Lessons From Facebook's IPO

The social network's bumpy first week highlights the dangers of investing in buzz.

Facebook's (FB) debut on the public market last Friday didn't do much to quell the heated chatter about the IPO. The only big change was that the tone switched from being distinctly positive to distinctly negative. Instead of hearing about the firm's breathless growth, we instead got plenty of reports on the myriad ways that the offering was allegedly mishandled. Investors that jumped in early were likely shaking their hands and licking their wounds, but even those who stayed on the sidelines can learn plenty from the hubbub.

IPOs Can Be Treacherous Investors had several complaints about the Facebook offering this week. The first was mostly technical. It now seems clear that  Nasdaq's(NDAQ) systems were not up to snuff for the huge volume of trades that poured through the exchange. The initial trading went so poorly, there were even rumors this week that Facebook was considering switching its listing to the New York Stock Exchange(NYX).

And although the mechanics of trading are important to all investors (remember 2010's Flash Crash), most people were more troubled by the news of how revised projections for Facebook's growth were disseminated. It emerged this week that  Morgan Stanley (MS) and  Goldman Sachs (GS) revised down projections for Facebook's growth ahead of the IPO, but they told only a small group of clients about it.

There is no sign that the banks did anything illegal, but it does underscore just how big the information asymmetry is for most IPOs. Small investors don't have much to go on before diving into an offering. They get a few SEC fillings and a few years of historical results. Compare this to the banks and their top clients, who have access to senior management and a much deeper knowledge of the business.

And the banks also have a vested interest in stoking the hype and talks of lofty growth levels. Their client is Facebook, not investors. Bankers are trying to maximize the amount of money that Facebook raises and to boost the returns of early shareholders cashing out. So the fact that they weren't exactly trumpeting the downwardly revised numbers shouldn't come as a huge shock.

Luckily, this informational advantage fades as a company spends more time on the public markets. Investors of all stripes get to see many more quarters of financial performance and can listen to management conference calls, and more analysts have an opportunity to weigh in on the stock. As a result, the direction of the business can become clearer. But trying to get in on an IPO that first day is more of a leap of faith than buying an established company's stock.

Buzz Doesn't Equal ProfitThe Facebook offering also pointed to the dangers of chasing hype. Talk about the future of Facebook was on the lips of not just growth fund managers, but plenty of smaller investors who wanted to get in on the action.

The buzz for Facebook was deafening; a service that touches 500 million people daily has a tendency to do that. But just because something makes great cocktail party conversation, doesn't mean it makes sense as an investment at any price. Facebook may have a great future ahead of it (and signs look like it does), but if you don't buy the stock when it is trading for a fraction of its value, it can be hard to profit from that growth. If the stock is priced to perfection, it will likely tumble at the first stumble.

If anything, the buzz itself is a good sign that a stock might be frothy. We've seen time and time again investors chasing hot sectors and hot stocks only to be burned as the buzz moves elsewhere. It takes only a cursory glance at Morningstar's investor return data to see how investors have a knack for picking investments at the wrong time.

In Facebook's case, it seems that plenty of investors piled on not because they liked the stock at $38, but because they thought there was a greater fool ready to buy it at $45. This is a dangerous game to play. If everyone is thinking that way, demand can drop in a hurry, and shares can fall, as we've seen since Facebook's debut. It's important to look beyond what is trendy to what is cheap.

Tech Is Not BulletproofOne of the surprising trends that emerged post-financial crisis was the ascension of a new wave of Internet companies. Thanks to new cloud services from  Amazon(AMZN) and others, and the rise of smartphones, this new breed of tech firm could get off the ground without needing much capital, which was in very short supply during the crisis. Given that these were basically the only new firms on the block, and also given the huge growth numbers they posted, excitement over them grew very quickly. Private market valuations shot through the roof, and investors anxiously waited to get their hands on the first IPOs.

But now that investors have gotten a closer look at these firms, they seem to be less excited about their prospects. Take a quick look at the post-first trade performance at Groupon (GRPN) (-54%),  Zynga (ZNGA) (-28%), and Pandora (P)(-33%) to see how fast sentiment has moved away from some of these names. (LinkedIn (LNKD), with its easy-to-understand monetization model, is a notable exception). Facebook could be another addition to stocks that have wilted, at least in the short term, in the public markets, as investors closely weighed the growth prospects against the price.

It's not that Facebook isn't a great company; we give it a wide moat and think it deserves a lofty valuation--just not quite as lofty as the company hoped when it priced its IPO. This offering was just another example, albeit a high-profile one, that tech IPOs aren't special and that there is no reason to believe tech valuations have become unmoored from reality. Just like any other company, the fundamentals need to support the valuation, and in this case, they didn't justify a stock price well above $38. Perhaps this whole episode will finally debunk the myth that this new wave of firms are somehow immune to normal economics.

The vast majority of investors, particularly those with a long-term focus, let the Facebook IPO come and go without losing a dollar. But the entire episode provided a great lesson on the perils of following the hype.

J.P. Morgan Plans Risk-Panel Shift

The board of J.P. Morgan Chase & Co. is expected to shake up its risk-policy committee in the wake of more than $2 billion in trading losses, people familiar with the matter said.

Directors Timothy Flynn and James Bell, who joined the New York company's board over the past year and have backgrounds in risk and finance, are considered candidates to join the committee, these people said. Either Mr. Flynn or Mr. Bell is expected to join the risk panel, a person familiar with the bank said.

The change was in the works before the company on May 10 disclosed losses tied to wagers on corporate-credit indexes placed by a unit called the Chief Investment Office, which includes a trader who has been called the "London whale" for his market-moving bets, the person said.

The blowup at the nation's largest bank by assets has raised questions among shareholders about the strength of risk controls and the level of oversight at the board, and tarnished the risk-management reputation of Chairman and Chief Executive James Dimon. Shares of J.P. Morgan have dropped 18% since the losses were disclosed, wiping $27 billion off the company's market value. They closed down 47 cents, or 1.4%, at $33.50 on Friday.

The risk-policy committee is responsible for "oversight of the CEO's and senior management's responsibilities to assess and manage the firm's credit risk, market rate risk, interest rate risk, investment risk, liquidity risk and reputational risk," according to regulatory filings.None of the directors could be reached for comment. It isn't clear whether any of the current risk-committee members will leave the panel.

Board members view the trading miscues as the responsibility of top executives, said one person familiar with the board's deliberations. The risk committee of the board "doesn't get into specific management issues," this person said.

Approving higher risk limits on trades, for instance, "is not something [committee members] would approve,'' this person explained. A risk committee typically deals "with broad-brush issues like, 'What are our policies? What are our controls? Do they work?'"

The New York bank is investigating the losses, in an inquiry led by its auditing and legal departments in cooperation with outside auditors and ex-Securities and Exchange Commission enforcement chief William McLucas, now a partner at Wilmer Hale in Washington. The board's audit and risk committees will likely meet every week for the next three months to get updates on the probe. The in-house inquiry is focusing on several areas, including whether the bank set risk limits too high for the Chief Investment Office. Last year, the audit committee met 15 times and the risk panel seven times.

CtW Investment Group, which represents pension funds that hold about six million J.P. Morgan shares, this month called for Mr. Crown to give up his committee chairmanship and for Ms. Futter to step down, according to a letter the group sent to the board's presiding director Lee R. Raymond. Ms. Futter was a director at American International Group Inc. before the insurer ran into problems during the financial crisis. She resigned from AIG's board in July 2008.

CtW Investment first outlined its concerns in a separate 2011 letter that said "the current three-person risk policy committee, without a single expert in banking or financial regulation, is simply not up the task of overseeing risk management at one of the world's largest and most complex financial institutions." Mr. Crown made $300,000 in compensation as a J.P. Morgan director last year, according to a bank filing, while Mr. Cote and Ms. Futter each made $245,000.

The investor group also is asking the bank's risk committee to independently examine how the bank's trading loss occurred, and to determine whether J.P. Morgan's compensation programs "inadvertently incentivize excessive risk-taking," according to the letter sent May 14.

Mr. Flynn and Mr. Bell would be well suited to the new role, said another person familiar with the board's deliberations, because of their work histories, the person said.

Mr. Flynn, who joined the board this month, is former chairman for accounting firm KPMG International and former CEO of its U.S. unit. Mr. Bell retired April 1 as chief financial officer for aerospace giant Boeing Co. Mr. Bell, who joined the board last November, could leave the audit committee as part of the changes, one of these people said.

U.S. data, Europe woes to set tone

Investors will grapple next week with major U.S. economic reports and the looming possibility of a Greek exit from the euro zone, which is likely to keep dragging on equities for weeks to come.

As contingency plans are made for Greece's possible departure from the euro zone, investors may not get a clear picture until Greece holds elections on June 17. As a result, U.S. economic statistics may grab the spotlight during the holiday-shortened week.

Major releases include consumer confidence, gross domestic product and on Friday the May non-farm payrolls report, which could provide clues on whether the economy is running out of steam or has simply hit a soft patch.

U.S. financial markets will be closed on Monday for the Memorial Day holiday.

Corporate news next week is expected to be light, with the first-quarter earnings season largely in the rear view mirror. Among S&P 500 .SPXcompanies, only government contractor SAIC Inc (SAI.N) is scheduled to report next week.

EUROPE STILL A CONCERN

"We are going to continue to worry about Europe no matter what. That is going to be a concern," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

"But with the two main events in Europe not taking place for several weeks, the market will probably concentrate more on the domestic economy and the economic numbers."

But Europe will continue to be closely monitored, with equities affected by any developments in the fiscally troubled region. Increasing worries about the region, coupled with tepid U.S. data, have sent the S&P 500 down more than 5 percent for May.

But stocks rose this week. The Dow Jones industrial average .DJI gained 0.7 percent, the Standard & Poor's 500 .SPX was up 1.7 percent and the Nasdaq composite index .IXIC rose 2.1 percent.

As the Greek elections draw closer, headlines from Europe could unsettle investors.

Belgian Deputy Prime Minister Didier Reynders said it would be a "grave professional error" if central banks and companies were not preparing for a Greek exit from the euro zone.

In addition, French banks, which are among the lenders most exposed to Greece, have stepped up their efforts on contingency plans for the debt-laden country leaving the euro zone, sources familiar with the situation said.

JUMPING INTO STOCKS

Any U.S. data in the coming week which points to an economy pulling out of the doldrums could divert attention from Europe and provide investors an incentive to jump into stocks, which have become cheap during the recent pullback.

Analysts have pointed to the 1,275 to 1,280 range for the benchmark S&P index, just below the 200-day moving average, as a key level of support the market is likely to challenge.

"You are looking at 1,277 on the downside. The market will test it, but when it gets there it is going to hold because there is a lot of money on the sideline that needs to be put to work," said Ken Polcari, managing director at ICAP Equities in New York.

"People are using that number as the entry point, so you will find stability at that level."

Another possible silver lining for investors may be the strengthening of the dollar, which has been a safe haven during the euro zone's sovereign debt troubles.

The dollar index .DXY is up nearly 5 percent for the month, and some analysts feel it could not only help equities stabilize but spur a move higher.

"With sovereign debt default now a possibility, and some form of dissolution of the euro also possible, the hidden positive may be for the U.S. dollar, and U.S. dollar-denominated assets," said Brad Lipsig, vice president of investments and senior portfolio manager at UBS Financial Services in New York.

"Capital inflows could support U.S. real estate prices, which could help stabilize U.S. banks," he said. "All of this could help support U.S. stock prices during a difficult period for Europe's economy. It's not inconceivable that this dynamic could trigger a rally in the U.S. stock market."

(Reporting By Chuck Mikolajczak; Editing by Kenneth Barry)

WRAPUP 6-Obama presses ailing Europe to focus on growth

Sat May 19, 2012 12:36am EDT

* Obama weighs in against too much focus on austerity

* President to isolated Merkel: "You have a few things on your mind"

* France's Hollande signals sticking to Afghan pullout vow

By Laura MacInnis

CAMP DAVID, Maryland, May 18 (Reuters) - A growing chorus of world leaders on Friday pushed for a shift toward more pro-growth policies to help ease a European crisis that threatens to oust Greece from the euro zone and reverberate throughout the global economy.

Setting the tone for a weekend G8 summit, President Barack Obama aligned himself with the new French president's drive for more economic stimulus in recession-plagued Europe, in a swipe at the tough austerity programs that have been spearheaded by German Chancellor Angela Merkel.

Obama's stance reflects his worries that the euro zone contagion, which threatens the future of Europe's 17-nation single currency, could hurt the fragile U.S. economic recovery and his own re-election chances in November.

The Camp David summit kicked off four days of intensive diplomacy - including a NATO meeting in Obama's home town of Chicago - that will test leaders' ability to quell unease over the threat of another financial meltdown as well as plans to wind down the unpopular war in Afghanistan.

Over dinner Friday at the presidential retreat, the leaders discussed still other intractable global problems. The group, which included Russian Prime Minister Dmitry Medvedev, agreed ahead of world powers' talks next week with Iran that Tehran must answer questions about its suspected nuclear weapons program, a U.S. official said.

North Korea, Syria and Myanmar were also on the dinner agenda, but it was the global economy that dominated the day.

After White House talks with French President Francois Hollande, Obama said the two agreed that tackling the euro-zone crisis was "an issue of extraordinary importance, not only to the people of Europe, but also to the world economy."

"We're looking forward to a fruitful discussion later this evening and tomorrow with the other G8 leaders about how we can manage a responsible approach to fiscal consolidation that is coupled with a strong growth agenda," Obama said before flying to Camp David and greeting fellow leaders for an opening dinner.

Merkel, who has insisted on the need for tough fiscal discipline to bring down suffocating debt levels even as angry voters have toppled some euro zone governments, seemed certain to find herself increasingly alone.

As Obama welcomed his guests one-by-one outside a rustic lodge at the presidential retreat in Maryland, he asked Merkel: "How have you been?"

She shrugged and offered a strained smile. "Well, you have a few things on your mind," he said in a brief exchange captured by a boom microphone.

Her predicament could be underscored in the summit's final communique that, according to a draft shown to Reuters, will stress "our imperative to create growth and jobs."

GREECE MUST "MAKE UP THEIR MINDS"

Reflecting growing frustration as Greece's post-election turmoil shakes global markets, British Prime Minister David Cameron called on euro members for decisive action and said the Greeks must "make their minds up" whether to stay in the euro zone.

No major economic policy decisions are expected from the talks but Obama will urge the Europeans to work harder at forging a comprehensive approach to their debt troubles.

World stocks fell to levels below where they began the year, depressed by the prospect that a Greek euro exit would spread upheaval in the currency bloc and engulf much larger economies such as Spain's.

The European Union's trade commissioner said for the first time that European officials were working on contingency plans in case Greece bombs out of the euro zone.

While Obama and Hollande found common ground on economics, their meeting also showed differences over France's commitment to the NATO military mission in Afghanistan, which will be the focus of the alliance's summit in Chicago starting on Sunday.

Hollande, a socialist sworn in this week as president, told Obama he would stick by his campaign pledge to withdraw French combat troops from Afghanistan by year's end, earlier than the alliance's 2014 timetable. But Hollande said France would continue to support the NATO effort in a "different way."

U.S. officials hope to convince Hollande to rethink the French pullout plan.

GERMANY 'QUITE ISOLATED'

But the two leaders, meeting for the first time since Hollande's election victory earlier this month, were more in sync on the euro zone crisis.

Hollande said he spoke to Obama about the need to put a priority on growth, and that they also agreed it was important to find a way for Greece to stay in the euro zone.

Obama's administration spent heavily to try to tackle the 2007-2009 U.S. recession, and has long urged Europeans to do more to boost growth. Hollande is seeking to take the edge off austerity with more job-creating infrastructure investments.

Like Cameron, Canadian Prime Minister Stephen Harper has been a frequent critic of euro zone G8 members' handling of their debt woes. Italian premier Mario Monti was calling for growth measures even before Hollande did.

That could leave Merkel, who has used Germany's status as Europe's biggest economy to pressure others to keep a tight rein on debt, cutting a lonely figure at Camp David.

"Germany is absolutely quite isolated," said Domenico Lombardi, a former International Monetary Fund official who now is a senior fellow at the Brookings Institution think tank.

Lombardi said that while Germany had the upper hand when controlling debt was the focus, "it is now clear that Greece has become a systemic crisis" and this must now become the center of the debate.

A SOFTER APPROACH

While Merkel wants Greece's continued membership in the euro zone tied to Athens meeting tough austerity measures laid out in its bailout program, Hollande was seeking a softer approach.

Hollande also said he favors Europe recapitalizing Spain's troubled banks, which would mark a significant shift toward Europe taking over wider responsibilities from individual nations.

Backing calls for a concerted effort to boost economic activity, Jose Manuel Barroso, president of the European Commission, said there was a need to promote growth while putting public finances in order and this should be center stage at the summit. He insisted, however, that "we want Greece to stay in the euro area."

The G8 summit comes as Greeks are pulling cash from banks amid growing fears about its euro zone membership. Financial markets are deeply concerned about the future of the entire currency zone, with Spain's banking sector also under pressure.

Nearly two-thirds of Greeks voted on May 6 for parties of the radical left and far right, which oppose the austere terms of an EU/IMF assistance program. Talks failed to avert a repeat election, which is now set for June 17.

The "balanced approach" that Obama is pushing for in the euro zone is similar to his domestic efforts combining short-term stimulus and longer-term cuts to try to heal the U.S. economy and stoke hiring that has not recovered from the financial crisis. But the U.S. economy continues to struggle, posing problems for Obama's re-election.

Mitt Romney, the presumptive Republican nominee to face Obama in the Nov. 6 election, has made reducing the U.S. debt load, which has escalated during Obama's tenure, one of his key campaign messages.

Also on the G8 agenda will be the price of oil. Obama may secure support to essentially pre-authorize a release of strategic oil reserves later this summer, just as U.S. and European sanctions on Iran come into force -- this despite Brent crude hitting a 2012 low on Friday.

While the secluded Camp David setting discouraged protests nearby, an estimated 2,500 people demonstrated peacefully in a downtown Chicago plaza under the watchful eye of police, chanting mostly about economic issues that have little to do with the coming NATO summit.

Hedge funds dump $2 billion in gold over a week: CFTC

By Barani Krishnan

NEW YORK | Fri May 18, 2012 8:18pm EDT

(Reuters) - Hedge funds and other money managers liquidated more than $2 billion in gold futures over a week, trade data on Friday showed, before a forceful rebound in the precious metal potentially tripped up some of them.

The majority of fund managers also appear to have bet wrongly against wheat, as suggested by the data from the Commodity Futures Trading Commission which showed a net "short" or bearish position against the grain which finished this week with its highest weekly gain in 16 years.

"It's still early to say if this rebound in wheat and gold will hold. But it's safe to assume that at least some hedge funds got burnt this week trying to ride the two markets all the way down," said Adam Sarhan at Sarhan Capital in New York.

Fund managers had been dumping gold since the start of May after election woes in Greece and new fears over Spain's finances put the euro zone crisis at the forefront of investor concerns. Traders initially selling the precious metal to cover losses in stocks and other markets were later joined by those betting that gold itself was overpriced and due for correction.

Trade data released by the CFTC showed the net "long" managed money in U.S. gold -- which reflects bullish bets on the shiny metal -- fell by $2.2 billion to $12.2 billion for the week ended May 15.

The drop came after hedge funds and money managers reduced to 78,619 the number of net gold contracts they held on the COMEX division of the New York Mercantile Exchange, versus the 92,498 contracts at the end of the week to May 8.

It was the smallest net long position for funds in gold since December 2008, when speculators were bailing out of all financial markets at the height of the global economic crisis.

COMEX gold's benchmark contract, June, fell around $82 an ounce, or 5 percent, between May 8 and 15, settling at a four-month low of around $1,557.

After falling for another session, it suddenly snapped back the last two days of this week, surging to nearly $1,598 before closing above $1,591 on Friday.

It was the sharpest two-day rally for gold since October, a rebound believed to have caught a number of funds that had been on the short end of the market.

"It's all a question of when you exited your shorts in gold this week, or whether you did at all. If you had gone short since the May 1 high of $1,672, yes, you'd have made quite a lot of money. Those who went short at $1,550 and stayed short, would have certainly lost," Sarhan said.

In the case of wheat, the managed money fell by $117 million to a net short of around $1.5 billion for the week to May 15.

U.S. wheat futures added about 16 percent to prices this week -- the largest weekly gain since 1996 -- as hot and dry weather kept fears simmering about crop losses in the U.S. Plains and inRussia.

CFTC data also showed the overall managed money in U.S. commodities falling for a second week in a row to its lowest level in nearly 5 months.

Net longs held by hedge funds and other money managers across 24 U.S. futures markets fell by nearly $8 billion, to settle at around $62 billion for the week to May 15. The last time net longs for managed money were at those levels was in the week to December 27.

(Editing by Bob Burgdorfer)

Obama presses ailing Europe to focus on growth

(Reuters) - A growing chorus of world leaders on Friday pushed for a shift toward more pro-growth policies to help ease a European crisis that threatens to oust Greece from the euro zone and reverberate throughout the global economy.

Setting the tone for a weekend G8 summit, President Barack Obama aligned himself with the new French president's drive for more economic stimulus in recession-plagued Europe, in a swipe at the tough austerity programs that have been spearheaded by German Chancellor Angela Merkel.

Obama's stance reflects his worries that the euro zone contagion, which threatens the future of Europe's 17-nation single currency, could hurt the fragile U.S. economic recovery and his own re-election chances in November.

The Camp David summit kicked off four days of intensive diplomacy - including a NATO meeting in Obama's home town of Chicago - that will test leaders' ability to quell unease over the threat of another financial meltdown as well as plans to wind down the unpopular war in Afghanistan.

Over dinner Friday at the presidential retreat, the leaders discussed still other intractable global problems. The group, which included Russian Prime Minister Dmitry Medvedev, agreed ahead of world powers' talks next week with Iran that Tehran must answer questions about its suspected nuclear weapons program, a U.S. official said.

North Korea, Syria and Myanmar were also on the dinner agenda, but it was the global economy that dominated the day.

After White House talks with French President Francois Hollande, Obama said the two agreed that tackling the euro-zone crisis was "an issue of extraordinary importance, not only to the people of Europe, but also to the world economy."

"We're looking forward to a fruitful discussion later this evening and tomorrow with the other G8 leaders about how we can manage a responsible approach to fiscal consolidation that is coupled with a strong growth agenda," Obama said before flying to Camp David and greeting fellow leaders for an opening dinner.

Merkel, who has insisted on the need for tough fiscal discipline to bring down suffocating debt levels even as angry voters have toppled some euro zone governments, seemed certain to find herself increasingly alone.

As Obama welcomed his guests one-by-one outside a rustic lodge at the presidential retreat in Maryland, he asked Merkel: "How have you been?"

She shrugged and offered a strained smile. "Well, you have a few things on your mind," he said in a brief exchange captured by a boom microphone.

Her predicament could be underscored in the summit's final communique that, according to a draft shown to Reuters, will stress "our imperative to create growth and jobs."

GREECE MUST "MAKE UP THEIR MINDS"

Reflecting growing frustration as Greece's post-election turmoil shakes global markets, British Prime Minister David Cameron called on euro members for decisive action and said the Greeks must "make their minds up" whether to stay in the euro zone.

No major economic policy decisions are expected from the talks but Obama will urge the Europeans to work harder at forging a comprehensive approach to their debt troubles.

World stocks fell to levels below where they began the year, depressed by the prospect that a Greek euro exit would spread upheaval in the currency bloc and engulf much larger economies such as Spain's.

The European Union's trade commissioner said for the first time that European officials were working on contingency plans in case Greece bombs out of the euro zone.

While Obama and Hollande found common ground on economics, their meeting also showed differences over France's commitment to the NATO military mission in Afghanistan, which will be the focus of the alliance's summit in Chicago starting on Sunday.

Hollande, a socialist sworn in this week as president, told Obama he would stick by his campaign pledge to withdraw French combat troops from Afghanistan by year's end, earlier than the alliance's 2014 timetable. But Hollande said France would continue to support the NATO effort in a "different way.

U.S. officials hope to convince Hollande to rethink the French pullout plan.

GERMANY 'QUITE ISOLATED'

But the two leaders, meeting for the first time since Hollande's election victory earlier this month, were more in sync on the euro zone crisis.

Hollande said he spoke to Obama about the need to put a priority on growth, and that they also agreed it was important to find a way for Greece to stay in the euro zone.

Obama's administration spent heavily to try to tackle the 2007-2009 U.S. recession, and has long urged Europeans to do more to boost growth. Hollande is seeking to take the edge off austerity with more job-creating infrastructure investments.

Like Cameron, Canadian Prime Minister Stephen Harper has been a frequent critic of euro zone G8 members' handling of their debt woes. Italian premier Mario Monti was calling for growth measures even before Hollande did.

That could leave Merkel, who has used Germany's status as Europe's biggest economy to pressure others to keep a tight rein on debt, cutting a lonely figure at Camp David.

"Germany is absolutely quite isolated," said Domenico Lombardi, a former International Monetary Fund official who now is a senior fellow at the Brookings Institution think tank.

Lombardi said that while Germany had the upper hand when controlling debt was the focus, "it is now clear that Greece has become a systemic crisis" and this must now become the center of the debate.

A SOFTER APPROACH

While Merkel wants Greece's continued membership in the euro zone tied to Athens meeting tough austerity measures laid out in its bailout program, Hollande was seeking a softer approach.

Hollande also said he favors Europe recapitalizing Spain's troubled banks, which would mark a significant shift toward Europe taking over wider responsibilities from individual nations.

Backing calls for a concerted effort to boost economic activity, Jose Manuel Barroso, president of the European Commission, said there was a need to promote growth while putting public finances in order and this should be center stage at the summit. He insisted, however, that "we want Greece to stay in the euro area."

The G8 summit comes as Greeks are pulling cash from banks amid growing fears about its euro zone membership. Financial markets are deeply concerned about the future of the entire currency zone, with Spain's banking sector also under pressure.

Nearly two-thirds of Greeks voted on May 6 for parties of the radical left and far right, which oppose the austere terms of an EU/IMF assistance program. Talks failed to avert a repeat election, which is now set for June 17.

The "balanced approach" that Obama is pushing for in the euro zone is similar to his domestic efforts combining short-term stimulus and longer-term cuts to try to heal the U.S. economy and stoke hiring that has not recovered from the financial crisis. But the U.S. economy continues to struggle, posing problems for Obama's re-election.

Mitt Romney, the presumptive Republican nominee to face Obama in the November 6 election, has made reducing the U.S. debt load, which has escalated during Obama's tenure, one of his key campaign messages.

Also on the G8 agenda will be the price of oil. Obama may secure support to essentially pre-authorize a release of strategic oil reserves later this summer, just as U.S. and European sanctions on Iran come into force -- this despite Brent crude hitting a 2012 low on Friday.

While the secluded Camp David setting discouraged protests nearby, an estimated 2,500 people demonstrated peacefully in a downtown Chicago plaza under the watchful eye of police, chanting mostly about economic issues that have little to do with the coming NATO summit.