them better leverage with their operating model.&S221;

With close to $7 billion in cash, the company can finance solar and LED projects that would tap into some of the manufacturing skills learned in the chip business. While there is considerable interest in green technologies, governments around the world have had to subsidize the purchase of solar cells and LED lights to stimulate demand. The costs of such devices are still not low enough to justify substituting them for existing technologies.

Pointedly, Mr. Tsai said its intentions in either area would be to create profitable businesses that could operate without government subsidies.

&S220;You have to get the costs down really fast,&S221; he said. &S220;You don&S217;t want to count on governments all the time for the viability of the business.&S221;

Chip Maker Wants to Expand to Solar Cells

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