State Department made "grievous mistake" over Benghazi: Senate report

The U.S. Consulate in Benghazi is seen in flames during a protest by an armed group said to have been protesting a film being produced in the United States September 11, 2012.

Credit: Reuters/Esam Al-Fetori

By Tabassum Zakaria and Mark Hosenball

WASHINGTON | Mon Dec 31, 2012 1:24pm EST

WASHINGTON (Reuters) - The State Department made a "grievous mistake" in keeping the U.S. mission in Benghazi open despite inadequate security and increasingly alarming threat assessments in the weeks before a deadly attack by militants, a Senate committee said on Monday.

A report from the Senate Homeland Security Committee on the September 11 attacks on the U.S. mission and a nearby CIA annex, in which the U.S. ambassador to Libya and three other Americans died, faulted intelligence agencies for not focusing tightly enough on Libyan extremists.

It also faulted the State Department for waiting for specific warnings instead of improving security.

The committee's assessment, "Flashing Red: A Special Report On The Terrorist Attack At Benghazi," follows a scathing report by an independent State Department accountability review board that resulted in a top security official resigning and three others at the department being relieved of their duties.

Joseph Lieberman, an independent senator who chairs the committee, said that in thousands of documents it reviewed, there was no indication that Secretary of State Hillary Clinton had personally denied a request for extra funding or security for the Benghazi mission. He said key decisions were made by "midlevel managers" who have since been held accountable.

Republican Senator Susan Collins said it was likely that others needed to be held accountable, but that decision was best made by the Secretary of State, who has the best understanding "of how far up the chain of command the request for additional security went."

The attacks and the death of U.S. Ambassador Christopher Stevens put diplomatic security practices at posts in risky areas under scrutiny and raised questions about whether intelligence on militant activity in the region was adequate.

The Senate report said the lack of specific intelligence of an imminent threat in Benghazi "may reflect a failure" by intelligence agencies to focus closely enough on militant groups with weak or no operational ties to al Qaeda and its affiliates.

"With Osama bin Laden dead and core al Qaeda weakened, a new collection of violent Islamist extremist organizations and cells have emerged in the last two to three years," the report said. That trend has been seen in the "Arab Spring" countries undergoing political transition or military conflict, it said.

NEED FOR BETTER INTELLIGENCE

The report recommended that U.S. intelligence agencies "broaden and deepen their focus in Libya and beyond, on nascent violent Islamist extremist groups in the region that lack strong operational ties to core al Qaeda or its main affiliate groups."

Neither the Senate report nor the unclassified accountability review board report pinned blame for the Benghazi attack on a specific militant group. The FBI is investigating who was behind the assaults.

President Barack Obama, in an interview on NBC's "Meet the Press" on Sunday, said the United States had "very good leads" about who carried out the attacks. He did not provide details.

The Senate committee said the State Department should not have waited for specific warnings before acting on improving security in Benghazi.

It also said it was widely known that the post-revolution Libyan government was "incapable of performing its duty to protect U.S. diplomatic facilities and personnel," but the State Department failed to fill the security gap.

"Despite the inability of the Libyan government to fulfill its duties to secure the facility, the increasingly dangerous threat assessments, and a particularly vulnerable facility, the Department of State officials did not conclude the facility in Benghazi should be closed or temporarily shut down," the report said. "That was a grievous mistake."

The Senate panel reviewed changing comments made by the Obama administration after the attack, which led to a political firestorm in the run-up to the November presidential election and resulted in U.S. Ambassador to the United Nations Susan Rice withdrawing her name from consideration to replace Clinton, who is stepping down early next year.

Rice had said her initial comments that the attack grew out of a spontaneous protest over an anti-Islam film were based on talking points provided by intelligence agencies.

Lieberman said it was not the job of intelligence agencies to formulate unclassified talking points and they should decline such requests in the future.

The report said the original talking points included a line saying "we know" that individuals associated with al Qaeda or its affiliates participated in the attacks. But the final version had been changed to say: "There are indications that extremists participated," and the reference to al Qaeda and its affiliates was deleted.

The report said that while James Clapper, the director of national intelligence, had offered to provide the committee with a detailed chronology of how the talking points were written and evolved, this had still not been delivered to Capitol Hill because the administration had spent weeks "debating internally" whether or not it should turn over information considered "deliberative" to Congress.

(Editing by Warren Strobel and David Brunnstrom)

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Senate confirms Galante as FHA chief despite losses

By David Lawder

WASHINGTON | Sun Dec 30, 2012 5:02pm EST

WASHINGTON (Reuters) - The Senate on Sunday confirmed the head of the Federal Housing Administration in her position despite mounting losses the mortgage funding agency that some fear could eventually lead to a taxpayer bailout.

In a 69-24 vote, the Senate confirmed Carol Galante as an assistant secretary of the Department of Housing and Urban Development. Galante, a former affordable housing developer in San Francisco, had been running the FHA in an acting capacity since July 2011.

The FHA, a key source of mortgage funding for first-time home buyers and those with modest incomes, backs $1.1 trillion in U.S. home mortgages. Last month it reported a projected shortfall of $16.3 billion due to souring loans that it insured during the housing market downturn during the past several years.

An independent audit suggested that the FHA would require taxpayer funding for the first time in its 78 years, though that won't be decided until February when the Obama administration releases its next budget proposal.

In response to the shortfall, the agency raised the premiums it charges on guaranteed loans by one-tenth of a percentage point, adding, on average, about $13 to a borrower's monthly mortgage payment.

Senator Tim Johnson, the Democrat who heads the Senate Banking Committee, said Galante was "highly qualified" and attributed the FHA's problems to legacy loans that were still threatening the agency's finances.

"It is important that the FHA have a confirmed management team in place to continue oversight of these legacy loans," Johnson said prior to the vote.

Following the collapse of the private subprime mortgage market during the 2007-2009 financial crisis, FHA-backed loans took over as the sole financing source for nearly all of the lower end of the U.S. housing market, which has continued to struggle.

The deteriorated finances had caused some Senate Republicans not to support Galante, who prior to her current position ran multifamily housing programs for HUD.

She joined the agency in 2009 after serving as president of Bridge Housing Corp, the largest non-profit developer of affordable housing in California.

But Republican Senator Bob Corker, who had been one of her biggest critics, publicly dropped his opposition to her confirmation after she sent him a letter pledging to take certain steps to improve the agency's finances, including tightening lending standards for buyers with lower credit scores and limiting the amount of money that could be borrowed in the FHA's reverse-mortgage program.

(Additional reporting by Margaret Chadbourn; Editing by Eric Walsh)

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Senate approves Baer to head Justice Department's antitrust team

WASHINGTON | Sun Dec 30, 2012 9:13pm EST

WASHINGTON (Reuters) - The U.S. Senate on Sunday approved prominent antitrust attorney William Baer to head the Justice Department's Antitrust Division 10 months after he was tapped by President Barack Obama.

The Senate voted 64-26 to approve Baer's nomination, which ran into problems with some Republicans because of secret information in an FBI background report.

Baer, an antitrust and white collar criminal defense attorney with the law firm Arnold & Porter LLP, has worked in the past for the U.S. Federal Trade Commission (FTC).

"Bill is a highly-skilled and well-respected antitrust lawyer who understands the importance of promoting competition in order for consumers to reap the benefits of lower prices and better quality products and services," Attorney General Eric Holder said in a statement welcoming the Senate vote.

The Justice Department's Antitrust Division, along with the FTC, reviews mergers to ensure they comply with antitrust law and prosecutes price-fixing and other antitrust violations.

Baer first joined FTC as a young attorney just out of law school and returned later to head its antitrust office.

At his confirmation hearing in July, Baer urged careful monitoring of powerful companies willing to flex their muscles to push aside rivals.

Obama nominated Baer in February to fill the post vacated by Christine Varney in mid-2011. James Wayland most recently served as acting head of the Antitrust Division, but left in November.

The Senate Judiciary Committee approved the nomination in September on a 12-5 vote, with the panel's top Republican, Mike Lee of Utah, joining the Democratic majority in support.

But Senator Charles Grassley, an Iowa Republican, said during that meeting he opposed Baer's nomination for reasons that he could not give in an open session.

Grassley and 25 other Republicans voted against Baer on Sunday while 14 Republicans voted for him.

(Reporting By Doug Palmer; Editing by Eric Walsh)

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Hours from "fiscal cliff," Washington still awaits deal

1 of 15. A man walks past the U.S. Capitol Building in Washington December 17, 2012.

Credit: Reuters/Joshua Roberts

By Fred Barbash

WASHINGTON | Mon Dec 31, 2012 1:27am EST

WASHINGTON (Reuters) - The U.S. Congress comes back on Monday without a deal to avert the "fiscal cliff" and only a few hours of actual legislative time scheduled in which to act if an agreement materializes.

Negotiations involving Vice President Joe Biden and Senate Republican leader Mitch McConnell appeared to offer the last hope for avoiding the across-the-board tax increases and draconian cuts in the federal budget that will be triggered at the start of the New Year because of a deficit-reduction law enacted in August, 2011.

A jolt from the financial markets could also prod the parties, as it has occasionally in the past.

"I believe investors will show their displeasure" at the lack of progress in Washington, said Mohannad Aama, managing director at Beam Capital Management, an investment advisory firm in New York.

Democratic and Republican leaders in the Senate had hoped to clear the way for swift action on Sunday. But with the two sides still at loggerheads in talks, Senate Democratic leader Harry Reid postponed any possible votes and the Senate adjourned until Monday.

The main sticking point between Republicans and Democrats remained whether to extend existing tax rates for everyone, as Republicans want, or just for those earning below $250,000 to $400,000, as Democrats have proposed.

Also at issue were Republican demands for larger cuts in spending than those offered by President Barack Obama.

Hopes for a "grand bargain" of deficit-reduction measures vanished weeks ago as talks stalled.

While Congress has the capacity to move swiftly when motivated, the leaders of the U.S. House of Representatives and the Senate have left themselves little time for what could be a complicated day of procedural maneuvering in the event of an agreement.

House Speaker John Boehner has insisted that the Senate act first, but that chamber does not begin legislative business until about noon Monday.

OTHER BUSINESS ALSO ON AGENDA

And the cliff is not the only business on the House agenda. Farm-state lawmakers are seeking a one-year extension of the expiring U.S. farm law to head off a possible doubling of retail milk prices to $7 or more a gallon in early 2013.

Relief for victims of Superstorm Sandy is waiting in line in the House as well, though it could still consider a Senate bill on assistance for the storm until January 2, the last day of the Congress that was elected in November 2010.

Expiring along with low tax rates at midnight Monday are a raft of other tax measures effecting tens of millions of Americans.

A payroll tax holiday Americans have enjoyed for two years looks like the most certain casualty as neither Republicans or Democrats have shown much interest in continuing it, in part because the tax funds the Social Security retirement program.

The current 4.2 percent payroll tax rate paid by about 160 million workers will revert to the previous 6.2 percent rate after December 31, and will be the most immediate hit to taxpayers.

A "patch" for the Alternative Minimum Tax that would prevent millions of middle-class Americans from being taxed as if they were rich, could go over the cliff as well. Both Republicans and Democrats support doing another patch, but have not approved one.

At best, the Internal Revenue Service has warned that as many as 100 million taxpayers could face refund delays without an AMT fix. At worst, they could face higher taxes unless Congress comes back with a retroactive fix.

After Tuesday, Congress could move for retroactive relief on any or all of the tax and spending issues. But that would require compromises that Republicans and Democrats have been unwilling to make so far.

Obama said on Sunday he plans on pushing legislation as soon as January 4 to reverse the tax hikes for all but the wealthy.

(Editing by Christopher Wilson)

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Immigration, economic revival head Obama's second-term checklist

U.S. President Barack Obama gestures while addressing his first news conference since his reelection, at the White House in Washington November 14, 2012.

Credit: Reuters/Larry Downing

By Mark Felsenthal

WASHINGTON | Sun Dec 30, 2012 4:30pm EST

WASHINGTON (Reuters) - President Barack Obama is pledging to focus in his second term on immigration reform, boosting economic growth through infrastructure repair and energy policies that nod to environmental protection.

The president is mired in a difficult fight with congressional Republicans to avoid sharp spending cuts and steep tax increases collectively referred to as the "fiscal cliff." However, he still has a longer-term to-do list for his remaining four years in office, he said in an interview on NBC's "Meet the Press" that was broadcast on Sunday.

Obama, who won re-election in November after a campaign in which he succeeded in painting himself as a strong advocate for the middle class and those aspiring to join it, also promised in the interview to make a run at passing gun control legislation in the first year of his second term.

"Fixing our broken immigration system is a top priority," he said. He renewed a pledge to introduce legislation in the first year of his second term to get it done.

Immigration reform is a sensitive subject for the president, who failed to fulfill his promise to revamp the system during his first term. Latino voters were a critical part of the coalition that helped get him re-elected, a fact that may soften political opposition from Republicans, who are eager to bolster their support with that demographic group.

Immigration reform supporters on the left believe that the 11 million undocumented foreigners in the United States should be allowed a path to work toward citizenship. But opponents believe that this approach would reward people who broke the law by coming to the United States illegally.

Republicans have sought stronger measures to keep illegal immigrants from entering the United States from Mexico. Advocates on both sides of the debate want to more effectively verify legal workers in an economy in which businesses want to hire non-U.S. workers ranging from low-paid farm hands to technology-savvy professionals.

While negotiations to avoid the fiscal cliff have hogged the spotlight in the first weeks after the election, Obama said he wants to take steps to ensure the sluggish recovery gains steam.

Many observers had believed a persistently high level of unemployment would thwart Obama's chances of winning a second term. The U.S. jobless rate peaked at 10 percent in 2009 after the harshest recession since the Great Depression but has been falling and dipped to 7.7 percent in November.

The president said rebuilding crumbling roads, bridges and schools could put people back to work and put the economy on a sounder footing. He said he would pair those steps - which would likely involve government spending - with deficit reduction measures to tame the nation's budget deficit.

The president also said energy policy would be a leading emphasis. He said he would focus on how the country can produce more energy and export energy, while also dealing with environmental challenges. He did not specify how he would do that. The president's effort to fight climate change with a broad emissions trading system failed during his first term.

When pressed, Obama added gun control to his list of priorities, reiterating his support for a ban on assault rifles and high capacity clips, as well as background checks.

(Reporting By Mark Felsenthal; Editing by Cynthia Osterman)

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Senate, House agriculture committees in deal to avert milk price spike

By Jim Wolf

WASHINGTON | Sun Dec 30, 2012 10:19pm EST

WASHINGTON (Reuters) - Farm-state lawmakers have agreed to a one-year extension of the expiring U.S. farm law that, if enacted, would head off a possible doubling of retail milk prices to $7 or more a gallon in early 2013.

The extension would end a 32-month attempt to update farm subsidies dating from the Depression era, when farmers were crushed by low prices and huge crop surpluses, to meet today's high-wire challenges of tight food supplies, high operating costs and volatile markets.

House Agriculture Committee Chairman Frank Lucas, an Oklahoma Republican, said on Sunday he hoped the legislation would be passed by Congress and signed by President Barack Obama by Tuesday to avoid higher prices for milk in grocery stores.

The bill was listed among measures that could be called for a vote on Monday in the House of Representatives although action was not guaranteed.

Despite consensus on the need to extend the farm bill, lawmakers continue to discuss how long the extension should be.

Representative Tom Cole, an Oklahoma Republican, told reporters late on Sunday a nine-month farm bill extension was being considered as part of deal being crafted in the Senate to stave off the "fiscal cliff" of automatic tax hikes and spending cuts that begin kicking in on January 1.

"There's good chance that if there is a package out of the Senate, it will include something on the farm bill. The easiest thing to get done would be nine months of current law," Cole said.

A second Republican, Representative Steven LaTourette, said a nine-month extension could be part of the fiscal cliff package or could move separately if the fiscal talks fail.

House Republican leaders refused to call a vote during the fall on a full-scale, $500 billion farm bill on grounds it might fail because it did not cut spending enough.

Grain, soybean and cotton growers would get another round of the $5 billion "direct payment" subsidy that all sides agreed to kill in a new farm bill. The payments are made regardless of need. Reformers say the payments are unjustified when crop prices and farm income are at near-record levels.

DISASTER MONEY AND A NEW DAIRY PROGRAM

Also in the extension, lawmakers would revive agricultural disaster-relief programs that ran out of money a year ago and create a new dairy subsidy program. It would compensate dairy farmers whenever milk prices are low and feed prices are high. The so-called margin protection program would require farmers to limit production to avert a long run of low dairy prices.

Traditionally, the dairy program sets a minimum price for milk through government purchase of butter, cheese and dry milk. If Congress does not act, the dairy support price will revert on Tuesday to the level dictated by an outmoded 1949 law and which is roughly double the price now paid to farmers.

The potential retail milk price has been estimated at $6 to $8 a gallon versus current levels near $3.50.

Agriculture Secretary Tom Vilsack, during an interview broadcast by CNN, said higher milk prices - if it comes to that - would ripple throughout all commodities "if this thing goes on for an extended period of time."

Senator Debbie Stabenow, chairwoman of the Senate Agriculture Committee, said the "responsible short-term farm bill extension ... not only stops milk prices from spiking, but also prevents eventual damage to our entire agriculture economy."

TWO FALLBACKS IF EXTENSION FALTERS

House Republican leaders readied two alternatives, if needed, to the one-year extension. One was a one-month extension of the now-expired 2008 farm law without disaster funds or the new dairy program and the other was a one-month suspension of the dairy provisions of the 1949 law.

It was not clear which bill would be called for debate, a farm lobbyist said on Sunday. A small-farm activist said any package passed by Congress must include rural economic development funds and money for soil conservation on "working lands," the largest of USDA's conservation programs.

"If a new farm bill doesn't pass this Congress, we'll soon hold another mark-up and just keep working until one is enacted next year," said Stabenow, a Michigan Democrat.

It would be the first time on record that Congress began drafting a farm bill during a two-year session and had to carry it into the following session, congressional researchers said. Hearings on the new farm bill began April 21, 2010.

HOUSE, SENATE DISPUTE ON BIG CUTS

While dairy producers generally support the so-called margin-protection program as the answer to high feed costs, processors and foodmakers oppose it. They say it is wrong-minded in its premise of curtailing production when prices are low, and it will destroy a healthy export market for dairy products.

The rejuvenated disaster programs would cover losses from this year's widespread drought, especially for livestock producers, although tree farmers, honey bees and farm-raised fish are also covered. Maximum payment would be $100,000.

Senators passed a farm bill in June estimated to save $23 billion over 10 years, with most of the cuts in crop subsidies and conservation programs. The House Agriculture Committee approved a bill with $35 billion in cuts in July, half of it in food stamps for the poor - the biggest cut in food stamps in a generation.

Fiscally conservative House Republicans have called for larger cuts in farm subsidies and food stamps while some House Democrats opposed any food stamp cuts.

(Additional reporting by Charles Abbott, David Lawder and Richard Cowan; Editing by Ros Krasny, Maureen Bavdek, Jan Paschal and Eric Walsh)

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Secretary of State Clinton hospitalized with blood clot

1 of 4. U.S. Secretary of State Hillary Clinton answers questions from the audience at the 2012 Saban Forum on U.S.-Israel relations gala dinner in Washington, in this file photo from November 30, 2012. Clinton was sent to the hospital December 30, 2012 with a blood clot stemming from a concussion she suffered earlier this month and was being assessed by doctors, a State Department spokesman said.

Credit: Reuters/Mary F. Calvert/Files

By Andrew Quinn

WASHINGTON | Sun Dec 30, 2012 11:04pm EST

WASHINGTON (Reuters) - U.S. Secretary of State Hillary Clinton was admitted to a New York hospital on Sunday with a blood clot linked to a concussion she suffered earlier this month, the State Department said in an announcement that looked sure to fuel speculation over the health of one of America's best-known political figures.

Clinton, 65, has been out of the public spotlight since mid-December, when officials said she suffered a concussion after fainting due to a stomach virus contracted during a trip to Europe.

"In the course of a follow-up exam today, Secretary Clinton's doctors discovered a blood clot had formed, stemming from the concussion she sustained several weeks ago," State Department spokesman Philippe Reines said in a statement.

"She is being treated with anti-coagulants and is at New York-Presbyterian Hospital so that they can monitor the medication over the next 48 hours," Reines said. "They will determine if any further action is required."

U.S. officials said on December 15 that Clinton, who canceled an overseas trip because of the stomach virus, suffered a concussion after fainting due to dehydration.

They have since described her condition as improving and played down suggestions that it was more serious. She had been expected to return to work this week.

Clinton's illness, already the subject of widespread political speculation, forced her to cancel planned testimony to Congress on December 20 in connection with a report on the deadly attack on the U.S. diplomatic post in Benghazi, Libya.

The attack became the subject of heated political debate in the run-up to the U.S. presidential election in November, and Republican lawmakers have repeatedly demanded that Clinton appear to answer questions directly.

Clinton's two top deputies testified in her place on the September 11 attack in Benghazi, which killed the U.S. ambassador and three other Americans and raised questions about security at far-flung diplomatic posts.

Some Republican commentators have implied that Clinton was seeking to avoid questioning on the subject, suggestions that have been strongly rebutted by State Department officials.

Clinton has stressed that she remains ready to testify and was expected to appear before lawmakers this month before she steps down, as planned, around the time of Obama's inauguration for his second term in late January.

After narrowly losing the Democratic presidential nomination to Obama in 2008, Clinton has been consistently rated as the most popular member of his Cabinet and is often mentioned as a potential presidential candidate in 2016.

Any serious medical concern could throw a fresh question mark over her future plans, although she has frequently alluded to her general good health.

BLOOD THINNERS

Dr. Edward Ellerbeck, a professor at the University of Kansas School of Medicine, said clots are more common in people who are sedentary, genetically predisposed, or on certain types of medicines such as the contraceptive pill or Estrogen replacements.

Ellerbeck, who is not treating Clinton, said clots are usually treated with blood thinners, typically for three to six months, and generally carry a low risk of further complications

Clinton is not known to have any of the risk factors that increase the risk of abnormal clotting, such as atherosclerosis or autoimmune disorders.

Head injuries such as the one she sustained earlier this month are associated more with bleeding than with clotting.

In one well-known case of bleeding following a head injury, actress Natasha Richardson hit her head skiing in 2009 and seemed fine, but died two days later of a hematoma, or bleeding between the outer membrane of the brain and the skull.

Clinton has said she wants to take a break from public life and has laughed off suggestions that she may mount another bid to become the first woman president of the United States - a goal she came close to reaching in 2008.

Her stint as secretary of state has further burnished the credentials she earned as a political partner to her husband, former President Bill Clinton, and later as a Democratic senator from New York.

In the four years since she became Obama's surprise choice as the top U.S. diplomat, Clinton has broken travel records as she dealt with immediate crises, including Libya and Syria, and sought to manage longer-term challenges, including U.S. relations with China and Russia.

She has maintained a punishing travel schedule, and was diagnosed with the virus after a December trip that took her to the Czech Republic, NATO headquarters in Brussels, Dublin and Belfast - where she had her last public appearance on December 7.

Officials announced on December 9 that she was ill with the stomach virus, forcing her to cancel a trip to North Africa and the Gulf that was to include a stop in Morocco for a meeting on the Syria crisis.

READY TO STEP DOWN

Clinton has repeatedly said that she only intended to serve one term, and aides said she was on track to leave office within the next few weeks, once a successor is confirmed by the Senate.

Her last months in office have been overshadowed by the Benghazi attack, the first to kill a U.S. ambassador in the line of duty since 1979, which brought sharp criticism of the State Department.

An independent inquiry this month found widespread failures in both security planning and internal management in the department.

It did not find Clinton personally responsible for any security failures, although she publicly took overall responsibility for Benghazi and the safety and security of U.S. diplomats overseas.

The State Department's top security officer resigned from his post under pressure and three other mid-level employees were relieved of their duties after the inquiry released its report.

The controversy also cost U.S. Ambassador to the United Nations Susan Rice her chance to succeed Clinton as secretary of state.

Rice drew heavy Republican criticism for comments on several television talk shows in which she said the attack appeared to be the result of a spontaneous demonstration rather than a planned assault. She ultimately withdrew her name for consideration for the top diplomatic job.

Obama on December 21 nominated Senator John Kerry, the Massachusetts Democrat who heads the Senate Foreign Relations Committee, to fill the position of secretary of state.

(Additional reporting by Jilian Mincer and Sharon Begley.; Editing by Eric Walsh and Christopher Wilson)

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Senate leaders still have no fiscal cliff deal, time running out: senior aide

n">(Reuters) - Senate leaders have not yet been able to reach a deal to a avert a "fiscal cliff," and with time running out, it is uncertain if they will get one, a senior Senate aide said on Sunday.

Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell have been aiming to reach an agreement by 3 p.m. EST (2000 GMT) so that they can present it to previously scheduled closed-door meetings of their respective Democratic and Republican colleagues in an attempt to beat a New Year's Day deadline.

However, at this point, they still do not have an agreement, the aide said, speaking on condition of anonymity. (Writing by Thomas Ferraro; Editing by David Brunnstrom)

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Obama skeptical of NRA proposal to put more guns in schools

U.S. President Barack Obama (R) salutes as he returns via Marine One from a Christmas visit with his family in Hawaii, to the White House in Washington, December 27, 2012.

Credit: Reuters/Jonathan Ernst

By Jeff Mason

WASHINGTON | Sun Dec 30, 2012 11:57am EST

WASHINGTON (Reuters) - President Barack Obama said in an interview broadcast on Sunday he hopes to get new U.S. gun control measures passed during the first year of his second term and is skeptical of a proposal by the National Rifle Association (NRA) gun lobby to put armed guards in schools.

Obama assigned Vice President Joe Biden to lead a task force to come up with proposals on guns at the beginning of 2013 after the massacre of 20 children and six adults by a gunman at an elementary school in Newtown, Connecticut, this month.

"I'd like to get it done in the first year. I will put forward a very specific proposal based on the recommendations that Joe Biden's task force is putting together as we speak. And so this is not something that I will be putting off," Obama told NBC's "Meet the Press" in an interview taped on Saturday.

"I am not going to prejudge the recommendations that are given to me. I am skeptical that the only answer is putting more guns in schools. And I think the vast majority of the American people are skeptical that that somehow is going to solve our problem," he said.

The influential NRA has said new gun laws are not a good answer and has called for some form of armed guards to be present in all U.S. schools.

Obama, who said the shooting was the worst day of his presidency, attended a memorial service for the Newtown victims and promised he would take swift action to prevent further massacres like that one from being repeated.

The president has faced criticism for failing to take on the gun lobby after other mass shootings that have occurred during his time in office. While bristling at the criticism, the president has indicated that this time something will get done.

"I'm going to be putting forward a package and I'm going to be putting my full weight behind it. And I'm going to be making an argument to the American people about why this is important and why we have to do everything we can to make sure that something like what happened at Sandy Hook Elementary does not happen again," he said in the interview.

"And the question then becomes whether we are actually shook up enough by what happened here that it does not just become another one of these routine episodes where it gets a lot of attention for a couple of weeks and then it drifts away. It certainly won't feel like that to me."

Gun control is a divisive issue in the United States, where the right to bear arms is enshrined in the Constitution, and the NRA has significant political sway.

Proponents of tighter gun laws hope that not having to run for re-election again will give Obama a strengthened hand, but any legislative measures would have to pass the Republican-controlled House of Representatives, which has been reluctant to support initiatives proposed by the Democratic president.

(Editing by Sandra Maler)

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Democrats, Republicans apart on key "fiscal cliff" issues: Reid

U.S. Senate Majority Leader Harry Reid (D-NV) is shown in this C-Span video footage as he addresses the Senate during an unusual session on Capitol Hill in Washington, December 30, 2012. Hopes rose on Sunday that U.S. lawmakers could reach at least a limited deal to prevent the still-recovering economy from tumbling off a ''fiscal cliff'' at the New Year, sending the country into another recession.

Credit: Reuters/C-SPAN/Handout

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Obama touts Hagel, says no decision on defense secretary job

US Democratic presidential candidate Senator Barack Obama (D-IL) (R) shares a laugh with Senator Chuck Hagel (R-NE) at the Amman Citadel in Amman July 22, 2008.

Credit: Reuters/Ali Jarekji

By Jeff Mason and Tabassum Zakaria

WASHINGTON | Sun Dec 30, 2012 12:12pm EST

WASHINGTON (Reuters) - President Barack Obama offered strong support for former Republican Senator Chuck Hagel as the potential next U.S. defense secretary but said in remarks aired on Sunday that he had not yet decided on a nominee for the Pentagon post.

Hagel is considered a leading candidate to replace outgoing Secretary of Defense Leon Panetta, but the former Nebraska lawmaker has come under criticism for his record on Israel and for a comment that being gay was an inhibiting factor for being an ambassador.

"I've served with Chuck Hagel. I know him. He is a patriot. He is somebody who has done extraordinary work both in the United States Senate, somebody who served this country with valor in Vietnam," Obama told NBC's "Meet the Press" in an interview taped on Saturday and broadcast on Sunday.

Any nomination for defense secretary must be approved by the Senate where some lawmakers have voiced criticism about their former colleague.

"I think a lot of Republicans and Democrats are very concerned about Chuck Hagel's positions on Iran sanctions, his views toward Israel, Hamas and Hezbollah, and that there is wide and deep concern about his policies. All of us like him as a person," Republican Senator Lindsey Graham said.

"There would be very little Republican support for his nomination, at the end of the day, there will be very few votes," Graham said on Fox News Sunday.

Republican Senator Tom Coburn from Oklahoma said bluntly: "I cannot vote for Chuck Hagel."

Aside from his controversial statements, "he does not have the experience to manage a very large organization like the Pentagon," Coburn said on CBS' "Face the Nation." "If there's a place that we need great management it's the Pentagon."

Senator Richard Durbin, a Democrat from Illinois, said on the same television show that Hagel deserved "respect for the service he's given our country in the military and in the Senate" and should be given consideration. "He at least deserves a hearing and an opportunity," he said.

Obama said he had seen nothing that would disqualify Hagel.

The president said Hagel had apologized for his comments related to homosexuality, referred to by NBC's David Gregory in the interview.

"With respect to the particular comment that you quoted, he apologized for it," Obama said.

"And I think it's a testimony to what has been a positive change over the last decade in terms of people's attitudes about gays and lesbians serving our country. And that's something that I'm very proud to have led," he said.

Obama came out in favor of gay marriage in the middle of his re-election bid this year. Earlier in his term he presided over the end of the "don't ask, don't tell" policy that prohibited gay men and women from serving openly in the U.S. military.

Hagel, who left the Senate in 2008, has faced questions about his record on Israel.

Some of Israel's leading U.S. supporters contend that Hagel at times opposed Israel's interests, voting several times against U.S. sanctions on Iran, and made disparaging remarks about the influence of what he called a "Jewish lobby" in Washington.

Obama, who has strained relations with Israeli Prime Minister Benjamin Netanyahu, has faced questions of his own from the American Jewish community about his approach to the U.S. ally.

Obama said Hagel was doing an "outstanding job" serving on an intelligence advisory board and gave no indication on when he would make his final decision about the defense chief job.

The president has already backed down once from a contentious nomination, choosing Democratic Senator John Kerry to replace Hillary Clinton as secretary of state rather than going with his presumed first choice, U.S. Ambassador to the United Nations Susan Rice, whom many Republicans opposed after she made controversial remarks about the September 11 attacks on a U.S. mission in Benghazi, Libya, that killed four Americans.

(Editing by Sandra Maler)

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Senate, House ag committees in deal to avert milk price spike

By Jim Wolf

WASHINGTON | Sun Dec 30, 2012 1:11pm EST

WASHINGTON (Reuters) - Farm-state lawmakers have agreed to a one-year extension of the expiring U.S. farm bill that, if enacted, would head off a possible doubling of retail milk prices to $7.OO or more a gallon in 2013.

The compromise measure resulted from bipartisan discussions in the House of Representatives' Agriculture Committee and talks with colleagues in the U.S. Senate, Frank Lucas of Oklahoma, the House panel's chairman, said in a statement Sunday.

"It is not perfect - no compromise ever is - but it is my sincere hope that it will pass the House and Senate and be signed by the President by January 1," Lucas, a Republican, said.

It was not immediately clear whether House and Senate leaders would bring the measure to a vote soon enough to avoid putting the so-called "dairy cliff" milk price spike into action.

Separately, lawmakers are working on a last-ditch effort to avert the similarly timed "fiscal cliff," when the biggest tax increases ever to hit Americans are set to start, paired with significant federal spending cuts

U.S. Agriculture Secretary Tom Vilsack, in an interview with CNN taped Friday and aired on Sunday, urged Congress to come up with such a solution, if only an extension of the old law that expired nearly three months ago, lest milk prices start rising after January 1, 2013.

Absent a new bill or an extension of current law, milk prices would revert to rules set in 1949, the last "permanent" farm legislation in the United States. Government price supports would kick in, based on production costs 64 years ago, plus inflation. The potential retail milk price has been estimated at $6.00 to $8.00 a gallon versus current levels near $3.50.

Lucas said in the statement that time had run out in Congress' current session to enact a new five-year farm bill, as farm-state lawmakers and the dairy lobby had hoped.

Vilsack told CNN that soaring milk prices - if it comes to that - would ripple throughout all commodities "if this thing goes on for an extended period of time."

The price of milk will not double on January 1, if Congress fails to act. Instead, prices would rise gradually as supplies are removed from normal markets and land instead in U.S. Department of Agriculture storage facilities.

With supplies more scarce in normal marketing channels, some milk distributors and dairy product manufacturers could have turned to imported supplies.

The Department of Agriculture is reviewing a range of options for administering programs should a permanent law become legally effective on January 1, a spokesman said on Friday.

The Senate passed its new five-year farm bill in June, and the House Agriculture Committee followed with a version in July.

But the House bill, with large cuts in food-stamp funding for lower-income Americans, has never been brought to a vote by the full House. The Senate and House have for months remained far apart on the issues of food stamps and crop subsidies.

Lucas said the year-long extension "provides certainty to our producers and critical disaster assistance to those affected by record drought conditions."

It would also mean another round of the direct subsidies to farmers that cost about $5 billion a year, and that both sides of debate had agreed earlier to eliminate.

(Additional reporting by Charles Abbott; Editing by Ros Krasny and Maureen Bavdek)

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Senate leaders work to avoid New Year's "fiscal cliff"

1 of 12. Senate Majority Leader Harry Reid (D-NV) (2nd L) walks with unidentified aides and security to his office at the U.S. Capitol after returning from a meeting with President Barack Obama at the White House in Washington December 28, 2012.

Credit: Reuters/Mary Calvert

By Richard Cowan and Rachelle Younglai

WASHINGTON | Sat Dec 29, 2012 7:22pm EST

WASHINGTON (Reuters) - Congressional negotiators burrowed into their offices on Saturday to see if they could stop the U.S. economy from falling off of a "fiscal cliff" in just three days when the biggest tax increases ever to hit Americans in one shot are scheduled to begin.

Aides to Senate Majority Leader Harry Reid, a Democrat, and Senate Republican leader Mitch McConnell worked through the day on a possible compromise that would set aside $600 billion in tax increases and across-the-board government spending cuts that are set to kick in next week.

A variety of lower taxes are scheduled to expire at the end of Monday, the last day of the year. If allowed to rise, the approximately $500 billion value of the revenue increases would represent a historic hike when taken together.

The combined punch of the tax increases and spending cuts could push the U.S. economy back into recession.

"We're now at the point where, in just a couple days, the law says that every American's tax rates are going up. Every American's paycheck will get a lot smaller. And that would be the wrong thing to do for our economy," President Barack Obama said in his weekly radio and Internet address, which was broadcast on Saturday.

McConnell left the U.S. Capitol after spending seven hours in his office. "We've been trading paper all day and talks continue into the evening," he told reporters on his way out.

A source with knowledge of the talks, speaking on condition of anonymity, said: "We are still very far apart with almost no time left on the clock."

TEMPORARY PATCHES

One congressional aide close to the talks said that most of what was being discussed late on Saturday would provide temporary patches to the "fiscal cliff" dilemma. The negotiations, the aide said, likely could extend into Sunday.

"They continue to go round and round," the aide said of the negotiations, with ideas constantly in flux.

The aide, who asked not to be identified, said negotiators were discussing the possibility of putting off for a few months the $109 billion in automatic spending cuts due to start on Wednesday. Those cuts would be divided equally between military and non-military programs. It is feared that they could cause severe disruptions inside federal agencies if allowed to occur.

Earlier this week, talk of a temporary delay in the spending cuts was met with derision by some congressional aides.

The extension of the low income tax rates first put in place under Republican former President George W. Bush would also be on a temporary basis, probably one year, the aide said.

No deal had been reached on the most difficult question: Democrats' demand that upper-income earners - families making more than $250,000 a year - see their tax rates go up.

Republicans had been opposed to any rate increase, but lately have signaled a willingness to go along with a higher threshold - and a $400,000 figure has been floating around for days.

Under proposals being discussed, top earners could see their income tax rate rise to 39.6 percent, from the current 35 percent, in order to help tame budget deficits.

The aide added that Republicans still had not agreed to Obama's call for extending long-term unemployment benefits, but that they were demanding some spending cuts to be included in a stop-gap deal.

Disagreements over what to do about low estate taxes that are expiring also had not been worked out, the aide said.

Unless Congress acts, the tax is set to jump on Tuesday - the first day of 2013 - to 55 percent with the first $1 million exempted for individuals. Currently, there is a 35 percent tax and a $5 million exemption.

A Senate Republican leadership aide said that it might not be known until sometime on Sunday whether these talks bear fruit. That is when the leaders are expected to brief their rank-and-file members.

The Senate is scheduled to hold a rare Sunday session beginning at 1 p.m. EST (1800 GMT), but it was not clear whether the chamber would have "fiscal cliff" legislation to act upon.

One Democratic aide was pessimistic that McConnell would come up with a counteroffer that Reid would find acceptable. Such a counteroffer would have to be calibrated in a way that also could attract votes from conservative House of Representatives Republicans, many of whom have balked at tax rate increases on anyone.

'HARD TO SEE'

A senior House Republican aide on Saturday voiced pessimism about prospects for a deal.

"It's hard to see Reid agreeing to anything that can get the votes of the majority of the (Republican) majority in the House, thereby allowing a bipartisan accomplishment," the aide said. A "majority of the majority" refers to the 241 Republicans who are in the 435-member House.

The Republican aide placed the blame squarely on Democrats, as many Republican members have done publicly, saying that going off the "fiscal cliff" is a "policy upside" for them. "Higher taxes, devastating defense cuts. The polls tell them they can win the PR (publican relations) war in January. From their perspective, why stop the cliff dive?"

Democrats, in turn, have publicly accused House Speaker John Boehner, the top Republican in Congress, of preferring to put off any tough "fiscal cliff" votes until after a January 3 House election in which he is expected to win another two-year term as speaker.

If McConnell and Reid can manage to reach a deal on inheritance taxes and raising income tax rates on the wealthiest Americans, they likely would throw into the compromise some other "fiscal cliff" solutions.

Those could include extending an array of other expiring tax breaks such as one that encourages companies to conduct research and development. Also, Congress wants to prevent a steep pay-cut in January for doctors who treat elderly patients under the Medicare health insurance program.

Lawmakers also want to prevent middle-class taxpayers from inadvertently creeping into a higher tax bracket, known as the alternative minimum tax, intended for the wealthiest.

If the Reid-McConnell effort fails, Obama has asked the Senate to hold a vote on Monday on a "basic package" that would stop taxes from going up on the middle class and would extend long-term unemployment benefits that are about to expire. If it passes the Senate, its fate would be in the hands of the Republican-controlled House.

(Additional reporting by Thomas Ferraro and Jeff Mason; Editing by Will Dunham)

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Analysis: After "fiscal cliff" dive, more battles, new cliffs

Macy Curtis, 11, and her grandparents Sam and Andrea Perrone, all of Snellville, Georgia, visit the U.S. Capitol in Washington, December 29, 2012. President Barack Obama and U.S. congressional leaders agreed on Friday to make a final effort to prevent the United States from going over the ''fiscal cliff,'' setting off intense bargaining over Americans' tax rates as a New Year's Eve deadline looms.

Credit: Reuters/Mary Calvert

By David Lawder and Fred Barbash

WASHINGTON | Sat Dec 29, 2012 4:26pm EST

WASHINGTON (Reuters) - Whether or not the "fiscal cliff" impasse is broken before the New Year's Eve deadline, there will be no post-cliff peace in Washington.

With the political climate toxic in Congress as the cliff's steep tax hikes and spending cuts approach, other partisan fights loom, all over the issue that has paralyzed the capital for the past two years: federal spending.

The first will come in late February when the Treasury Department runs out of borrowing authority and has to come to Congress to get the debt ceiling raised.

The next is likely in late March, when a temporary bill to fund the government runs out, confronting Congress with a deadline to act or face a government shutdown. The third will possibly be whenever the temporary bill replacing the temporary bill expires.

While Congress is supposed to pass annual spending bills before the start of each fiscal year, it has failed to complete that process since 1996, resorting to stopgap funding ever since.

Influential anti-tax activist Grover Norquist predicted in an interview with Reuters that conservatives would wage repeated battles with President Barack Obama to demand budget savings every time the government needs a temporary funding bill or more borrowing capacity.

The so-called "continuing resolutions" to which a divided Congress has increasingly resorted to keep the government operating, provide a "very powerful tool" to pry out spending cuts, said Norquist, president of Americans for Tax Reform.

Republican Senator Bob Corker of Tennessee said he will not be satisfied until there are substantial cuts to federal retirement and healthcare benefits known as entitlements, producing savings in the $4.5 trillion to $5 trillion range.

"Unfortunately for America," said Corker, "the next line in the sand will be the debt ceiling."

Most observers see the $16.4 trillion debt limit as the true fiscal cliff in the new year because if not increased, it would eventually lead to a default on U.S. Treasury debt, an event that could prove cataclysmic for financial markets.

The Treasury Department said on Wednesday it would start taking extraordinary measures by December 31 to extend its borrowing capacity for about two more months.

'POISONOUS CLIMATE'

It was a deadlock over raising the debt ceiling in August 2011 that prompted a deficit reduction deal that led to a key fiscal cliff component, the $109 billion in automatic spending cuts on military and domestic programs.

If the fiscal cliff's spending cuts or tax increases are left even partly unresolved on December 31, the political combat over them will carry over into the new Congress, possibly simultaneously with the debt ceiling debate.

"We would be pessimistic of a quick fix" if the deadline is missed, Sean West, head U.S. analyst at Eurasia Group, a political risk consultancy, said in a note to clients. "The political climate will be poisoned. The new Congress will need time to settle in."

"We are concluding one of the most unsuccessful Congresses in history," Democratic Representative John Dingell of Michigan declared in a statement on Saturday, "noteworthy not only for its failure to accomplish anything of importance, but also for the poisonous climate of the institution."

Dingell, 86, is the longest serving member of the House, elected first in 1955.

Historically, bitter struggles in Congress like that over the fiscal cliff lead to further resentment and strife in a cycle of cumulative grudges that now spans nearly 30 years.

Many analysts and lobbyists in Washington believe the strife could get even worse because the new Congress convening on January 3 will include fewer members from moderate or swing districts and more from districts tilted heavily to the left or the right.

Republicans in particular are likely to face their most serious re-election challenges in 2014 not from Democrats but from conservative Republicans challenging them in primary elections.

"Ironically," said a post-election analysis published by the law firm Patton Boggs, "the voters have elected a 113th Congress that may be even more partisan than the 112th."

(Reporting by David Lawder and Fred Barbash; Editing by Eric Beech)

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Governor signs new law for abortion clinics in Michigan

By James B. Kelleher

Fri Dec 28, 2012 7:39pm EST

n">(Reuters) - Michigan's Republican governor on Friday signed into law new rules for abortion providers that supporters say will protect the health of pregnant women but critics say will shutter clinics and restrict access.

The law signed by Governor Rick Snyder increases state oversight of abortion clinics and establishes a screening protocol to make sure women are not being forced to get an abortion.

The measure requires health facilities or clinics that perform more than 120 abortions a year to become licensed freestanding surgical outpatient facilities.

It also requires physicians to "properly and respectfully dispose of fetal remains."

"This bill respects a woman's right to choose while helping protect her health and safety, including making sure a pregnant person is not being coerced into a decision," Snyder said.

The Michigan law is the latest flashpoint in the battle between opponents and supporters of abortion, a procedure that is legal in the United States. In the past two years, conservative Republicans in more than a dozen U.S. states have take steps to eliminate state funding for Planned Parenthood, a family planning provider that performs abortions.

Critics of the Michigan law fear its insistence on new, standalone facilities will hurt women in rural and low-income areas as it could force some clinics to close. They say questioning women on whether an abortion is voluntary subjects them to a type of interrogation.

The Center for Reproductive Rights, an abortion rights group that opposed the measure, said it could force many existing abortion providers in the state to either tear down their offices and rebuild from the ground up -- or shutter their practices.

The Michigan chapter of the American Civil Liberties Union, which also opposed the law, called its passage a setback for reproductive rights and the health of women.

"Safety was never the intention of this law. The only thing this law accomplishes is to make a difficult decision even more difficult," said Rana Elmir, the communications director for the Michigan ACLU.

Snyder vetoed a separate measure on Friday that would have restricted insurance providers and businesses from providing elective abortion coverage in employee health plans.

The bill also would have forced the victims of rape or incest who did not purchase separate abortion coverage to pay for the procedure out of pocket.

"I don't believe it is appropriate to tell a woman who becomes pregnant due to a rape that she needed to select elective insurance coverage," Snyder said in his veto message.

"And as a practical matter, I believe this type of policy is an overreach of government into the private market."

Elmir, at Michigan ACLU, called Snyder's veto of the second measure "encouraging."

(Reporting by James Kelleher; Editing by Greg McCcune and Andrew Hay)

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Former President George H.W. Bush moved out of intensive care

1 of 5. Former President George H.W. Bush smiles as he listens to Republican presidential candidate Mitt Romney speak as he met with Bush to pick up his formal endorsement in Houston March 29, 2012.

Credit: Reuters/Donna Carson

By Deborah Quinn Hensel

HOUSTON | Sat Dec 29, 2012 5:58pm EST

HOUSTON (Reuters) - Former President George H.W. Bush's condition improved enough for him to be moved on Saturday out of the intensive care unit and into a regular room at the Houston hospital where he was admitted last month for respiratory problems, a spokesman said.

Bush, 88, who served as president from 1989 to 1993, entered Methodist Hospital on November 23 for treatment of what doctors said was bronchitis, and he was moved into the ICU last Sunday after suffering a number of medical complications, including a persistent fever.

Bronchitis is an inflammation of the mucous membranes lining the air passages through the lungs.

"President Bush's condition has improved, so he has been moved today from the intensive care unit to a regular patient room at the Methodist Hospital to continue his recovery," the family said in a statement from his spokesman, Jim McGrath.

"The Bushes thank everyone for their prayers and good wishes," it added.

McGrath said on Friday that Bush's condition was getting better and that he was even singing at times in his communications with doctors and nurses.

He added in an email reply to Reuters on Saturday, "George Bush is the most relentlessly upbeat man you'll ever meet, and his spirits have been good throughout this ordeal." He declined to disclose any information about Bush's prognosis or how much longer he might remain hospitalized.

Bush, the 41st U.S. president and a Republican, is the father of former President George W. Bush. In a political career spanning four decades, he also served as a congressman, ambassador to the United Nations, envoy to China, CIA director, and vice president for two terms under Ronald Reagan.

Bush has lower-body parkinsonism, which causes a loss of balance, and has used a wheelchair for more than a year.

(Additional reporting and writing by Steve Gorman; Editing by Peter Cooney)

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Lockheed gets up to $4.9 billion in further F-35 funding

By Andrea Shalal-Esa

WASHINGTON | Fri Dec 28, 2012 7:43pm EST

WASHINGTON (Reuters) - Lockheed Martin Corp on Friday was awarded up to $4.9 billion in additional funding for its F-35 Joint Strike Fighter program, the Pentagon announced on Friday, providing a significant end-of-year boost in orders for the largest U.S. defense contractor.

The U.S. Defense Department said it had reached agreement with Lockheed on a preliminary contract valued at up to $3.68 billion for 31 F-35s in a sixth batch of planes to be built for the U.S. military, with details to be finalized the coming year.

It also awarded Lockheed additional separate contracts valued at up to $1.2 billion for spare parts and sustainment of the new radar-evading warplane.

The Pentagon plans to spend $396 billion to buy a total of 2,443 F-35 fighter jets from Lockheed over the next decades for the U.S. Air Force, Navy and Marine Corps, making the Joint Strike Fighter the costliest weapons program in U.S. history.

Lockheed is developing the single-seat, single-engine plane for the U.S. military and eight international partners -- Britain, Australia, Italy, Canada, Turkey, Denmark, Norway and the Netherlands, which helped pay for the plane's development.

The production contract announced on Friday includes 18 conventional takeoff and landing jets for the Air Force, six short takeoff and landing variants for the Marine Corps; and seven carrier variants for the Navy.

It does not include three F-35 fighters to be purchased by Italy and two to be purchased by Australia as part of the sixth lot of low-rate, initial production.

Those agreements will be negotiated next year, said Joe DellaVedova, spokesman for the Pentagon's F-35 program office.

He said an agreement reached earlier this month on a fifth batch of jets had helped speed up negotiations on the preliminary sixth production contract.

"The F-35 Joint Program Office continues to work diligently to ensure that managing jet cost, remaining on schedule during test and production and driving production efficiencies ... are incentivized in contract negotiations while ensuring that respectable profit is available to the contractor," he said.

He said the Pentagon continued to push the company to reduce its "rework" rate, which refers to production work that has to be redone because of mistakes, and also the amount of time needed to make any required changes to the plane's design.

Lockheed welcomed the agreement with the Defense Department.

"We remain committed to reducing costs while building upon our excellent production performance in 2012," said spokesman Mike Rein. "Our top priority remains to deliver the F-35's 5th generation capability to our U.S. and partner nations."

The agreement also does not include engines for the fighters, which are purchased under separate contracts negotiated directly between the Pentagon and engine maker Pratt & Whitney, a unit of United Technologies Corp.

Sources familiar with the government's talks with Pratt & Whitney said they were making good progress.

The Defense Department two weeks ago finalized an agreement with Lockheed for a fifth batch of F-35 planes, a $3.8 billion deal to buy 32 of the aircraft.

At the time, company executives and defense officials said that agreement paved the way for a deal on early funding for the next group of planes by the end of the year.

The agreement obligates a significant portion of the funding for that next group of F-35s, safeguarding that money from cuts, even if U.S. lawmakers do not reach a deal to avert automatic reductions due to start taking effect on January 2.

The agreement also removes a potential $1.1 billion liability that Lockheed said it faced on the program for work done by it and its key suppliers without a signed contract.

Lockheed shares closed $1.49, or 1.6 percent, lower at $91.34 on the New York Stock Exchange on Friday.

(Reporting by Andrea Shalal-Esa; Editing by Richard Chang, David Gregorio and Bob Burgdorfer)

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Lawmakers rush to finish farm bill extension

U.S. Senate Finance Committee Chairman Max Baucus (D-MT) departs after meeting with a bipartisan group of lawmakers and Vice President Joe Biden to work on a legislative framework for comprehensive deficit reduction at the Blair House in Washington May 10, 2011.

Credit: Reuters/Jonathan Ernst

By Charles Abbott

WASHINGTON | Fri Dec 28, 2012 7:39pm EST

WASHINGTON (Reuters) - The U.S. House and Senate agriculture committees are working on a short-term extension to the expired U.S. farm bill, and plan to vote on the extension by Monday, the final day of 2012, lawmakers and aides said.

The proposed extension to farm legislation that expired in September could be for six months to a year.

If an extension is passed the United States would avoid reverting to 1949 "permanent law" and a potential spike in the retail price of milk to as much as $8 a gallon in 2013.

But a year-long extension would probably mean another round of the direct subsidies to farmers that cost about $5 billion a year and that both sides of debate had agreed earlier to eliminate.

The Senate passed its new five-year farm bill in June, and the House Agriculture Committee followed with a version in July.

But the House bill, with large cuts in food stamp funding for lower-income Americans, has never been brought to a vote by the full House. The Senate and House remain far apart on the issues of food stamps and crop subsidies.

Many estimate that U.S. retail milk prices could rise sharply in 2013 - to some $6 to $8 per gallon from the current level of about $3.53 - if the government reverts to 1949 statutes that would require USDA to buy and store dairy products at inflated prices.

Pressure has been rising from the Agriculture Department and dairy groups for Congress to take action by year-end - if not on the entire farm bill, then at least on an extension or a specific "patch" to address the dairy program.

"We'll find a way" to get an extension passed, said Minnesota Senator Amy Klobuchar, a member of the Senate Agriculture Committee, who added that the senators' preference was still to pass a complete bill.

"This is so much 'Plan B' that it's like 'Plan M' for milk," Klobuchar said.

The price of milk will not double on January 1 if Congress does not act, but would likely rise gradually as supplies are removed from normal merchandising channels and instead land in USDA storage facilities.

"USDA continues to review a variety of options for administering programs, should permanent law become legally effective on January 1," a spokesman said.

Government buying could quickly produce a glut of milk, butter, cheese and powdered milk that would get stored in warehouses, given to food banks and exported as food aid, said Jay Gordon, a dairy farmer and executive director of the Washington State Dairy Federation, a trade organization.

"We're not going to sit around watching the Super Bowl and eating chunks of butter," said Gordon, who has about 150 cows on his farm in Washington state. "But the government has to keep buying" to keep the price up.

Major milk retailers have been watching the Congressional maneuvers closely, without outlining specific strategies.

"When it comes to milk, competitive price changes do occur all of the time, where allowed. Milk costs are adjusted both up and down monthly. At this point we do not anticipate any changes in the cost of milk as a result of the bill," said Mike Siemienas, spokesman for Supervalu Inc., a major U.S. grocery store operator with chains such as Albertsons and Jewel-Osco.

The International Dairy Foods Association, which represents companies that provide about 85 percent of the bottled milk, ice cream and cheese to U.S. consumers, is hopeful that Congress will succeed in passing a farm bill extension.

But the group this week urged USDA Secretary Tom Vilsack to avoid or delay the impact of a return to 1949 law, should an extension or patch not be successful. Vilsack, for his part, has repeatedly urged Congress to act responsibly.

"The worst outcome would be for us to continue to see Congress do nothing, and for permanent law to come into effect," Vilsack said last week.

Some lawmakers have been counting on time being on their side, regardless of the status of legislation.

"Implementation of permanent law will take a considerable amount of time, and to that end, I call on (the USDA Secretary) to carefully consider all relevant factors and to take public comment through a rule making process before proceeding," Frank Lucas, chairman of the House Agriculture Committee, told the Tulsa World newspaper this week.

A formal rule making process - which is also advocated by IDFA, absent a farm bill extension - could typically be expected to take up to several months.

The process "will enable stakeholders, not just dairy producers and processors but also food manufacturers, food retailers and others, to voice their concerns prior to the implementation of any new rule," IDFA President Connie Tipton said in a letter to Vilsack dated December 27. (Additional reporting by Doug Palmer in Washington, Jessica Wohl in Chicago and Alwyn Scott in New York, writing by Ros Krasny; Editing by Bob Burgdorfer and David Gregorio)

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After Jackson, EPA faces decisions on U.S. fracking boom

U.S. Environmental Protection Agency Administrator Lisa Jackson, speaks during a news conference in Rio de Janeiro June 20, 2012.

Credit: Reuters/Ueslei Marcelino

By Jonathan Leff and Joshua Schneyer

NEW YORK | Fri Dec 28, 2012 4:28pm EST

NEW YORK (Reuters) - The past four years of U.S. environmental regulation was marked by a crackdown on emissions that angered coal miners and power companies. Over the next four, the new head of the Environmental Protection Agency will have to decide whether to take on an even larger industry: Big Oil.

Following Lisa Jackson's resignation on Wednesday, her successor will inherit the tricky task of regulating a drilling boom that has revolutionized the energy industry but raised fears over the possible contamination of water supplies.

The controversial technique at the center of the boom, hydraulic fracturing, involves injecting millions of gallons of water laced with chemicals deep into shale rocks to extract oil and gas. It has become a flashpoint issue, putting the EPA -- charged with safeguarding the nation's water -- in the middle of a fight between environmentalists and the energy industry.

Both sides now eagerly await a major EPA research project into fracking's effects on water supplies due in 2014, as well as final rules on issues including the disposal of wastewater and the use of 'diesel' chemicals in the process.

It is unclear who will take the role, but the incoming chief may have a "huge impact" on the oil and gas industry, says Robert McNally, a White House energy adviser during the George W. Bush administration who now heads the Rapidan Group, a consulting firm.

On the one hand, energy industry and big manufacturers are warning the EPA not to impede a drilling boom that offers the promise of decades' worth of cheap energy. Meanwhile, environmentalists are pressing President Barack Obama to ensure the drilling bonanza is not endangering water resources.

"This administration clearly needs contributors to economic growth for its economic legacy as much as it needs to add to its environmental legacy," said Bruce Bullock of the Maguire Energy Institute at Southern Methodist University in Dallas.

"This appointment could be key in seeing which of those two legacies is more important."

There are many contenders for the role, but no clear front-runner as yet. Obama may seek an insider to avoid a difficult confirmation process, with possible candidates including Bob Perciasepe, the EPA deputy administrator and interim chief, and Gina McCarthy, who runs the air quality division.

Obama is unlikely to win Congressional approval for a heavy-handed regulator, and there is no suggestion of a stringent crackdown.

Even Jackson, who suffered withering criticism from big industry and Republicans for her efforts to curb pollution and limit greenhouse gas emissions, has cautiously condoned the practice as safe, while acknowledging the need for greater study and, in some cases, oversight.

"(Fracking technology) is perfectly capable of being clean," Jackson said in February. "It requires smart regulation, smart rules of the road."

Jackson's successor may now be charged with refining those rules, and both energy companies and fracking critics are anxious about the outcome.

Industry body Independent Petroleum Association of America said the EPA has "hindered development" of oil and gas for four years, and looks forward to a new chief who will promote energy drilling "hand in hand" with environmental regulation.

Executive director of the Sierra Club environmental group Michael Brune says the EPA has "unfinished business" in addressing things such as the release of methane emissions during fracking.

APPETITE TO REGULATE

Some analysts say Obama will not risk the economic stimulus of cheaper, domestic energy by pushing for tougher regulations. The oil sector is one of the few bright spots in the U.S. economy; natural gas prices are near their lowest in a decade, a boon for manufacturers, and U.S. oil output is the highest in 18 years.

"Even before (Jackson's resignation) there didn't seem to be much of an appetite in the White House to regulate shale drilling on a federal level in the next couple of years," says Nitzan Goldberger, U.S. energy policy analyst with Eurasia Group.

But big drillers such as ExxonMobil and Chesapeake who have plowed billions of dollars into shale fields are watching carefully for any sign of new rules or oversight.

Mark P. Fitzsimmons, a former lawyer in the Department of Justice's environmental division, and now a partner at Steptoe & Johnson LLP in Wash DC, says there is "a risk of overregulation." Some drilling activity has already slowed sharply this year due to the slump in natural gas prices.

"Regulatory overlays that add to the cost of production will further slow down development" but won't stop it, he said.

While fracking technology has been around for decades, it has only gained widespread use across dozens of states in recent years. The EPA, like many groups, has struggled to keep up with the expansion, according to Government Accountability Office reports released earlier this year.

After years in which states were mostly responsible for regulating onshore drilling, the new EPA administrator will be pressed to take a more central role.

A year ago, in the first U.S. government report of its kind, the EPA drew a potential link between water contamination in rural Pavillion, Wyoming and fracking, based on samples of ground water from the area. That study has been contested, and subsequent research has been inconclusive.

A firmer word on the impact may not emerge until 2014, when the EPA is expected to release the first exhaustive in-depth government study on the long-term effects of fracking on drinking water, commissioned by Congress over two years.

While climate change issues and air pollution may remain larger agency priorities, fracking is moving up the agenda.

"I don't think they would be capable of ignoring something that Matt Damon makes a movie about," said Fitzsimmons.

Damon and John Krasinski star in "Promised Land," a new film that opened on Friday exploring the social impact of fracking. It received mixed reviews from critics, but is being closely watched by an energy industry that fears it could further antagonize public opinion over domestic drilling.

A Gallup poll this year showed drinking water contamination is the leading environmental concern among Americans.

DIESEL, WASTEWATER AND FLARING

The debate rages over a diverse range of issues.

While fracking was exempted from the Federal Clean Water Act in 2005, operations that used diesel fuel, which contains a number of toxic chemical compounds, were not exempted.

However, what exactly constitutes "diesel" has been a bone of contention among oil firms and environmental groups.

"The question is how to define "diesel" - broadly or narrowly," says consultant McNally.

"It's a big issue especially for Bakken producers," he said, referring to the region of North Dakota where crude oil output has more than tripled in two years.

The EPA published a draft definition in May, which met with criticism from the industry and some legislators, but it will fall to the new administrator to set a final definition.

Under Jackson, the EPA also said it would begin to regulate the millions of gallons a day of wastewater that is withdrawn from wells after the fracking process, probably in 2014. This is usually trucked offsite and sometimes re-injected elsewhere, although increasingly it is being reprocessed for further use.

And eventually, the EPA could face pressure to backtrack on previous initiatives. In April, the agency relented to pressure from the industry, giving drillers until January 2015 to end the practice of "flaring" excess natural gas from wells that were not connected to pipelines. It had initially proposed that firms cease almost immediately.

For Jackson's successor, a central question is whether the EPA takes a broader role in the industry, or, as Jackson hinted a year ago, allows state officials to call most the shots when it comes to drilling:

"It's not to say that there isn't a federal role, but you can't start to talk about a federal role without acknowledging the very strong state role."

(Additional reporting by Selam Gebrekidan and Valerie Volcovici; Editing by Joseph Radford and Andrew Hay)

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Senate approves $60.4 billion Superstorm Sandy aid bill

1 of 2. Clouds roll over destroyed homes, almost two months after superstorm Sandy caused damage in the region of Breezy Point of Queens borough, New York, December 27, 2012.

Credit: Reuters/Lucas Jackson

By Doug Palmer and David Lawder

WASHINGTON | Fri Dec 28, 2012 9:19pm EST

WASHINGTON (Reuters) - The U.S. Senate on Friday approved a $60.4 billion aid package to pay for reconstruction costs from Superstorm Sandy, which ravaged mid-Atlantic and northeastern states, after defeating Republican efforts to trim the bill's cost.

Senate Majority Leader Harry Reid urged the Republican-controlled House of Representatives to quickly take up the bill, which includes $12 billion to repair and strengthen the region's transportation system against future storms.

"There is no time to waste," Reid said.

Both chambers have to agreed on a package by January 2, when the current term of Congress is expected to end, or restart the process of crafting legislation in 2013. The Senate approved the bill 62-32, with most Republicans voting no.

"We beat back all of the crippling amendments," said Senator Charles Schumer, a Democrat from New York, which suffered the largest monetary damage in the storm.

"The century-old tradition of different parts of the country rallying to help those who are beleaguered because of difficult natural disasters continues," Schumer said.

The bill's chances in the next few days could depend on whether President Barack Obama and congressional leaders reach a deal to avert the "fiscal cliff" of tax increases and spending cuts set to begin taking effect in the new year.

House Republican leaders have not yet decided whether to take up the Senate bill, a Republican aide said.

The bill also provides $17 billion in Community Development Block Grants to help rebuild homes, schools, hospitals and other buildings destroyed by the late October storm, help small businesses and improve the power infrastructure.

Senate Republicans complained the $60.4 billion reconstruction package requested by Obama is more than the annual budgets for the departments of Interior, Labor, Treasury and Transportation combined.

HOUSE ACTION UNCLEAR

Senator Dan Coats, an Indiana Republican, offered an alternative that would have provided $23.8 billion in funding to help victims of the storm through the end of March and give Congress time to determine additional needs.

"Let me just say, we simply are allowing three months for the Congress of the United States, the representatives of the taxpayers' dollars, to assess, document and justify additional expenditures that go beyond emergency needs," Coats said just before his amendment was defeated.

House Appropriations Committee Chairman Harold Rogers, a Republican from Kentucky, would still prefer to pass a stop-gap bill to meet immediate needs and wait to do another package after better estimates come in, a committee aide said.

The Congressional Budget Office has estimated about $8.97 billion of the Senate bill would be spent in 2013, with another $12.66 billion spent in 2014 and $11.59 billion spent in 2015.

The Senate bill is considerably less than the $82 billion in aid requested by New York, New Jersey and Connecticut, the states that bore the brunt of damage from the storm.

New Jersey Governor Chris Christie, a Republican, was in Washington this month, lobbying lawmakers for the larger amount.

The Federal Emergency Management Agency's disaster relief fund now has less than $5 billion available.

The damage to New York and New Jersey coastal areas was on a scale not seen since Hurricane Katrina slammed the Gulf Coast and flooded New Orleans in 2005. Two weeks after that storm hit, Congress approved $62.3 billion in emergency appropriations.

Lawmakers passed numerous subsequent emergency funding requests over several years to cover damages from Katrina, which topped $100 billion. A number of Gulf State Republicans supported the Sandy relief bill.

Republicans were successful in requiring offsetting spending cuts for $3.4 billion in mitigation work to prevent future disasters. Some Democrats said this would set a precedent for future disaster aid bills.

(Reporting By Doug Palmer and David Lawder; editing by Todd Eastham)

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Senate leaders to make last-ditch "fiscal cliff" effort

1 of 12. U.S. Senate Minority Leader Mitch McConnell (R-KY) speaks to reporters on his way to lunch at the U.S. Capitol in Washington December 28, 2012.

Credit: Reuters/Mary F. Calvert

By Roberta Rampton and Richard Cowan

WASHINGTON | Fri Dec 28, 2012 8:35pm EST

WASHINGTON (Reuters) - President Barack Obama and U.S. congressional leaders agreed on Friday to make a final effort to prevent the United States from going over the "fiscal cliff," setting off intense bargaining over Americans' tax rates as a New Year's Eve deadline looms.

With only days left to avoid steep tax hikes and spending cuts that could cause a recession, two Senate veterans will try to forge a deal that has eluded the White House and Congress for months.

Obama said he was "modestly optimistic" an agreement could be found. But neither side appeared to give much ground at a White House meeting of congressional leaders on Friday.

What they did agree on was to task Harry Reid, the Democratic Senate majority leader, and Mitch McConnell, who heads the chamber's Republican minority, with reaching a budget agreement by Sunday at the latest.

"The hour for immediate action is here. It is now. We're now at the point where in just four days, every American's tax rates are scheduled to go up by law. Every American's paycheck will get considerably smaller. And that would be the wrong thing to do," Obama told reporters.

A total of $600 billion in tax hikes and automatic cuts to government spending will start kicking in on Tuesday - New Year's Day - if politicians cannot reach a deal. Economists fear the measures will push the U.S. economy into a recession.

Pessimism about the fiscal cliff helped push U.S. stocks down on Friday for a fifth straight day. The Dow Jones industrial average dropped 158.20 points, or 1.21 percent. Retailers are blaming worries about the "fiscal cliff" for lackluster Christmas season shopping.

Under the plan hashed out on Friday, any agreement between McConnell and Reid would be backed by the Senate and then approved in the Republican-controlled House of Representatives before the end of the year.

But the House could well be the graveyard of any accord.

A core of fiscal conservatives there strongly opposes Obama's efforts to raise taxes for the wealthiest as part of a plan to close America's budget deficit. House Republicans also want to see Obama commit to major spending cuts.

Talks between Obama and Republican House Speaker John Boehner collapsed last week when several dozen Republicans defied their leader and rejected a plan to raise rates for those earning $1 million and above.

A Democratic aide said Boehner stuck mainly to "talking points" in Friday's White House meeting, with the message that the House had acted on the budget and it was now time for the Senate to move.

TALKS ON 'BIG NUMBERS'

The two Senate leaders and their aides will plunge into talks on Saturday that will focus mainly on the threshold for raising income taxes on households with upper-level earnings, a Democratic aide said. Analysts say both sides could agree on raising taxes for households earning more than $400,000 or $500,000 a year.

The pair will also discuss whether the estate tax should be kept at current low levels or allowed to rise, the aide said.

Democrat Reid warned of tough talks.

"It's not easy, we're dealing with big numbers, and some of that stuff we do is somewhat complicated," he said.

McConnell described Friday's White House summit, also attended by Democratic House Minority Leader Nancy Pelosi, as "a good meeting."

"So we'll be working hard to try to see if we can get there in the next 24 hours. So I'm hopeful and optimistic," he said.

If things cannot be worked out between the Senate leaders, Obama said he wanted both chambers in Congress to vote on a backup plan that would increase taxes only for households with more than $250,000 of annual income.

The plan would also extend unemployment insurance for about 2 million Americans and set up a framework for a larger deficit reduction deal next year.

There are signs in the options market that investor fear is taking hold. The CBOE Volatility Index, or the VIX, the market's favored anxiety indicator, has remained at relatively low levels throughout this process, but it moved on Friday above 22, the highest level since June.

But some in the market were resigned to Washington going beyond the New Year's Day deadline, as long as a serious agreement on deficit reduction comes out of the talks in early January.

"Regardless of whether the government resolves the issues now, any deal can easily be retroactive. We're not as concerned with January 1 as the market seems to be," said Richard Weiss, a senior money manager at American Century Investments.

Another component of the "fiscal cliff" - $109 billion in automatic spending cuts to military and domestic programs - is set to kick in on Wednesday.

S&P rating agency said on Friday the fiscal cliff impasse did not affect the U.S. sovereign rating.

That lifted the immediate threat of a downgrade from the agency, which cut the United States' triple-A rating in August, 2011 in an unprecedented move after a similar partisan budget fight.

(Additional reporting by David Lawder, Thomas Ferraro, Rachelle Younglai and Mark Felsenthal; Writing by Alistair Bell; Editing by Peter Cooney)

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Obama not making new "fiscal cliff" offer to Congress: source

U.S. President Barack Obama delivers remarks at the White House in Washington November 28, 2012.

Credit: Reuters/Kevin Lamarque

By Mark Felsenthal

WASHINGTON | Fri Dec 28, 2012 4:06pm EST

WASHINGTON (Reuters) - President Barack Obama was not planning to make a new offer to avert the tax increases and spending cuts that loom on January 1 at a White House meeting with congressional leaders on Friday, a source familiar with the meeting said.

At the meeting, Obama was set to ask lawmakers to hold a vote on a "fiscal cliff" plan that would allow taxes to rise on those who earn $250,000 and up, and that would extend unemployment insurance benefits, according to the source.

Obama believes his plan would pass with a majority in both the House of Representatives and the Senate, the source said.

The president was meeting with Senate Majority Leader Harry Reid, Senate Minority Leader Mitch McConnell, House Speaker John Boehner and House Minority Leader Nancy Pelosi - the first time the group has met together since November.

If congressional leaders object to his plan, Obama will ask them for a viable counterproposal, the source added. If lawmakers have no alternative approach, he will seek an up-or-down vote in Congress on his plan, the source said.

(Reporting by Mark Felsenthal and Roberta Rampton; editing by Todd Eastham)

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Wall Street Week Ahead: Cliff may be a fear, but debt ceiling much scarier

By Ryan Vlastelica, Edward Krudy and Doris Frankel

Fri Dec 28, 2012 8:34pm EST

n">(Reuters) - Investors fearing a stock market plunge - if the United States tumbles off the "fiscal cliff" next week - may want to relax.

But they should be scared if a few weeks later, Washington fails to reach a deal to increase the nation's debt ceiling because that raises the threat of a default, another credit downgrade and a panic in the financial markets.

Market strategists say that while falling off the cliff for any lengthy period - which would lead to automatic tax hikes and stiff cuts in government spending - would badly hurt both consumer and business confidence, it would take some time for the U.S. economy to slide into recession. In the meantime, there would be plenty of chances for lawmakers to make amends by reversing some of the effects.

That has been reflected in a U.S. stock market that has still not shown signs of melting down. Instead, it has drifted lower and become more volatile.

In some ways, that has let Washington off the hook. In the past, a plunge in stock prices forced the hand of Congress, such as in the middle of the financial crisis in 2008.

"If this thing continues for a bit longer and the result is you get a U.S. debt downgrade ... the risk is not that you lose two-and-a-half percent, the risk is that you lose ten and a half," said Jonathan Golub, chief U.S. equity strategist at UBS Equity Research, in New York.

U.S. Treasury Secretary Tim Geithner said this week that the United States will technically reach its debt limit at the end of the year.

INVESTORS WARY OF JANUARY

The White House has said it will not negotiate the debt ceiling as in 2011, when the fight over what was once a procedural matter preceded the first-ever downgrade of the U.S. credit rating. But it may be forced into such a battle again. A repeat of that war is most worrisome for markets.

Markets posted several days of sharp losses in the period surrounding the debt ceiling fight in 2011. Even after a bill to increase the ceiling passed, stocks plunged in what was seen as a vote of "no confidence" in Washington's ability to function, considering how close lawmakers came to a default.

Credit ratings agency Standard & Poor's lowered the U.S. sovereign rating to double-A-plus, citing Washington's legislative problems as one reason for the downgrade from triple-A status. The benchmark S&P 500 dropped 16 percent in a four-week period ending August 21, 2011.

"I think there will be a tremendous fight between Democrats and Republicans about the debt ceiling," said Jon Najarian, a co-founder of online brokerage TradeMonster.com, in Chicago.

"I think that is the biggest risk to the downside in January for the market and the U.S. economy."

There are some signs in the options market that investors are starting to eye the January period with more wariness. The CBOE Volatility Index, or the VIX, the market's preferred indicator of anxiety, has remained at relatively low levels throughout this process, though on Thursday it edged above 20 for the first time since July.

More notable is the action in VIX futures markets, which shows a sharper increase in expected volatility in January than in later-dated contracts. January VIX futures are up nearly 23 percent in the last seven trading days, compared with a 13 percent increase in March futures and an 8 percent increase in May futures. That's a sign of increasing near-term worry among market participants.

The CBOE Volatility Index closed on Friday at 22.72, gaining nearly 17 percent to end at its highest level since June as details emerged of a meeting on Friday afternoon of President Barack Obama with Senate and House leaders from both parties where the president offered proposals similar to those already rejected by Republicans. Stocks slid in late trading and equity futures continued that slide after cash markets closed.

"I was stunned Obama didn't have another plan, and that's absolutely why we sold off," said Mike Shea, a managing partner and trader at Direct Access Partners LLC, in New York.

Obama offered hope for a last-minute agreement to avoid the fiscal cliff after a meeting with congressional leaders, although he scolded Congress for leaving the problem unresolved until the 11th hour.

"The hour for immediate action is here," he told reporters at a White House briefing. "I'm modestly optimistic that an agreement can be achieved."

The U.S. House of Representatives is set to convene on Sunday and continue working through the New Year's Day holiday. Obama has proposed maintaining current tax rates for all but the highest earners.

Consumers don't appear at all traumatized by the fiscal cliff talks, as yet. Helping to bolster consumer confidence has been a continued recovery in the housing market and growth in the labor market, albeit slow.

The latest take on employment will be out next Friday, when the U.S. Labor Department's non-farm payrolls report is expected to show jobs growth of 145,000 for December, in line with recent growth.

Consumers will see their paychecks affected if lawmakers cannot broker a deal and tax rates rise, but the effect on spending is likely to be gradual.

PLAYING DEFENSE

Options strategists have noted an increase in positions to guard against weakness in defense stocks such as General Dynamics because those stocks would be affected by spending cuts set for that sector. Notably, though, the PHLX Defense Index is less than 1 percent away from an all-time high reached on December 20.

This underscores the view taken by most investors and strategists: One way or another, Washington will come to an agreement to offset some effects of the cliff. The result will not be entirely satisfying, but it will be enough to satisfy investors.

"Expectations are pretty low at this point, and yet the equity market hasn't reacted," said Carmine Grigoli, chief U.S. investment strategist at Mizuho Securities USA, in New York. "You're not going to see the markets react to anything with more than a 5 (percent) to 7 percent correction."

Save for a brief 3.6 percent drop in equity futures late on Thursday evening last week after House Speaker John Boehner had to cancel a scheduled vote on a tax-hike bill due to lack of Republican support, markets have not shown the same kind of volatility as in 2008 or 2011.

A gradual decline remains possible, Golub said, if business and consumer confidence continues to take a hit on the back of fiscal cliff worries. The Conference Board's measure of consumer confidence fell sharply in December, a drop blamed in part on the fiscal issues.

"If Congress came out and said that everything is off the table, yeah, that would be a short-term shock to the market, but that's not likely," said Richard Weiss, a Mountain View, California-based senior money manager at American Century Investments.

"Things will be resolved, just maybe not on a good time table. All else being equal, we see any further decline as a buying opportunity."

(Wall St Week Ahead runs every Friday. Questions or comments on this column can be emailed to: david.gaffen(at)thomsonreuters.com)

(Reporting by Edward Krudy and Ryan Vlastelica in New York and Doris Frankel in Chicago; Writing by David Gaffen; Editing by Martin Howell, Steve Orlofsky and Jan Paschal)

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