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[sandi66]

Prosecutors Ask if 8 Banks Duped Rating Agencies
By LOUISE STORY
Published: May 12, 2010
The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation.

Chang W. Lee/The New York Times
Andrew Cuomo, the attorney general of New York, sent subpoenas to eight Wall Street banks late Wednesday.

The investigation parallels federal inquiries into the business practices of a broad range of financial companies in the years before the collapse of the housing market.
Where those investigations have focused on interactions between the banks and their clients who bought mortgage securities, this one expands the scope of scrutiny to the interplay between banks and the agencies that rate their securities.

The agencies themselves have been widely criticized for overstating the quality of many mortgage securities that ended up losing money once the housing market collapsed. The inquiry by the attorney general of New York, Andrew M. Cuomo, suggests that he thinks the agencies may have been duped by one or more of the targets of his investigation.

Those targets are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, which is now owned by Bank of America.

The companies that rated the mortgage deals are Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. Investors used their ratings to decide whether to buy mortgage securities.

Mr. Cuomo’s investigation follows an article in The New York Times that described some of the techniques bankers used to get more positive evaluations from the rating agencies.

Mr. Cuomo is also interested in the revolving door of employees of the rating agencies who were hired by bank mortgage desks to help create mortgage deals that got better ratings than they deserved, said the people with knowledge of the investigation, who were not authorized to discuss it publicly.

Contacted after subpoenas were issued by Mr. Cuomo’s office late Wednesday night notifying the banks of his investigation, spokespeople for Morgan Stanley, Credit Suisse and Deutsche Bank declined to comment. Other banks did not immediately respond to requests for comment.

In response to questions for the Times article in April, a Goldman Sachs spokesman, Samuel Robinson, said: “Any suggestion that Goldman Sachs improperly influenced rating agencies is without foundation. We relied on the independence of the ratings agencies’ processes and the ratings they assigned.”

Goldman, which is already under investigation by federal prosecutors, has been defending itself against civil fraud accusations made in a complaint last month by the Securities and Exchange Commission. The deal at the heart of that complaint — called Abacus 2007-AC1 — was devised in part by a former Fitch Ratings employee named Shin Yukawa, whom Goldman recruited in 2005.

At the height of the mortgage boom, companies like Goldman offered million-dollar pay packages to workers like Mr. Yukawa who had been working at much lower pay at the rating agencies, according to several former workers at the agencies.

Around the same time that Mr. Yukawa left Fitch, three other analysts in his unit also joined financial companies like Deutsche Bank.

In some cases, once these workers were at the banks, they had dealings with their former colleagues at the agencies. In the fall of 2007, when banks were hard-pressed to get mortgage deals done, the Fitch analyst on a Goldman deal was a friend of Mr. Yukawa, according to two people with knowledge of the situation.

Mr. Yukawa did not respond to requests for comment.

Wall Street played a crucial role in the mortgage market’s path to collapse. Investment banks bundled mortgage loans into securities and then often rebundled those securities one or two more times. Those securities were given high ratings and sold to investors, who have since lost billions of dollars on them.

Banks were put on notice last summer that investigators of all sorts were looking into their mortgage operations, when requests for information were sent out to all of the big Wall Street firms. The topics of interest included the way mortgage securities were created, marketed and rated and some banks’ own trading against the mortgage market.

The S.E.C.’s civil case against Goldman is the most prominent action so far. But other actions could be taken by the Justice Department, the F.B.I. or the Financial Crisis Inquiry Commission — all of which are looking into the financial crisis. Criminal cases carry a higher burden of proof than civil cases. Under a New York state law, Mr. Cuomo can bring a criminal or civil case.

His office scrutinized the rating agencies back in 2008, just as the financial crisis was beginning. In a settlement, the agencies agreed to demand more information on mortgage bonds from banks.

Mr. Cuomo was also concerned about the agencies’ fee arrangements, which allowed banks to shop their deals among the agencies for the best rating. To end that inquiry, the agencies agreed to change their models so they would be paid for any work they did for banks, even if those banks did not select them to rate a given deal.

Mr. Cuomo’s current focus is on information the investment banks provided to the rating agencies and whether the bankers knew the ratings were overly positive, the people who know of the investigation said.

A Senate subcommittee found last month that Wall Street workers had been intimately involved in the rating process. In one series of e-mail messages the committee released, for instance, a Goldman worker tried to persuade Standard & Poor’s to allow Goldman to handle a deal in a way that the analyst found questionable.
The S.& P. employee, Chris Meyer, expressed his frustration in an e-mail message to a colleague in which he wrote, “I can’t tell you how upset I have been in reviewing these trades.”

“They’ve done something like 15 of these trades, all without a hitch. You can understand why they’d be upset,” Mr. Meyer added, “to have me come along and say they will need to make fundamental adjustments to the program.”

At Goldman, there was even a phrase for the way bankers put together mortgage securities. The practice was known as “ratings arbitrage,” according to former workers. The idea was to find ways to put the very worst bonds into a deal for a given rating. The cheaper the bonds, the greater the profit to the bank.

The rating agencies may have facilitated the banks’ actions by publishing their rating models on their corporate Web sites. The agencies argued that being open about their models offered transparency to investors.

But several former agency workers said the practice put too much power in the bankers’ hands. “The models were posted for bankers who develop C.D.O.’s to be able to reverse engineer C.D.O.’s to a certain rating,” one former rating agency employee said in an interview, referring to collateralized debt obligations.

A central concern of investors in these securities was the diversification of the deals’ loans. If a C.D.O. was based on mostly similar bonds — like those holding mortgages from one region — investors would view it as riskier than an instrument made up of more diversified assets. Mr. Cuomo’s office plans to investigate whether the bankers accurately portrayed the diversification of the mortgage loans to the rating agencies.

www.nytimes.com/2010/05/13/business/13street.html?hpw


ty nalmann

[sandi66]

Yuan Forwards Rise as U.S.-China Talks May Lead to Appreciation

May 13, 2010, 7:36 AM EDT

By Patricia Lui

May 13 (Bloomberg) -- Yuan forwards strengthened, extending this week’s rebound from an eight-month low, on speculation China will soon relax its peg to the dollar to head off U.S. criticism of its currency policy during upcoming talks.

Any adjustment of the yuan’s exchange rate must be slow and unpredictable to prevent any damage to the economy, according to a column in the official China Daily newspaper today. U.S. Treasury Secretary Timothy F. Geithner, who last month delayed a report that may have branded China a currency manipulator, will attend the second U.S.-China Strategic and Economic Dialogue in Beijing on May 24-25.

“Some adjustment could take place before the talks as back in 2007 they announced the widening of the trading band a week before the strategic talks,” said Suan Teck Kin, an economist at United Overseas Bank Ltd. in Singapore. “China will strike when the market least expects it. When markets are pricing in up to 3.5 percent appreciation, like they were earlier this year, that would not be the time when China moves.”

The yuan’s 12-month non-deliverable forwards appreciated 0.1 percent to 6.6711 per dollar as of 5:40 p.m. in Hong Kong, reflecting bets the currency will advance 2.3 percent from the spot rate of 6.8278, according to data compiled by Bloomberg. The contracts reached 6.7532 on May 7, the weakest level since Sept. 10, 2009.

Chinese Premier Wen Jiabao has pegged the exchange rate against the dollar at around 6.83 since July 2008 to help exporters cope with a global recession. The U.S. and European economies have since returned to growth and China’s exports rose 30.5 percent from a year earlier in April, a fifth straight gain.

Shifting Stance

The People’s Bank of China has indicated with new language that it will likely allow the yuan to appreciate against the dollar, Xia Bin, one of its academic advisers, was cited as saying in yesterday’s China Business News newspaper. Xia said a reference in the central bank’s latest quarterly report to managing the currency “with reference to a currency basket” shows a change to the peg is coming.

“They will probably move the yuan in June or July, but I’m not looking for any one-off revaluation and only a gradual 1 percent appreciation till year-end,” UOB’s Suan said.

China may allow its currency to strengthen by June 30 to curb inflation, while avoiding a one-time jump in value that might curb exports, a Bloomberg survey of analysts last month showed. Consumer prices rose 2.8 percent in April, the most in 18 months, and property values climbed at a record pace, the government reported on May 11.

www.businessweek.com/news/2010-05-13/yuan-forwards-rise-as-u-s-china-talks-may-lead-to-appreciation.html

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Wall Street said to face new investigations
May 13, 2010: 8:33 AM ET


NEW YORK (CNNMoney.com) -- Investigations into Wall Street's business dealings leading up to the crisis appear to be growing by the day.

Two separate reports published Thursday revealed that some of the financial industry's top firms are now facing investigations at both the federal and state level.

Federal prosecutors are reportedly expanding a criminal probe into whether big banks misled investors about their participation in mortgage-bond deals, according to the Wall Street Journal.

The newspaper, citing a person familiar with the matter, said JPMorgan Chase (JPM, Fortune 500), Citigroup (C, Fortune 500), Deutsche Bank (DB) and UBS (UBS) have received civil subpoenas from the Securities and Exchange Commission.

They join fellow Wall Street firms Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500), which are believed to be under the scrutiny by U.S. prosecutors and regulators.

The paper said the U.S. Attorney's office in New York and the SEC are working together to see whether these firms made proper disclosures when they created and sold complex investments tied to home loans, better known as collateralized debt obligations, or CDOs.

The U.S. Attorney's office in New York declined to comment on Thursday's report, as did Citigroup and UBS. Spokespeople for the other institutions named in the story were not immediately available.

Are big banks dead in the water? - The Buzz
In related news, New York Attorney General Andrew Cuomo has launched a separate investigation into many of those same institutions to determine whether they provided misleading information to credit rating agencies, according to The New York Times.

A total of eight firms are part of the probe, including Goldman Sachs, Morgan Stanley, Deutsche Bank, Credit Suisse (CS), Citigroup, UBS, Credit Agricole and Merrill Lynch, which has since been acquired by Bank of America (BAC, Fortune 500), according to the report.

Cuomo's office was not immediately available for comment, nor were several of the other institutions named in the story. Goldman Sachs, Citigroup and Credit Agricole all declined to comment on the matter.


0:00 /4:27Banks: The new punching bag
Critics have repeatedly suggested that the relationship between Wall Street firms and the credit rating agencies was a key factor contributing to the economic meltdown.

Hungry for business, rating agencies assigned top marks to securities issued by banks that would eventually turn toxic. Financial firms, on the other hand, would employ a wide variety of techniques to get higher ratings on their investment products, according to the critics.

Critics have long grumbled that the rating agencies were also slow to lower the debt ratings for troubled financial firms and warn of the risks of bonds and other securities tied to subprime mortgages.

The report of the widening criminal probe of Wall Street banks could weigh on bank shares Thursday.

Goldman shares are down about 22% since the SEC filed fraud charges against it last month.

Morgan Stanley shares tumbled Wednesday when reports that it was being investigated first surfaced, but the stock pared losses and ended the day just 2% lower.

money.cnn.com/2010/05/13/news/companies/wall_street_investigation/

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Wall Street Probe Widens - J.P. Morgan, Citigroup, Deutsche Bank and UBS Also Face Prosecutors' Scrutiny

May 12, 2010

By SUSAN PULLIAM, KARA SCANNELL, AARON LUCCHETTI and SERENA NG
Federal prosecutors, working with securities regulators, are conducting a preliminary criminal probe into whether several major Wall Street banks misled investors about their roles in mortgage-bond deals, according to a person familiar with the matter.

The banks under early-stage criminal scrutiny—J.P. Morgan Chase & Co., Citigroup Inc., Deutsche Bank AG and UBS AG—have also received civil subpoenas from the Securities and Exchange Commission as part of a sweeping investigation of banks' selling and trading of mortgage-related deals, the person says. Under similar preliminary criminal scrutiny are Goldman Sachs Group Inc. and Morgan Stanley, as previously reported by The Wall Street Journal.

The Manhattan U.S. Attorney's office and SEC are working hand-in-hand. At issue is whether the Wall Street firms made proper representations to investors in marketing, selling and trading pools of mortgage bonds called collateralized debt obligations, or CDOs.

Many major Wall Street banks created CDOs at the behest of players that made bets against the deals—and banks themselves sometimes bet against the deals. Bearish bets paid off when the mortgage market crashed.

Representatives of the Manhattan U.S. Attorney's office, the SEC, Goldman, Citigroup, Deutsche Bank and UBS all declined to comment. Morgan Stanley said it hadn't been contacted by prosecutors and has done nothing wrong. A J.P. Morgan spokesman said the bank "hasn't been contacted" by federal prosecutors and isn't aware of any criminal investigation.

The criminal probe marks an important juncture in the fallout from the financial crisis and highlights the severity of the scrutiny for Wall Street. Prosecutors have brought just one major criminal case stemming from the crisis, against two Bear Stearns Cos. traders, and lost it. Lawmakers are calling on prosecutors to do more.

Prosecutors so far are simply gathering evidence. They haven't issued criminal subpoenas, nor have they homed in on the outlines of any potential case.

To win a criminal case, they would have to prove beyond a reasonable doubt that a firm or its employees intentionally misled investors. It's possible the probe could end with no charges being brought against any of the firms. It is unclear whether any individuals are of particular interest to the authorities.

As part of the joint probe, the SEC has asked the banks for a range of documents, including final and draft prospectuses, final and draft offering documents and investor lists associated with mortgage-related deals, the people say.

Last month, the SEC sued Goldman in a New York federal court, alleging that the firm and one of its mortgage traders created a product designed to fail for the benefit of a favored hedge-fund client without disclosing the client's role in picking investments for the deal. Goldman has vigorously denied the allegations but recently began settlement talks with the government, people familiar with the matter say.

It isn't known which specific deals investigators are focusing on. Nearly every major Wall Street bank created and traded CDOs, with different twists.

Wall Street firms issued a total of $1.08 trillion in CDOs between 2005 and 2007, according to research firm Thomson Reuters. Merrill Lynch & Co. (now part of Bank of America Corp.), Citigroup and Deutsche Bank issued the largest dollar amount of CDOs in those years. J.P. Morgan, Morgan Stanley, UBS and Goldman were ranked Nos. 5, 7, 10 and 14, respectively, Thomson Reuters says.

Morgan Stanley shares fell 2% Wednesday following a Journal article saying the Manhattan U.S. Attorney was investigating whether the firm misled investors about mortgage-derivatives deals it helped design and sometimes bet against.

Citigroup, Deutsche Bank and UBS created mortgage CDOs named after constellations such as Cetus, Carina and Virgo at the behest of a hedge-fund client, Magnetar Capital, according to people familiar with the matter. Magnetar bought a risky piece of the deals and placed bearish bets against other parts of the same CDOs or similar deals, the people say. Those bets enabled the fund to profit in a housing downturn.

In the few years before the housing downturn, Morgan Stanley designed, created and sold CDOs that its own traders sometimes bet against, traders say.

Among CDOs the firm created and bet against were deals called ABSpoke in 2005 and 2006, according to traders. Morgan Stanley sold about a dozen of these deals in that time, according to Thomson Reuters.

Another such deal Morgan Stanley marketed to investors in mid-2006 and also bet against was called Baldwin 2006-I, according to people familiar with the matter.

People familiar with Morgan Stanley say the firm's roles on Baldwin and ABSpoke were "fully disclosed' to investors who were betting on mortgage assets holding up.

A feature of the Morgan Stanley deals was a structure that could increase bullish investors' exposures to the underlying mortgage bonds. This made it more likely such investors could lose money if the bonds performed poorly. Morgan Stanley took the bearish side of these transactions in what turned out to be the more profitable bets, say traders.

Across Wall Street, disclosures in CDO deals were inconsistent. Banks often provided pages of potential conflicts and risk factors about each deal in offering documents. But there sometimes was spotty disclosure about the possible involvement of institutions with bearish market views in the deals' creation and design.

Some CDO offering documents indicated that mortgage assets selected for the deals may have factored in the interests of market players whose interests were "adverse" to other investors. But none went as far as to state that hedge funds or banks' trading desks were making bets against the deals for their own accounts, according to documents reviewed by the Journal.

online.wsj.com/article/SB10001424052748704247904575240783937399958.html?mod=wsj_india_main

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Cuomo Probing 8 Banks Over Securities

by Soterios Johnson and Louise Story

NEW YORK, NY May 13, 2010 —New York Attorney General Andrew Cuomo is investigating eight banks to find out if they gave misleading information to Standard & Poor’s, Fitch Ratings and Moody’s Investors Service to inflate the grades of their mortgage securities.

The New York Times reports the investigation includes Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, which is owned by Bank of America. The Attorney General's office delivered subpoenas about the investigation late Wednesday.

"It's kind of the biggest mystery," said New York Times business reporter Louise Story, speaking to WNYC's Soterios Johnson. "How did those bonds, which turned out to be toxic, get Triple A ratings? And the Attorney General is looking into whether the banks misled the ratings agencies."

The banks did not respond for comment, but a Goldman Sachs spokesperson told The Times last month that "any suggestion that Goldman Sachs improperly influenced rating agencies is without foundation. We relied on the independence of the ratings agencies’ processes and the ratings they assigned."

The investigation will also look at ratings agency workers who were hired by bank mortgage desks to help create mortgage deals that got better ratings than they deserved, according to The Times.

"You can be a rating agencies worker and if' you're pretty senior there, you might make $200,000 or $300,000," Story said. "But then a bank like Goldman will come along and say, 'Oh, we can offer you something like a $1 million pay package if you come over here.' Some people think that that makes the rating agency workers less likely to really crack down on the banks because they're eyeing a job over there."

www.wnyc.org/news/articles/154845

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More Banks Targeted in Wall Street Probes

Updated 8:21 AM EDT, Thu, May 13, 2010

Federal and New York state investigators are widening their probe into past Wall Street mortgage securities deals, taking a closer look at the practices of five U.S. banks and four European lenders in the years before the collapse of the housing market, persons close to the investigation said.

New York Attorney General Andrew Cuomo's office issued subpoenas on Wednesday notifying the banks of his investigation, which will parallel a federal inquiry, sources said.

Cuomo's office is looking into whether any of the eight banks provided misleading information to rating agenices in order to get better ratings on risky securities, said the person, who spoke on condition of anonymity because the investigation has not been made public.

The eight banks being looked at are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch -- now owned by Bank of America.

The companies that rated the mortgage deals are Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. Investors used their ratings to decide whether to buy mortgage securities.

Separately, theWall Street Journal reported today that federal prosecutors, working with securities regulators, are conducting a preliminary criminal probe into whether four banks misled investors about their roles in mortgage bond deals.

Citing a source familiar with the investigation, the WSJ said the banks under early-stage criminal scrutiny are J.P. Morgan Chase & Co., Citigroup Inc., Deutsche Bank AG and UBS AG. Those banks also received civil subpoenas from the Securities and Exchange Commission as part of a massive probe of banks' selling and trading of mortgage-related deals, the source told the WSJ.

Reports of the new investigations come less than a month after the SEC charged Goldman with fraud over its marketing of a subprime mortgage product.

www.nbcnewyork.com/news/local-beat/More-Banks-Targeted-in-Wall-Street-Probes-Report-93668344.html

[sandi66]

May 12, 2010
TG-695

Readout of Meeting between
U.S. Secretary of the Treasury Tim Geithner
and European Commissioner Michel Barnier


U.S. Treasury Secretary Timothy Geithner and European Commissioner Michel Barnier met today and reaffirmed their strong determination to cooperate closely in strengthening the global financial system and in putting in place the G-20 financial reform agenda.

They agreed that the United States and the European Union, as the world's two largest economies and financial systems, have a special responsibility to promote and implement stronger global financial standards, reduce the scope for regulatory arbitrage and work toward greater regulatory convergence.

They reviewed the progress in implementing the G-20 financial regulatory commitments made at the London and Pittsburgh Summits. In particular, they agreed on the importance of reducing systemic risk and the too-big-to-fail problem by raising prudential standards through implementing the G-20 Leaders commitments including: stronger capital and liquidity requirements; a leverage ratio; a global framework for comprehensive regulation of OTC derivatives markets; and stronger crisis management and resolution tools so as to allow regulators to manage the failure of a major firm without exposing taxpayers to losses. They also reaffirmed their support for the G-20 Leaders commitments on accounting convergence.

Secretary Geithner and Commissioner Barnier agreed that in translating internationally agreed principles and standards into their respective markets, both sides should focus pragmatically on achieving broadly equivalent outcomes in the context of their different historical and legal traditions. In reviewing a range of U.S. and EU priority issues, including the Alternative Investment Fund Management Directive, they reaffirmed their support for the principle of non-discrimination and the importance of maintaining a level playing field. Both sides agree that within their respective legal systems and in coordination with the Basel Committee on Banking Supervision, they will work towards a common implementation date in 2011 for the Basel trading book rules.

They agreed to stay in close and regular contact so that the United States and European Union can continue to work together to ensure robust implementation of all of the G-20 commitments, address specific issues that have arisen in the U.S./EU context, and further support and strengthen our ongoing financial market regulatory dialogue.

###

www.treas.gov/press/releases/tg695.htm

[sandi66]

Knight Capital Group to Transfer Listing to NYSE, Cross-List on NYSE Euronext


JERSEY CITY, N.J., May 12 /PRNewswire-FirstCall/ -- Knight Capital Group, Inc. (Nasdaq: NITE) today announced the pending transfer of its listing of common stock to the New York Stock Exchange (NYSE), as well as the cross-listing of its common stock on the Professional Segment of the Paris market of NYSE Euronext.

Knight common stock will begin trading on NYSE Euronext markets in the U.S. and Paris under the ticker symbol "KCG" on May 25, 2010. Until the transfer is complete, Knight's common stock will continue to trade in the U.S. under the ticker symbol "NITE" on The NASDAQ Stock Market.

"Knight is a growing, global firm providing market access and trade execution services across multiple asset classes to buy- and sell-side clients," said Thomas M. Joyce, Chairman and Chief Executive Officer, Knight Capital Group. "Moving to NYSE Euronext will make our stock more accessible to investors in Europe as well as support Knight's expansion in the global capital markets. We look forward to taking our place on the world's leading exchange alongside our clients and financial services peers."

"We are very excited that Knight has chosen to list its shares on our U.S. and European markets," said Duncan L. Niederauer, Chief Executive Officer, NYSE Euronext. "Knight is an industry leader that provides trading connectivity and liquidity across multiple asset classes globally. We look forward to a strong and lasting partnership with Knight and its shareholders."

Trading in Knight's common stock on NYSE Euronext's European markets will be conducted in Euros. Euroclear will coordinate share transfers with The Depository Trust Company (DTC). The listing will not alter Knight's share count, capital structure, or its current and future stock-listing in the U.S.

In connection with the cross-listing, the French Autorite des marches financiers ("AMF") today approved Knight's prospectus for admission to listing and trading on the Professional Segment of the Paris market of NYSE Euronext, and granted visa number 10-129, dated May 12, 2010, on the prospectus. This prospectus has been prepared by Knight Capital Group, Inc. and its signatory accepts the responsibility for its contents. The attention of investors is drawn to the risk factors described in the prospectus. On May 7, 2010, NYSE Euronext approved Knight's application for listing and trading of its common stock on the Professional Segment of the Paris market of NYSE Euronext.

Copies of this prospectus may be obtained free of charge from Knight Capital Group, Inc. at 545 Washington Boulevard, Jersey City, New Jersey 07310, U.S.A. and from its paying agent in France, BNP Paribas Securities Services (Postal address: GCT – Services aux Emetteurs, Les Grands Moulins de Pantin, 75450 Paris Cedex 09), and on the websites of Knight Capital Group, Inc. (www.knight.com) and the AMF (www.amf-france.org).

About Knight

Knight Capital Group, Inc. (Nasdaq: NITE) is a global financial services firm that provides market access and trade execution services across multiple asset classes to buy- and sell-side firms. Knight's hybrid market model features complementary electronic and voice trade execution services in global equities and fixed income as well as foreign exchange, futures and options. The firm is the leading source of liquidity in U.S. equities by share volume. Knight also offers capital markets services to corporate issuers. Knight is headquartered in Jersey City, NJ with a growing global presence across North America, Europe and the Asia-Pacific region. For more information, please go to www.knight.com.

About NYSE Euronext

NYSE Euronext (NYX) is a leading global operator of financial markets and provider of innovative trading technologies. The company's exchanges in Europe and the United States trade equities, futures, options, fixed-income and exchange-traded products. With approximately 8,000 listed issues (excluding European Structured Products), NYSE Euronext's equities markets – the New York Stock Exchange, NYSE Euronext, NYSE Amex, NYSE Alternext and NYSE Arca – represent one-third of the world's equities trading, the most liquidity of any global exchange group. NYSE Euronext also operates NYSE Liffe, one of the leading European derivatives businesses and the world's second-largest derivatives business by value of trading. The company offers comprehensive commercial technology, connectivity and market data products and services through NYSE Technologies. NYSE Euronext is in the S&P 500 index, and is the only exchange operator in the S&P 100 index and Fortune 500. For more information, please visit: www.nyx.com.

Certain statements contained herein may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts and are based on current expectations, estimates and projections about the Company's industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, readers are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict including, without limitation, risks associated with changes in market structure, legislative or regulatory rule changes, the costs, integration, performance and operation of businesses recently acquired or developed organically, or that may be acquired in the future, by the Company and risks related to the costs and expenses associated with the Company's exit from the Asset Management business. Since such statements involve risks and uncertainties, the actual results and performance of the Company may turn out to be materially different from the results expressed or implied by such forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Unless otherwise required by law, the Company also disclaims any obligation to update its view of any such risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements made herein. Readers should carefully review the risks and uncertainties disclosed in the Company's reports with the U.S. Securities and Exchange Commission (SEC), including, without limitation, those detailed under the headings "Certain Factors Affecting Results of Operations" and "Risk Factors" in the Company's Annual Report on Form 10-K for the year-ended December 31, 2009, and in other reports or documents the Company files with, or furnishes to, the SEC from time to time. This information should also be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto contained in the Company's Annual Report on Form 10-K for the year-ended December 31, 2009, and in other reports or documents the Company files with, or furnishes to, the SEC from time to time.

SOURCE Knight Capital Group, Inc.

RELATED LINKS
www.knight.com

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Western premiers on Asian trade quest
Last Updated: Thursday, May 13, 2010 | 9:39 AM CT

Three western premiers are leaving for Asia on Thursday, with an eye to promoting investment in their provinces from China and Japan and touting the region as Canada's "economic powerhouse."

Saskatchewan Premier Brad Wall, Alberta’s Ed Stelmach and British Columbia’s Gordon Campbell are making the trek as part of their recently signed New West Partnership agreement, which commits them to work together promoting trade and reducing trade barriers.

Wall said the three provinces may establish a trade office in China.

“There's a cost issue, to be sure, if we were to do this,” said Wall. “There's also a branding issue.

"Because it's one thing for the Saskatchewan brand to be known in a market that big and that far away. It's a little bit better to leverage the western Canadian brand or the Canadian brand, and so if we were to do something like that — that would be the rationale — yes, cost and also the branding issue of the 'Canadian brand.'"

“The recent economic downturn has proven that we are stronger if we work together,” said Campbell.

“The New West Partnership is not only an integral agreement to improve our economy domestically, but also creates new opportunities to market Western Canada on an international stage. We will market our region’s incredible potential to our trading partners in Asia.”

Stelmach added: “The West is stronger than ever and we offer one of the most attractive business environments in the world. Asia is a critical market and this mission will showcase the West’s leadership on resource development, clean energy technologies and innovation.”

Spreading message
“Saskatchewan is focused on establishing the West as Canada’s economic powerhouse,” Wall said.

“Our first joint task is to take our message to the vast market opportunities that exist in Asia. The West has the resources the world needs, we have the opportunities global investors want and the New West Partnership is making it as easy as possible to access them.”

The premiers will work to establish a permanent collaborative trade and investment presence in Asia and promote Western Canada’s competitive advantage of having some of the lowest corporate income tax rates in the G7 with stable financial institutions.

The trade mission will market the region’s natural resources such as gold, copper, potash, wood, natural gas and metallurgical coal, as well as Western Canada’s geographical advantage as the Pacific Gateway.

The three provinces signed a partnership deal April 30 committing to remove barriers to economic development and function more as a single economic zone. Under the New West Partnership, professional qualifications and business licences obtained in one province will be recognized by each of the partners.

The provinces also hope to save costs by jointly making purchases of such things as pharmaceutical supplies.

The premiers will be in Japan and China for about 10 days.

www.cbc.ca/canada/saskatchewan/story/2010/05/13/sask-west-premiers-trade-asia.html

[sandi66]

When Cash is Worth its Weight in Gold



By Economic Times Posted: 05/14/10 07:01
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(RAPAPORT) Economic Times: Whenever a client walks into his accounting office, Dalipbhai plays a little guessing game. Is the man the quintessential, unsuspecting taxpayer anxious to file his return? Or, does he belong to the smarter lot trying to beat the May 31 deadline?

The lot that's partly fuelling an unusual spurt in cash deals in recent weeks. Deals to organize a mountain of cash to pay a builder for a home or to keep off a sticky-fingered bureaucrat. For some, these are the last and the easiest routes to transform currency notes stashed inside cupboards into legitimate bank deposits; while for many others, it's a way to gift a friend without any tax hassles.

Helped by seasoned chartered accountants like Dalipbhai, they have been quick to spot a loophole in the law that will exist for just another fortnight. And, are making the most of it. The deals, simple and quick, have a common link: All such transactions will take them to Zaveri Bazar, the congested gold market of uptown Mumbai. To make the transaction foolproof, the parties will have to either buy or sell gold bars.

A man who has to generate, say, Rs 50 lakh of cash will have to find someone who has it, and is looking for a way to convert the black money into white. And this is what they will do:

Step 1. The man who needs the cash will buy 10 gold bars of Rs 5 lakh each. A perfectly official transaction. Here, he will pay with a check to the jeweller and collect the bullion.

Step 2. He then 'gifts' the gold to the other man, who gives him the cash equivalent. Thus, the person who was looking for cash gets it.

Step 3. The person who receives the gold sells it in the market to recover his money. Again, an official transaction and the check he receives from the jeweller is deposited in his bank.

The three-step transaction helps one man to convert his undisclosed money into white while the other generates Rs 50 lakh without withdrawing it from his bank account and arousing the teller's suspicion. What makes it happen is gold.

Surge in cash holdings

Says one Mumbai-based accountant: "But from June 1, such deals can't happen. The rules have been changed in the [federal] budget, where any gift of bullion will be treated as an income in the hands of the receiver and attract the usual tax. Till recently, bullion was excluded from the list of movable assets like shares, debentures... In many cases, people are forced to do these transactions. What do you do if the builder asks 40 percent of the money in cash?"

Strangely, cars are still excluded from the list of movable assets whose transfers will trigger a tax claim. "While one can use this lacunae in the law to 'gift' motor cars, it can't be a convenient option to convert black money into white and vice-versa. There's registration cost and other transfer charges," said a tax planner who confirmed several such cash deals happened in the past month. That is where gold, which can be instantly sold, comes handy.

Interestingly, recent data released by the Reserve Bank of India shows an unusual surge in cash holdings in the economy and large withdrawl in demand deposits from banks for April - a trend typically seen only during festivals and before elections. According to published data, more than Rs 57,000 crore was withdrawn from banks, including co-operative banks, between early April and April 23 this year. "There weren't too many public issues, particularly big ones, which cause such fund movements. The withdrawal during the same period in 2009 was only Rs 21,000 crore," said a banker.

Cash holdings with individuals and businesses rose almost by Rs 32,000 crore this past month - about Rs 6,000 crore higher than the year-ago number. The currency-deposit ratio has also inched up, from 0.159 in March 31 to 0.165 in April 23. While it will be far fetched to explain the composite data by the various 'cash deals,' such transactions are likely to have influenced the recent money movements.

(c) 2010 Bennett, Coleman & Co., Ltd., Source: The Financial Times Limited
Copyright © 2010 Acquire Media. All rights reserved.


www.diamonds.net/news/newsitem.aspx?articleid=30992

[sandi66]

Gold hits record high as investors flock to safety

Friday May 14, 2010, 7:17 am
By Jan Harvey

LONDON (Reuters) - Gold hit record highs near $1,250 an ounce in Europe on Friday as investors bought the metal to protect against sovereign risk in the euro zone and instability in the foreign exchange markets.

Gold priced in euros, sterling and Swiss francs extended the record highs they have already set this month as investors concerned about the outlook for the European currencies chose gold as an alternative asset.

Spot gold hit a record $1,248.95 and was bid at $1,246.75 an ounce at 1046 GMT (6:46 a.m. EDT), against $1,231.83 late in New York on Thursday.

U.S. gold futures for June delivery on the COMEX division of the New York Mercantile Exchange rose $17.70 to $1,246.90 an ounce.

"The gold price has benefited from strong safe-haven demand linked to fiscal issues in the euro zone, and a pull-back from the euro as a reserve currency," said BNP Paribas analyst Anne-Laure Tremblay.

"We expect incremental safe-haven demand to ebb as the Greek crisis subsides," she added. "However, gold will remain a much sought-after hedge should fiscal concerns over Greece or other EMU countries mount again."

Concerns over the outlook for Greece and other debt-laden euro zone economies has prompted demand for assets seen as a safe store of value this year.

A $1 trillion rescue deal aimed at stabilizing financial markets announced last weekend helped the euro and European equities recover some losses, but the boost it gave the markets has proved short-lived.

The cost of insuring peripheral euro zone government debt against default rose on Friday, having fallen sharply this week after the deal was unveiled, while the euro fell below $1.25 to an 18-month low and European shares slid.

A weaker euro and consequently stronger dollar would usually weigh on gold, but this link has been weakened as sovereign risk concerns fueled buying both of bullion and the U.S. currency.

While investors have traditionally bought gold as an alternative to the dollar at times when the U.S. currency is weak, analysts say they are increasingly seeing it as an alternative to paper currencies in general.

"Bullion is performing rather well against any fiat (paper) currency at the moment," said VTB Capital analyst Andrey Kryuchonkov.

INVESTMENT STRONG

Investment interest in physical bullion was strong as buyers sought safety, with holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, at a record high 1,209.5 tonnes on Thursday.

The fund's reserves have risen 68.5 tonnes or 6 percent in the last four weeks. The SPDR ETF is the world's sixth largest holder of gold, ahead of Switzerland, China and Japan.

However, high prices are set to curb gold demand from the jewelry sector after a soft year in 2009 in key gold buying centers such as India, Turkey and the Middle East.

Gold imports by India, the world's biggest market for the precious metal, could drop for a third straight year in 2010 as record high prices scare off traditional buyers.

Among other commodities, oil prices fell more than 2 percent to below $73 a barrel on Friday on concerns the European debt crisis may curb global growth, and therefore energy demand. Industrial metal prices also slid.

Silver tracked gold higher to at $19.63 an ounce against $19.41. Platinum was at $1,721.50 an ounce against $1,731.50 and palladium at $529 against $537.

"Selling pressure has again been seen overnight but again we expect tightening fundamentals to offer background support," said James Moore, an analyst at TheBullionDesk.com.

"Volatility may increase in the coming days ahead of next week's Platinum Week activities in London."

finance.yahoo.com/news/Gold-hits-record-high-as-rb-3217908392.html?x=0&.v=1

[sandi66]

Europe enters era of belt-tightening
By Victor Mallet in Madrid

Published: May 13 2010 20:49 | Last updated: May 13 2010 20:49

Amid cries of outrage and expressions of disbelief, a new age of austerity has arrived in Europe.

As governments across the eurozone impose cuts on a scale unseen in decades, Greece – widely seen as the centre of the crisis – has already seen violent demonstrations and general strikes. Now there is growing concern that such displays of public anger will become more widespread.

Spanish trade unions were on Thursday threatening nationwide walkouts and protests. The shock is palpable in countries which have moved from poverty to prosperity during the decades of almost uninterrupted growth since the second world war and have always enjoyed the material benefits of European Union membership.

“Two things are hard to believe: I can get laid-off and that I’ll have to work to 65 to get a pension,” says Yannis Adamopoulos, who is a security guard at a state-controlled Greek corporation. Another Greek, Fotis Magriotis, a self-employed civil engineer, has put his sports utility vehicle up for sale. Work is hard to find and taxes on petrol have twice been increased. “There’s no alternative to downsizing,” he says.

Such statements provoke grim humour in the northern half of Europe, where job insecurity, retirement at 65, small cars and high petrol prices are not unusual.

In the end it was the financial markets, not the austere German paymasters of the eurozone, that exposed the vulnerability of Greece, Spain and Portugal and triggered a €750bn rescue package unveiled at the weekend.

The emergency bail-out, which aims to free up sovereign debt and interbank markets in Europe, came with strings attached by the European Union, the International Monetary Fund and the US: after the two-year fiscal spending binge that followed the financial crisis of 2008 and made life easier during the recession, governments will be obliged to cut their deficits, and cut them hard.

For the first time since EU aid started flowing freely in the 1980s, Greeks face a significant drop in living standards, with the economy set to shrink 4 per cent this year and another 2.6 per cent in 2011.

The new reality being imposed by the Greek socialist government – a 12 per cent wage cut for civil servants, reductions in pensions and looming job losses in public sector corporations – stuns workers in the bloated state sector.

A similar, if less severe, adjustment is being imposed by the socialist government of Spain. José Luis Rodríguez Zapatero, prime minister, is angering former allies in the trade union movement by going back on his promises and cutting civil service pay by 5 per cent from next month as part of a drive to control the deficit.

Orthodox economists, and Mr Zapatero’s conservative opponents, say the government and the Spanish people have been slow to grasp the importance of having a dynamic private sector to pay for the welfare state. “The Spanish want to think like Cubans and live like Yankees,” says Lorenzo Bernaldo de Quirós, an economist and business consultant.

In the north, the Germans have been living up to their reputation as diligent workers prudently aware of the eternal trade-off between services and taxes. Many voters in the North Rhine-Westphalia state election last Sunday said they would rather pay more taxes than see their local swimming pool or kindergarten close.

“Germans are far more in favour of stability and austerity and not for deficit spending,” says Jürgen Falter, professor of political science at Mainz university. “It is part of the collective memory, going back to the hyperinflation that wiped out their grandparents’ savings in the 1920s.”

The north-south divide, however, is not as stark as it first appears.

France straddles north and south and could face mass protests over a three-year government spending freeze. Ireland and the UK in north-west Europe were among the most profligate European nations as bubbles in housing and financial services swelled unsustainably in the heady years before the collapse of Lehman Brothers.

In Dublin at least, the harsh cuts unveiled to restore order to public finances are beginning to bite. Around the corner from Government Buildings, John Myley, a shoe repairer, complains that a lot of his customers are finding it hard to pay. “Everyone’s trying to keep up appearances. But at the moment, I tell you, I’ve got 14 pairs of shoes on tick [credit], for people who can’t pay until they’re paid at the end of the month.”

The former and the new British governments have proposed sweeping cuts to public expenditure but the issue was not much discussed in the general election campaign and details remain secret. There is no means yet of knowing how well Britain will accept its fate. But even small cuts of £500m to university expenditure this year brought howls of protest.

Nor are southern Europeans necessarily as profligate as some suggest.

Italians feel their belts have been tightened for some time, although the word austerity has not entered Italy’s political vocabulary because Silvio Berlusconi, prime minister, likes to keep the mood upbeat. Over the past five years both centre-left and centre-right governments have kept a fairly tight lid on spending, keeping Italy’s ratio of budget deficit to gross domestic product within manageable limits.

In Portugal, the economically conservative inhabitants are responding to tough austerity measures by saving, prioritising mortgage payments and defending jobs.

As in previous recessions, when thousands worked for months without pay, the country has opted for resilience rather than revolt. Domestic savings are up and defaults on mortgage loans remain low.

After a decade of the lowest economic growth in the eurozone, however, the Portuguese face another four years of belt-tightening with growing frustration.

The same is true of most of western Europe. Each eurozone country is taking the measures it must take or can take – from pursuing tax cheats in Spain and Greece, to reducing child benefits in Ireland and controlling public spending almost everywhere – to reach a budget deficit target of 3 per cent of GDP in the next three or four years.

The danger is that a Europe hounded by market forces has acted too late, and that these sharp doses of austerity will stifle the first stirrings of new economic growth and so worsen budget problems in the future by provoking a relapse into recession.

A lot of Spaniards have realised this week that the money isn’t ours, it’s borrowed from others and we do not have sovereign powers,” says one private equity investor in Madrid. “What has to be done in Spain is so serious that it makes you panic to think about it.

www.ft.com/cms/s/0/9acbb194-5eaa-11df-af86-00144feab49a.html?ftcamp=rss

[sandi66]

Euro Breakup Talk Increases as Germany Loses Its Currency Proxy
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By James G. Neuger

May 14 (Bloomberg) -- Romano Prodi recalls how he persuaded Germany to allow debt-swamped Italy into the euro: support our membership and we’ll buy your milk, he said.

When Prodi toured Germany’s agricultural heartland after becoming Italian leader in 1996, he pitched “a big milk pipeline from Bavaria,” pointing to a three-year, 40 percent plunge in the Italian lira that was hurting dairy sales. “To have Italy outside the euro, a huge quantity of exports from Germany would have been endangered,” Prodi, now 70, said.

Germany got the message, allowing entry rules to be bent to create a 16-nation market for its exporters. Now, German taxpayers are footing the bill for that permissiveness as Europe bails out divergent economies lashed to a single currency with little control over national taxes and spending.

The consequences are an 860 billion-euro ($1 trillion) bill for a debt binge led by Greece, sagging confidence in the European Central Bank’s independence and mounting speculation that a currency designed to last forever might break apart.

“You have the great problem of a potential disintegration of the euro,” former Federal Reserve Chairman Paul Volcker, 82, said yesterday in London. “The essential element of discipline in economic policy and in fiscal policy that was hoped for” has “so far not been rewarded in some countries.”

German-led northern Europe, with its zeal for budget discipline, is attempting to fix the mistakes made by the euro’s founding fathers in the 1990s. It is squaring off against the governments of the south over who will control the euro and the ECB; whether the currency will be used to promote growth or squelch inflation, and ultimately, whether some countries should be disbarred from the monetary union.

European Club

What was conceived as a club for Europe’s strongest economies was expanded for political reasons, leaving the currency union with minimal powers to police deficit spending and no safety net for dealing with countries, like Greece, that veer toward default.

“There was no discussion of that at all, of a crisis mechanism,” said Niels Thygesen, a retired Copenhagen University economics professor who served on the 1989 group led by European Commission President Jacques Delors that mapped out the path to the euro. “It was believed that if countries adhered more or less to prudent budgetary policies, that would not or could not happen.”

Kohl’s Role

Former German Chancellor Helmut Kohl, seeing the euro as the capstone of Europe’s economic integration and Germany’s return to the European family after two world wars, opened the door to the deficit-prone southern European countries that the Bundesbank, haunted by the memory of hyper-inflation, wanted to keep out.

Returning from the December 1991 summit in Maastricht, the Netherlands, that kicked off the euro project, Kohl told the German parliament that he wanted “the greatest possible number of countries” in the euro. That gave Italy, Spain and Portugal the encouragement to meet the economic targets to join in 1999 and Greece to follow two years later.

Defenders of the German economic model knew the threat posed by countries such as Italy, whose budget deficit was 10.2 percent of gross domestic product in 1991, when they forced European leaders to set 3 percent as the limit for euro members.

“A well-known German financial leader told me: Fortunately for Germany, Austria is between Italy and Germany,” said Alfons Verplaetse, who oversaw the Belgian central bank from 1989 to 1999. The reckoning was that only Germany and its immediate neighbors would pass the economic tests, limiting the euro to a handful of countries, Verplaetse, 80, said.

Nobel Laureate

Today’s euro is far from what economists like Nobel laureate Robert Mundell call an “optimum currency area.” Gross domestic product per person ranges from 69,300 euros in Luxembourg to 18,100 euros in Slovakia, debt from 14.5 percent of GDP in Luxembourg to 115.8 percent in Italy, and unemployment from 4.1 percent in the Netherlands to 19.1 percent in Spain.

“A currency without a state is difficult to manage,” said former Italian Prime Minister Lamberto Dini, 79, who also served as the nation’s finance and foreign minister. “The decision to create a single currency in Europe was an eminently political decision. It was supposed to bring about greater European integration not only at an economic level, but at a political one.”

Europe’s multi-state structure leaves it without a U.S.- style federal tax and financial-transfer system to smooth discrepancies between richer and poorer regions. The EU’s budget, mostly for farm aid and infrastructure projects, represents barely 1 percent of the bloc’s GDP, compared with European national budgets that average 47 percent of GDP.

The Blueprint

Signs of a mismatch between strong and weak economies and a loose coordination of fiscal policies were noticeable in the earliest blueprint for a common currency.

“In view of the marked divergences that persist between member states in realizing the goal of growth and stability, there is a risk of surging disequilibriums unless economic policy can be harmonized,” Luxembourg Prime Minister Pierre Werner wrote in the 1970 report that introduced Europe’s first bid for a single money.

Four decades later, Werner’s prophecies are coming true, as euro-region governments prioritize domestic needs to pacify voters after the deepest recession in a half century. The EU Commission estimated May 5 that the overall economy will grow 0.9 percent in 2010, not enough to create jobs, after shrinking 4.1 percent in 2009. It predicts unemployment will climb to 10.3 percent in 2010 from 9.4 percent in 2009.

Euro Rejection?

German officials are already debating what was unthinkable to the euro’s architects: that a currency union designed in its founding treaty to be “irrevocable” might not be. Finance Minister Wolfgang Schaeuble said March 12 that expulsion from the euro may be the ultimate penalty for serial violators of debt rules.

Under current EU law, ejection is “legally next to impossible,” the ECB said in December. Changing the treaty requires unanimity among the EU’s 27 governments, so the euro’s current lineup -- likely to be joined by Estonia next year -- will have to find a way of making do.

Markets have rendered a mixed verdict on the euro’s resistance to the crisis. The currency’s decline below $1.25 from a record high of $1.60 in July 2008 still leaves it above the 1999 starting rate of $1.17. The euro is about 11 percent overvalued against the dollar, data compiled by Bloomberg of purchasing power parities show.

Maastricht Treaty

Greece’s ability to get into the euro illustrates what is wrong with Europe’s uncoordinated economic management. Greece, the EU’s poorest country at the time of Maastricht, set about cutting its budget deficit from 16.3 percent and persuading the Germans that it was serious about being fiscally prudent.

By 1996, with Greece’s deficit at 7.4 percent of GDP, Finance Minister Yannos Papantoniou was confident enough of making the grade that he pleaded for the euro’s paper money to feature the name “euro” in the Greek alphabet.

The German reaction wasn’t encouraging. Theo Waigel, Germany’s finance minister at the time, responded by saying he had “enough trouble in Germany trying to sell this idea of giving up the mark, and now you want me to put funny letters on it as well,” said Ruairi Quinn, then Irish finance minister, recalling the altercation at an April 1996 meeting in Verona, Italy. Waigel added that “it’s all irrelevant because you’re never going to qualify,” according to Quinn.

Greek Letters

The global economic boom of the late 1990s enabled Greece to meet the targets for deficits, debt, inflation, interest rates and currency stability. Greece joined the monetary union in 2001 and a year later, banknotes featuring generic architectural symbols and embossed with Greek lettering went into Europe-wide circulation.

Waigel started with a “very negative position,” said Papantoniou, 60, the Greek finance minister from 1994 to 2001. He responded to the German’s outburst in Verona by offering him “an appointment in two years’ time to check this out and you’ll change your mind.”

“Once we entered the euro, we forgot about the necessity of carrying on this structural effort and we now pay the price,” Papantoniou said. Waigel, now 71 and a lawyer at GSK Stockmann + Kollegen in Munich, wasn’t available to comment for this article.

What Societe Generale SA economist Dylan Grice dubs a “Greek tragedy” dates to 2004, when the new Conservative government of Costas Karamanlis accused its predecessor of fiddling the budget numbers to pass the euro test -- a charge Papantoniou denies. EU records now show that Greece has never brought its deficit under the limit.

‘Greek Drachma’

“Investors had always regarded the euro as a de jure German mark,” Louis Bacon, founder of the $15 billion hedge- fund firm Moore Capital Management LLC, wrote in an April 16 letter to investors who have made an annual return of 20.5 percent from his flagship fund during the past two decades. “It’s dawning on the world that it is becoming, de facto, a Greek drachma.”

Greece’s credit rating was cut to junk by Standard & Poor’s on April 27, making it the first euro member to lose its investment grade.

The nation’s slipping competitiveness was masked by an economic expansion buoyed by the euro-driven drop in bond yields to 3.23 percent in September 2005. Growth peaked at 5.9 percent in 2003, topping the euro zone that year. Unit labor costs that bounded ahead by as much as 10.2 percent in 2002 put Greece at a disadvantage to countries like Germany, where wages declined in 2004, 2005 and 2006.

‘New Odyssey’

Greece’s fiscal crisis was exposed after another change in government, from the conservatives back to the socialists last October. Prime Minister George Papandreou, elected on a promise of higher wages and benefits, is now on what he calls a “new Odyssey” that may end with the dismantling of the welfare state built by his father Andreas, Greek leader from 1981 to 1989 and 1993 to 1996.

Italy’s journey to the euro followed a similar script to Greece, from German opposition to reluctance to acceptance. Then the paths diverged. Italy kept its deficit under the limit five times in the euro’s first 11 years. Deficit-obsessed Germany has only done so six times.

Led by Prodi, Italy snuck under the deficit ceiling in 1997, the test year for the first group of euro aspirants, helped by a one-off “Eurotax” and a yen-denominated swap. Italy wasn’t alone in coming up with one-time savings and accounting dodges. France transferred pension funds from France Telecom SA to graze the 3 percent limit.

Bundesbank Bid

Even Waigel made an ill-fated bid to get the Bundesbank to boost the paper value of its currency reserves to reduce Germany’s debt.

Germany’s tight-money faction dictated the rules for the euro, yet it lost out when Waigel’s call for automatic sanctions on countries with deficit overruns was rejected by other governments in talks that culminated in Dublin in December 1996.

Prodi, who served two stints as Italian leader and ran the EU Commission from 1999 to 2004, said the “crisis isn’t unexpected. It came much later than I thought.”

The euro project is “half baked,” he said in an April 20 telephone interview. “You cannot have a monetary policy without coordination in fiscal and economic policy, because otherwise you will have problems.”

The budgetary lapses cloud EU efforts to quell Greece’s crisis and prevent a stampede by speculators against Portugal as well. Germany, for example, is again pressing for curbs on deficits as long as its own economy escapes closer oversight.

‘Fractious Mobilization’

Bickering over Greece, exacerbated by Germany overruling French opposition to making the International Monetary Fund part of a rescue, contributed to the euro’s slide this year against the dollar. Moody’s Investors Service cited the “fractious mobilization” of EU support as a reason why it cut Greece’s credit rating on April 22.

Spain, France and Germany have scoffed at a May 12 EU Commission proposal for more coordination of taxing and spending plans before they are voted on by national parliaments. The commission also urged more “expeditious” enforcement of the deficit rules, without calling for tougher fines on violators.

“The old idea that you discuss with peers your budgetary plans before they’re announced is very difficult to implement,” said Jean Pisani-Ferry, a Maastricht-era EU economic adviser who now runs the Bruegel research institute in Brussels. “It runs up against the politics.”

www.bloomberg.com/apps/news?pid=20601087&sid=agwHp5N5FXA8&pos=1

[sandi66]

Spain’s Core Inflation Turns Negative for First Time (Update3)
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By Emma Ross-Thomas

May 14 (Bloomberg) -- Spain’s underlying inflation rate turned negative in April for the first time on record, just as Prime Minister Jose Luis Rodriguez Zapatero pushes through the country’s biggest budget cuts in more than three decades.

Core consumer prices, which exclude energy and fresh food, fell 0.1 percent from a year earlier, after rising 0.2 percent in March, the National Statistics Institute in Madrid said today. That’s the first annual decline since the data were first collected in 1986. The headline inflation rate, based on European Union calculations, was 1.6 percent, in line with an initial estimate published on April 29.

Spain’s economy emerged from an almost two-year recession in the first quarter, even as unemployment rose to 20 percent. After the third-largest budget gap in the euro region prompted a surge in Spain’s borrowing costs, the government announced a 5 percent reduction in civil servants’ wages this week and said the measures could undermine the return to growth.

“It’s the start of a trend,” said Luigi Speranza, an economist at BNP Paribas in London who first forecast deflation in Spain more than a year ago. “It’s an adjustment mechanism, a way of gaining competitiveness.”

European Comparison

Spanish inflation has generally been above the EU average over the last decade. Now, its negative core inflation compares with a positive rate of 1 percent in the euro area in March. The European rate probably slowed to 0.8 percent in April, according to a Bloomberg News survey.

The government plans to increase the main value-added tax rate to 18 percent from 16 percent in July. Retailers may pass on around half of the increase and absorb the rest, Deputy Finance Minister Carlos Ocana said on March 23. Inditex SA, the owner of the Zara fashion chain, said on March 17 that it would not pass on the increase to consumers.

The new VAT rate will have a “marginal” impact, pushing up the core rate briefly before the downward trend resumes, Speranza said. Deputy Finance Minister Jose Manuel Campa, speaking today in Madrid, said April’s negative core rate was “temporary” and due to seasonal effects.

As households pay down one of the largest private-debt burdens in the euro area, Spaniards expect prices to fall and have the region’s second-most negative inflation expectations after Italians, according to data from the European Commission.

Spain’s economy will contract 0.4 percent this year, while the euro area and U.S. expand, according to the International Monetary Fund. The government forecasts growth of 1.8 percent next year, even as Zapatero said new austerity measures could trim that expansion.

Following pressure from the EU to reduce spending in return for an almost $1 trillion backstop for indebted members, Zapatero announced the reduction in public workers’ wages and said ministers will take a 15 percent pay cut, a subsidy for newborns will be abolished and pensions will be frozen.

www.bloomberg.com/apps/news?pid=20601087&sid=a5jFdx_0uZV0&pos=6

[sandi66]

The Trillion-Dollar Treatment - Europe is trying to fix its own raging fiscal disorder. So far it hasn't even nailed the diagnosis

By Peter Coy

May 13, 2010, 5:00PM EST

European leaders still don't understand what caused the Aegean Contagion that swept through the eurozone in late April and early May. Swedish Finance Minister Anders Borg blamed "wolf-pack behavior" by speculators. Others have railed against clueless rating agencies, feckless debtors, and unreasonable creditors. Then there are those who ask if there's an inherent flaw in the bond markets that made them cascade, turning vague worries into scary, self-fulfilling prophecies.

You can't defeat an enemy you don't understand, and unless Europe gets a better grasp on what went wrong, it will be vulnerable to more turmoil, even with the nearly $1 trillion backstop lending authority that calmed markets. "I still think it's a very fragile situation," says Gary Gorton, a Yale University economist.

The reality isn't all that complicated. Europe was vulnerable to contagion, and remains so, because its governance and its financial system are weak. It was lax fiscal oversight that allowed nations such as Greece to violate European Union rules on the size of their budget deficits in the first place. Overleveraged investors made matters worse: When the value of their Greek debt fell, they were forced to reduce the size and risk of their portfolio by selling other assets—the debt of Portugal and Spain, for example.

In retrospect, Europe's crisis was a done deal last November, when a new Greek government announced that its deficit-to-gross domestic product ratio for 2009 would be 12.7 percent, more than double what the previous government had projected and four times what the European Union allows. Interest rates on Greek debt, which had been nearly as low as rates on German bonds, inched upward. In a vicious circle, the higher rates themselves increased Greece's debt burden. That made default more likely and pushed rates even higher. On Apr. 27, Standard & Poor's lowered Greece's credit rating to junk. By May 7, the yield on two-year Greek government bonds hit 18 percent. Yields on Portuguese bonds reached 6 percent that day, double their level of three weeks earlier. Spanish and Italian credit was beginning to be affected as well.

Eventually the Europeans had no choice but to agree to a backstop lending arrangement for seriously threatened governments. That brought two-year Greek bond yields back down to a bit below 7 percent by May 12—about what an American might pay for a car loan but far higher than any other eurozone nation pays to service its debt.

Now that it has some breathing room, Europe needs to think hard about what just happened. The best place to start is with another contagion, the 2007-09 financial crisis that began with shoddy subprime mortgage lending in the U.S. In his new book, Slapped by the Invisible Hand, Yale's Gorton describes the dangerous tipping point that comes when investors lose faith in complicated financial instruments they once took for granted. Mortgage-backed securities had been treated like Treasuries—investors looked at the yield and the credit rating and didn't bother asking what was inside. When subprime mortgages started going into default, investors suddenly wanted to know if the securities in their portfolio contained any of those bad loans—and discovered they couldn't disentangle the assets. They got scared and bailed out. In Gorton's terminology, the securities went from being "information-insensitive" (a good thing for market liquidity) to "information-sensitive" (bad). Gorton says the same fate befell Greek bonds when players in the credit default swap market began digging up information pointing to a risk of default that bond investors hadn't bothered to ferret out in advance.

As with a physical disease, financial contagion spreads faster in a weakened population. Europe's problem is that many of Greece's creditors are themselves debtors on a massive scale. If the value of their assets declines, the only way they can stay solvent is by reducing their debt, and the only way they can pay down the debt is by selling assets, which pushes their price down even further, exacerbating the problem and spreading it to other securities.

It's revealing that the ultimate beneficiaries of Europe's rescue are the big banks, not the Greeks, who will barely touch any rescue money before it goes out the window to their lenders.

To prevent a spreading financial contagion, then, it's not just the debtors that need to develop a stronger immune system. It's the creditors, too. As Princeton University economist Markus Brunnermeier pointed out in a 2010 paper, "Deciphering the Liquidity and Credit Crunch, 2007-2008," the big global investment banks became heavily dependent in 2007-08 on so-called repo financing. They borrowed money using bonds, asset-backed securities, and the like for collateral. Repo lenders give the best terms on overnight loans because there's less risk the collateral will lose value. But if borrowers can't roll over their debt, they must sell assets at fire-sale prices—and, in turn, stop extending loans to their clients. In 2007, according to Brunnermeier, repo lending that has to be rolled over daily amounted to some 25 percent of the assets of the 19 big U.S., European, Japanese, and Canadian primary dealers in U.S. Treasury securities. (The calculation is based on gross repo borrowing. They also make repo loans.)

One might suppose that these large investment banks learned their lesson in the crisis and weaned themselves off overnight repo loans—which, after all, force them to scrounge up fresh loans every single day or go bust. Not quite. Bloomberg Businessweek updated Brunnermeier's calculation using publicly available data from the Federal Reserve Board and the Federal Reserve Bank of New York. As of the end of 2009, overnight and continuing repo loans were down more than 40 percent from their peak, but still funded 15 percent of the big banks' assets. Even after the pullback, overnight repo grew 155 percent from the beginning of 2000 through the end of April 2010. That compares to growth of just 82 percent in a broad measure of the money supply known as M2. Bottom line: A big chunk of their financing remains precarious.

Many Europeans would prefer to blame the crisis on outsiders, the favorite scapegoats being speculators and ratings agencies. On Apr. 30, German Foreign Minister Guido Westerwelle called for the creation of a European credit rating agency. Complaining about the U.S. rating agencies, Pierre Lellouche, the French minister for European affairs, told The New York Times: "I'd be interested to know what these 30-year-old boys know about the disaster they are causing to people in Spain or Portugal or anywhere else." In reality, the rating agencies were no more than the bearers of bad tidings. Greeks are tired of having ancient ancestors quoted at them, but it's hard to resist citing Sophocles: "No one loves the messenger who brings bad news."

For countries with the highest deficits, the challenge now is to cut government spending and increase revenue in a time of slow growth or outright recession. It's not clear whether Greece in particular will be able to muster the social solidarity necessary to do so. It's equally difficult to see how Germany will go ahead with backstop loans to Greece if the country doesn't meet its commitments. "This deal is necessary. I don't know if it's sufficient," says Sandra Valentina Lizarazo, an economist at the Mexico Autonomous Institute of Technology who has studied emerging-market debt crises.

The EU's problems resemble those of the young and weak United States of America from 1781 until 1788, before the Constitution was ratified. Under the Articles of Confederation, the federal government had no power to tax. It relied on contributions from the states. Alexander Hamilton, who later became the nation's first Treasury secretary, warned in 1780 that "without revenues, a government can have no power. That power which holds the purse-strings absolutely, must rule." So Europe is discovering nearly 230 years later. For Europe, the strongest defense against another bout of Aegean Contagion would be a unified Continental government with authority over taxation and spending—a United States of Europe. A unified Europe would have the power to prohibit, not just remonstrate against, the fiscal frivolity that brought on this virus. Since such a political solution does not seem remotely possible, more bouts of fiscal sickness are all but certain.

www.businessweek.com/magazine/content/10_21/b4179006021713.htm

[sandi66]

SEC Said to Probe Wall Street Selling of Muni Bonds

Published: Friday, 14 May 2010 | 5:17 AM ET

The U.S. Securities and Exchange Commission (SEC) is investigating whether Wall Street banks used their own money to bet in financial markets against municipal bonds that they had sold, the Wall Street Journal said.



Citing people familiar with the matter, the newspaper reported that the regulator is examining trades of municipal credit default swaps.

The fact finding probe may not result in any formal action, the newspaper said.

Also, if the firms had used their own money to effectively short sell the municipal bonds, investigators are examining if that activity was properly disclosed to bond buyers, the WSJ said.

Credit default swaps are insurance-like derivatives that provide protection against issuer defaults.

SEC could not be immediately reached for comment by Reuters outside regular U.S. business hours.

www.cnbc.com/id/37145158

[sandi66]

Ex-Lehman Bankers Start Funds to Buy Structured Debt (Update2)
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By Bei Hu

May 14 (Bloomberg) -- Oracle Capital Ltd., a hedge-fund company founded by two former Lehman Brothers Holdings Inc. bankers, aims to raise $50 million over the next two months to buy structured credit products, whose plunge contributed to the worst financial crisis since the 1930s.

The first fund, Oracle Investment Fund Spc targeting U.S. investors, started trading on May 12, and a second targeting non-U.S. investors will be set up in June, said Leon Hindle, a partner of Hong Kong-based Oracle, in an interview yesterday.

The funds will seek to buy structured credit products, including collateralized debt obligations, from Asian banks, insurers, corporations and funds, which are using the market’s recovery to sell some of their marked-down holdings. Asian financial institutions have posted losses and writedowns of $41 billion since the credit crisis, partly due to investments in highly rated U.S. and European securitized products.

“It would be quite unusual to find any type of financial institution that didn’t have any exposure to it,” Hindle said. “The market has rallied. We’re mid-way through the recovery from this crisis, but there’s still a lot of uncertainty.”

Asian companies, hoping to boost investment yields on excess capital before the financial crisis, have bought more than $50 billion of structured credit products, estimated Fredric Teng, another Oracle partner. Few funds in the region have the expertise to analyze and find underpriced structured credit products, making the investment strategy more profitable for Oracle, he added.

‘Huge Market’

“It’s a huge market relative to the number of people that are in it,” said Hindle. “There’s still a supply overhang.”

Hindle, 39, headed Lehman’s structured credit and CDO group in the region. Teng, 37, led Lehman’s Asia-Pacific fixed-income syndicate between 2006 and 2008.

The funds will invest in structured credit products including CDOs, collateralized loan obligations and credit- linked notes, Hindle said. CDOs are structured debt securities backed by pools of bonds issued by companies or sovereign issuers, or loans made to companies. CLOs are backed with receivables from loans.

The Oracle funds will focus on securities backed by a variety of corporate credit, instead of mortgages, Hindle said. They may trade or hold them to maturity to realize profits.

The funds, each with a five-year investment period, will target 20 percent annual returns, Hindle said. Investors’ capital will be locked up for a year, and they can redeem their investments on a monthly basis after that.

Credit Losses

Financial firms around the world have posted more than $1.7 trillion of credit losses and writedowns since mid-2007 in the worst financial crisis since the 1930s. Investors took losses of as much as 90 percent in the $1.2 trillion market for CDOs tied to corporate credit by 2008 as the failures of financial institutions such as Lehman and Washington Mutual Inc. triggered rating downgrades on such securities.

Australia’s Basis Capital Fund Management Ltd., which oversaw more than $1 billion in 2007, filed bankruptcy for its Yield Alpha Fund in August that year after banks cut the value of its investments in CDOs, the first hedge fund in Asia-Pacific to become a victim of the financial crisis.

“It’s appropriate that another hedge fund has been set up to pick up the pieces,” said Peter Douglas, the principal of Singapore-based GFIA Pte, which advises investors seeking to allocate money to hedge funds. “The market dislocations that followed the Asian crisis sowed the seeds for some of the current bellwether Asian managers.”

Default Rate

The S&P/LSTA U.S. 100 Leveraged Loan index has gained 54 percent since a Dec. 17, 2008, low to 91.15 cents on the dollar as of yesterday. The 12-month global default rate for high-yield, high-risk debt fell to 9 percent in April, compared to 13 percent at the end of 2009, and Moody’s Investors Service’s earlier forecast default rate of 15 percent for year-end 2009.

Equity managers accounted for 58 percent of assets managed by Asia-focused hedge funds at the end of the first quarter, according to Chicago-based data provider Hedge Fund Research Inc.

“Those who were trading structured credit were carried out in 2008,” said Dan McNicholas, head of Asia financing sales at Merrill Lynch & Co. “Given the limited investor demand since, it has been hard for anyone new to raise enough capital to exploit any opportunities.”

New York-based Morgan Stanley, the sixth-largest U.S. bank by assets, was being probed by U.S. prosecutors over whether it misled investors in CDO deals, the Wall Street Journal reported on May 12.

The U.S. Securities and Exchange Commission last month sued Goldman Sachs Group Inc. for alleged fraud in its sale of CDOs in 2007. The New York-based bank said on May 10 it was expecting more litigation tied to sales of CDOs.

To contact the reporter on this story: Bei Hu in Hong Kong at [e-mail]

Last Updated: May 14, 2010 05:09 EDT

www.bloomberg.com/apps/news?sid=aZQuCpHkngjs&pid=20601087

[sandi66]

Euro/Dollar Parity

Airtime: Fri. May 14 2010 | 6:15 AM ET

Parity on the Euro/Dollar could come sooner than expected, and a discussion about the movement of gold and oil, with CNBC's Guy Johnson.


www.cnbc.com/id/15840232?video=1493938747&play=1


ty nalmann

[sandi66]

SEC, CFTC Form Joint Committee
05-14-2010 | Source: emii.com

The Securities and Exchange Commission and Commodity Futures Trading Commission have announced the creation of a new joint to increase harmony between the U.S. regulators. The Joint SEC-CFTC Advisory Committee on Emerging Regulatory Issues will: focus on identifying emerging risks for both regulatory units, offer information to investors about the implications of such risks, and then use the information to harmonize regulatory efforts.
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Mary Schapiro, chairman of the SEC, and Gary Gensler, chairman of the CFTC, will co-chair the new committee, which includes other current and former regulators, such as: Brooksley Born, Jack Brennan, Richard Ketchum, and David Ruder, as well as leading academicians and others. The joint committee will begin its work by investigating unusual market events that occurred last Thursday, as well as analyzing “disparate trading conditions and rules across various markets.” A preliminary report is expected on Monday.

www.emii.com/Articles/2487009/Capital-Markets/Top-Stories/SEC-CFTC-Form-Joint-Committee.aspx



SEC, CFTC Announce Creation Of Joint CFTC-SEC Advisory Committee On Emerging Regulatory Issues
FOR IMMEDIATE RELEASE
2010-75
Washington, D.C., May 11, 2010 — Securities and Exchange Commission Chairman Mary Schapiro and Commodity Futures Trading Commission Chairman Gary Gensler today announced the formation of a joint committee that will address emerging regulatory issues. The establishment of the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues was one of the 20 recommendations included in the agencies' harmonization report issued last year.


--------------------------------------------------------------------------------

Additional Materials
Notice of Federal Advisory Committee Establishment

--------------------------------------------------------------------------------

The joint committee will develop recommendations on emerging and ongoing issues relating to both agencies. The first item on the committee's agenda is conducting a review of last Thursday's market events and making recommendations related to market structure issues that may have contributed to the volatility, as well as disparate trading conventions and rules across various markets.

To orient the Committee's work, the staff of the SEC and CFTC will provide to the Committee on Monday their joint preliminary findings regarding last Thursday's market events.

"As last week's events remind us, our markets are increasingly interrelated and interdependent so we need to appreciate how events in one arena can potentially impact investors and markets elsewhere," said Chairman Schapiro. "The Joint Committee will serve an essential role in addressing that challenge."

"It is important that we hear from this prominent panel of market practitioners, academics and former regulators about emerging risks in our markets," Chairman Gensler said. "It is critical that the CFTC and SEC hear from the panel together because our markets are so intertwined. I am particularly interested in the Committee's first focus: advising on courses of action in response to the lessons learned from the market events of May 6."

The Committee's charter provides for a broad scope of interest, including:

Identifying of emerging regulatory risks.
Assessing and quantifying of the impact of such risks and their implications for investors and market participants.
Furthering the SEC's and CFTC's efforts on regulatory harmonization.
Chairman Schapiro and Chairman Gensler will serve as co-chairs of the Joint Committee.

Members of the Joint Committee include (additional members to join in coming days):

Brooksley Born, Former Chair of the CFTC
Jack Brennan, Former Chief Executive Officer and Chairman, Vanguard
Robert Engle, Michael Armellino Professor of Finance at the NYU Stern School of Business
Richard Ketchum, Chairman and Chief Executive Officer, FINRA
Maureen O’Hara, Professor of Management, Professor of Finance, Cornell University
Susan Phillips, Dean and Professor of Finance, The George Washington University School of Business
David Ruder, Former Chair of the SEC
# # #



www.sec.gov/news/press/2010/2010-75.htm

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Home | Previous Page Modified: 05/11/2010

[sandi66]

Euro Breakup Talk Increases as Germany Loses Proxy (Update1)
Share Business ExchangeTwitterFacebook| Email | Print | A A A
By James G. Neuger

May 14 (Bloomberg) -- Romano Prodi recalls how he persuaded Germany to allow debt-swamped Italy into the euro: support our membership and we’ll buy your milk, he said.

When Prodi toured Germany’s agricultural heartland after becoming Italian leader in 1996, he pitched “a big milk pipeline from Bavaria,” pointing to a three-year, 40 percent plunge in the Italian lira that was hurting dairy sales. “To have Italy outside the euro, a huge quantity of exports from Germany would have been endangered,” Prodi, now 70, said.

Germany got the message, allowing entry rules to be bent to create a 16-nation market for its exporters. Now, German taxpayers are footing the bill for that permissiveness as Europe bails out divergent economies lashed to a single currency with little control over national taxes and spending.

The consequences are an 860 billion-euro ($1 trillion) bill for a debt binge led by Greece, sagging confidence in the European Central Bank’s independence and mounting speculation that a currency designed to last forever might break apart.

“You have the great problem of a potential disintegration of the euro,” former Federal Reserve Chairman Paul Volcker, 82, said yesterday in London. “The essential element of discipline in economic policy and in fiscal policy that was hoped for” has “so far not been rewarded in some countries.”

German-led northern Europe, with its zeal for budget discipline, is attempting to fix the mistakes made by the euro’s founding fathers in the 1990s. It is squaring off against the governments of the south over who will control the euro and the ECB; whether the currency will be used to promote growth or squelch inflation, and ultimately, whether some countries should be disbarred from the monetary union.

European Club

What was conceived as a club for Europe’s strongest economies was expanded for political reasons, leaving the currency union with minimal powers to police deficit spending and no safety net for dealing with countries, like Greece, that veer toward default.

“There was no discussion of that at all, of a crisis mechanism,” said Niels Thygesen, a retired Copenhagen University economics professor who served on the 1989 group led by European Commission President Jacques Delors that mapped out the path to the euro. “It was believed that if countries adhered more or less to prudent budgetary policies, that would not or could not happen.”

Kohl’s Role

Former German Chancellor Helmut Kohl, seeing the euro as the capstone of Europe’s economic integration and Germany’s return to the European family after two world wars, opened the door to the deficit-prone southern European countries that the Bundesbank, haunted by the memory of hyper-inflation, wanted to keep out.

Returning from the December 1991 summit in Maastricht, the Netherlands, that kicked off the euro project, Kohl told the German parliament that he wanted “the greatest possible number of countries” in the euro. That gave Italy, Spain and Portugal the encouragement to meet the economic targets to join in 1999 and Greece to follow two years later.

Defenders of the German economic model knew the threat posed by countries such as Italy, whose budget deficit was 10.2 percent of gross domestic product in 1991, when they forced European leaders to set 3 percent as the limit for euro members.

“A well-known German financial leader told me: Fortunately for Germany, Austria is between Italy and Germany,” said Alfons Verplaetse, who oversaw the Belgian central bank from 1989 to 1999. The reckoning was that only Germany and its immediate neighbors would pass the economic tests, limiting the euro to a handful of countries, Verplaetse, 80, said.

Nobel Laureate

Today’s euro is far from what economists like Nobel laureate Robert Mundell call an “optimum currency area.” Gross domestic product per person ranges from 69,300 euros in Luxembourg to 18,100 euros in Slovakia, debt from 14.5 percent of GDP in Luxembourg to 115.8 percent in Italy, and unemployment from 4.1 percent in the Netherlands to 19.1 percent in Spain.

“A currency without a state is difficult to manage,” said former Italian Prime Minister Lamberto Dini, 79, who also served as the nation’s finance and foreign minister. “The decision to create a single currency in Europe was an eminently political decision. It was supposed to bring about greater European integration not only at an economic level, but at a political one.”

Europe’s multi-state structure leaves it without a U.S.- style federal tax and financial-transfer system to smooth discrepancies between richer and poorer regions. The EU’s budget, mostly for farm aid and infrastructure projects, represents barely 1 percent of the bloc’s GDP, compared with European national budgets that average 47 percent of GDP.

The Blueprint

Signs of a mismatch between strong and weak economies and a loose coordination of fiscal policies were noticeable in the earliest blueprint for a common currency.

“In view of the marked divergences that persist between member states in realizing the goal of growth and stability, there is a risk of surging disequilibriums unless economic policy can be harmonized,” Luxembourg Prime Minister Pierre Werner wrote in the 1970 report that introduced Europe’s first bid for a single money.

Four decades later, Werner’s prophecies are coming true, as euro-region governments prioritize domestic needs to pacify voters after the deepest recession in a half century. The EU Commission estimated May 5 that the overall economy will grow 0.9 percent in 2010, not enough to create jobs, after shrinking 4.1 percent in 2009. It predicts unemployment will climb to 10.3 percent in 2010 from 9.4 percent in 2009.

Euro Rejection?

German officials are already debating what was unthinkable to the euro’s architects: that a currency union designed in its founding treaty to be “irrevocable” might not be. Finance Minister Wolfgang Schaeuble said March 12 that expulsion from the euro may be the ultimate penalty for serial violators of debt rules.

Under current EU law, ejection is “legally next to impossible,” the ECB said in December. Changing the treaty requires unanimity among the EU’s 27 governments, so the euro’s current lineup -- likely to be joined by Estonia next year -- will have to find a way of making do.

Markets have rendered a mixed verdict on the euro’s resistance to the crisis. The currency’s decline below $1.24 for the first time since November 2008 from a record high of $1.60 in July 2008 still leaves it above the starting rate of $1.17. The euro is about 11 percent overvalued against the dollar, data compiled by Bloomberg of purchasing power parities show.

Maastricht Treaty

Greece’s ability to get into the euro illustrates what is wrong with Europe’s uncoordinated economic management. Greece, the EU’s poorest country at the time of Maastricht, set about cutting its budget deficit from 16.3 percent and persuading the Germans that it was serious about being fiscally prudent.

By 1996, with Greece’s deficit at 7.4 percent of GDP, Finance Minister Yannos Papantoniou was confident enough of making the grade that he pleaded for the euro’s paper money to feature the name “euro” in the Greek alphabet.

The German reaction wasn’t encouraging. Theo Waigel, Germany’s finance minister at the time, responded by saying he had “enough trouble in Germany trying to sell this idea of giving up the mark, and now you want me to put funny letters on it as well,” said Ruairi Quinn, then Irish finance minister, recalling the altercation at an April 1996 meeting in Verona, Italy. Waigel added that “it’s all irrelevant because you’re never going to qualify,” according to Quinn.

Greek Letters

The global economic boom of the late 1990s enabled Greece to meet the targets for deficits, debt, inflation, interest rates and currency stability. Greece joined the monetary union in 2001 and a year later, banknotes featuring generic architectural symbols and embossed with Greek lettering went into Europe-wide circulation.

Waigel started with a “very negative position,” said Papantoniou, 60, the Greek finance minister from 1994 to 2001. He responded to the German’s outburst in Verona by offering him “an appointment in two years’ time to check this out and you’ll change your mind.”

“Once we entered the euro, we forgot about the necessity of carrying on this structural effort and we now pay the price,” Papantoniou said. Waigel, now 71 and a lawyer at GSK Stockmann + Kollegen in Munich, wasn’t available to comment for this article.

What Societe Generale SA economist Dylan Grice dubs a “Greek tragedy” dates to 2004, when the new Conservative government of Costas Karamanlis accused its predecessor of fiddling the budget numbers to pass the euro test -- a charge Papantoniou denies. EU records now show that Greece has never brought its deficit under the limit.

‘Greek Drachma’

“Investors had always regarded the euro as a de jure German mark,” Louis Bacon, founder of the $15 billion hedge- fund firm Moore Capital Management LLC, wrote in an April 16 letter to investors who have made an annual return of 20.5 percent from his flagship fund during the past two decades. “It’s dawning on the world that it is becoming, de facto, a Greek drachma.”

Greece’s credit rating was cut to junk by Standard & Poor’s on April 27, making it the first euro member to lose its investment grade.

The nation’s slipping competitiveness was masked by an economic expansion buoyed by the euro-driven drop in bond yields to 3.23 percent in September 2005. Growth peaked at 5.9 percent in 2003, topping the euro zone that year. Unit labor costs that bounded ahead by as much as 10.2 percent in 2002 put Greece at a disadvantage to countries like Germany, where wages declined in 2004, 2005 and 2006.

‘New Odyssey’

Greece’s fiscal crisis was exposed after another change in government, from the conservatives back to the socialists last October. Prime Minister George Papandreou, elected on a promise of higher wages and benefits, is now on what he calls a “new Odyssey” that may end with the dismantling of the welfare state built by his father Andreas, Greek leader from 1981 to 1989 and 1993 to 1996.

Italy’s journey to the euro followed a similar script to Greece, from German opposition to reluctance to acceptance. Then the paths diverged. Italy kept its deficit under the limit five times in the euro’s first 11 years. Deficit-obsessed Germany has only done so six times.

Led by Prodi, Italy snuck under the deficit ceiling in 1997, the test year for the first group of euro aspirants, helped by a one-off “Eurotax” and a yen-denominated swap. Italy wasn’t alone in coming up with one-time savings and accounting dodges. France transferred pension funds from France Telecom SA to graze the 3 percent limit.

Bundesbank Bid

Even Waigel made an ill-fated bid to get the Bundesbank to boost the paper value of its currency reserves to reduce Germany’s debt.

Germany’s tight-money faction dictated the rules for the euro, yet it lost out when Waigel’s call for automatic sanctions on countries with deficit overruns was rejected by other governments in talks that culminated in Dublin in December 1996.

Prodi, who served two stints as Italian leader and ran the EU Commission from 1999 to 2004, said the “crisis isn’t unexpected. It came much later than I thought.”

The euro project is “half baked,” he said in an April 20 telephone interview. “You cannot have a monetary policy without coordination in fiscal and economic policy, because otherwise you will have problems.”

The budgetary lapses cloud EU efforts to quell Greece’s crisis and prevent a stampede by speculators against Portugal as well. Germany, for example, is again pressing for curbs on deficits as long as its own economy escapes closer oversight.

‘Fractious Mobilization’

Bickering over Greece, exacerbated by Germany overruling French opposition to making the International Monetary Fund part of a rescue, contributed to the euro’s slide this year against the dollar. Moody’s Investors Service cited the “fractious mobilization” of EU support as a reason why it cut Greece’s credit rating on April 22.

Spain, France and Germany have scoffed at a May 12 EU Commission proposal for more coordination of taxing and spending plans before they are voted on by national parliaments. The commission also urged more “expeditious” enforcement of the deficit rules, without calling for tougher fines on violators.

“The old idea that you discuss with peers your budgetary plans before they’re announced is very difficult to implement,” said Jean Pisani-Ferry, a Maastricht-era EU economic adviser who now runs the Bruegel research institute in Brussels. “It runs up against the politics.”

Last Updated: May 14, 2010 11:47 EDT

www.bloomberg.com/apps/news?pid=20601087&sid=a8CjGqGASv9E&pos=2

[sandi66]

Midwest Bank, other failures bring 2010 tally to 72

May 14, 2010, 7:39 p.m. EDT

SAN FRANCISCO (MarketWatch) -- The closure on Friday of Midwest Bank and Trust Co., which had over $5 billion in deposits and assets, helped bring the number of U.S. bank failures for the year to 72.

Midwest Bank /quotes/comstock/15*!mbhi/quotes/nls/mbhi (MBHI 0.15, -0.01, -3.33%) had disclosed in a regulatory filing earlier in the week that it likely would be placed in receivership because of undercapitalization. The bank had 23 branches, $2.42 billion in deposits and $3.17 billion in assets as of March 31, according to the Federal Deposit Insurance Corp.

Its failure will cost the deposit-insurance fund $216.4 million, the FDIC said.

Springfield, Mo.-based Southwest Community Bank was also closed by regulators Friday. Southwest Community Bank had $102.5 million in deposits as of March 31, the FDIC said, and its failure will cost the deposit-insurance fund $29 million.

Other banks closed Friday included Plymouth, Mich.-based New Liberty Bank, which had $101.8 million in deposits as of March 31, and St. Marys, Ga.-based Satilla Community Bank, which had $134 million in deposits as of March 31.

The closures of New Liberty Bank and Satilla Community Bank will cost the deposit-insurance fund a combined $56.3 million, the FDIC said

www.marketwatch.com/story/midwest-bank-other-failures-bring-10-tally-to-72-2010-05-14?siteid=rss&rss=1

[sandi66]

With Banks Under Fire, Some Expect a Settlement

Friday, 14 May 2010 | 10:07 AM ET

By: Nelson D. Schwartz and Eric Dash
The New York Times DiggBuzz FacebookTwitter More Share
It is starting to feel as if everyone on Wall Street is under investigation by someone for something.

News on Thursday that New York State prosecutors are examining whether eight banks hoodwinked credit ratings agencies opened yet another front in what is fast becoming the legal battle of a decade for the big names of finance.

Not since the conflicts at the center of Wall Street stock research were laid bare a decade ago, eventually resulting in a $1.4 billion industrywide settlement, have so many investigations swirled across the financial landscape.

Nearly two years after Washington rescued big banks with billions of taxpayer dollars, half a dozen government agencies are still trying, with mixed success, to peel back the layers of the collapse to determine who, if anyone, broke the rules.

The Securities and Exchange Commission, the Justice Department, the United States attorney’s office and more are examining how banks created, rated, sold and traded mortgage securities that turned out to be some of the worst investments ever devised.

Virtually all of the investigations, criminal as well as civil, are in their early stages, and investigators concede that their job is daunting. The S.E.C. has been examining major banks’ mortgage operations since last summer, but so far, it has filed a civil fraud claim against just one big player: Goldman Sachs [GS 143.23 -1.42 (-0.98%) ]. Goldman has vowed to fight.

But legal experts are already starting to handicap potential outcomes, not only for Goldman but for the broader industry as well. Many suggest that Wall Street banks may seek a global settlement akin to the 2002 agreement related to stock research. Indeed, Wall Street executives are already discussing among themselves what the broad contours of such a settlement might look like.

“I would be stunned if any of these cases go to trial,” said Frank Partnoy, a professor of law at the University of San Diego. “I think Wall Street needs to put this scandal behind it as quickly as possible and move on.”

As part of the 2002 settlement, 10 banks paid $1.4 billion total and pledged to change the way their analysts and investment bankers interacted to prevent conflicts of interest. This time, the price of any settlement would probably be higher and also come with a series of structural reforms.

David Boies, chairman of the law firm Boies, Schiller & Flexner, represented the government in its case against Microsoft [MSFT 28.93 -0.31 (-1.06%) ] and is now part of a federal challenge to California’s same-sex marriage ban. He said a settlement by banks might be painful but would ultimately be something Wall Street could live with. “The settlement may be bad for everyone, but not disastrous for anyone,” he said.

A settlement also would let the S.E.C. declare victory without having to bring a series of complex cases. The public, however, might never learn what really went wrong.

“The government doesn’t have the personnel to simultaneously prosecute several investment banks,” said John C. Coffee, a Columbia Law School professor.

The latest salvo came on Thursday from Andrew M. Cuomo, the New York attorney general. His office began an investigation into whether banks misled major ratings agencies to inflate the grades of subprime-linked investments.

Many Americans are probably already wondering why this has taken so long. The answer is that these cases are tricky, like the investments at the center of them.

But regulators also concede that they were reluctant to pursue banks aggressively until the financial industry stabilized. The S.E.C., for one, is now eager to prove that it is on its game after failing to spot the global Ponzi scheme orchestrated by Bernard L. Madoff, or head off the Wall Street excesses that nearly sank the entire economy.

The stakes are high for both sides. At a minimum, the failure to secure a civil verdict, or at least a mammoth settlement, would be another humiliation for regulators.

Wall Street wants to put this season of scandal behind it. That is particularly so given the debate over new financial regulations that is under way on Capitol Hill. The steady flow of new allegations could strengthen calls for tougher rules.

Even worse would be a criminal charge, which could put a firm out of business even if that firm were ultimately found not guilty, as was the case with the accounting giant Arthur Andersen after the fraud at Enron.

“No firm in the financial services field has the stomach for a criminal trial,” Mr. Coffee said.

Bankers have been reluctant until now to take their case to the public. But that is changing as Wall Street chieftains like Lloyd C. Blankfein of Goldman take to the airwaves and New York politicians warn that the city’s economy will be endangered by the attack on some of the city’s biggest employers and taxpayers.

“In New York, Wall Street is Main Street,” Gov. David A. Paterson has said. “You don’t hear anybody in New England complaining about clam chowder.”

There are broader political consequences as well. At the top, there is President Obama, who was backed by much of Wall Street in 2008. Many of those supporters now privately say they are disillusioned and frustrated by his attacks on their industry, which remains a vital source of campaign contributions for both parties.

Closer to home, the man who hopes to succeed Mr. Paterson, Mr. Cuomo, is painting himself as the new sheriff of Wall Street. Another attorney general, Eliot Spitzer, rode a series of Wall Street investigations to the governor’s mansion in 2006.

But ultimately, it is what Wall Street does best — making money — that is already on trial in the court of public opinion.

Put simply, the allegations against Wall Street were prompted by evidence that the firms may have devised and sold securities to investors without telling them they were simultaneously betting against them.

Wall Street firms typically play both sides of trades, whether to help buyers and sellers of everything from simple stocks to complicated derivatives complete their transactions, or to make proprietary bets on whether they would rise or fall.

These activities form half of the four-legged stool on which Wall Street’s profits and revenue rest, the others being advising on mergers and acquisitions and helping companies issue stocks, bonds and other securities.

“This case is a huge deal. It has the potential to be the mother of all Wall Street investigations,” said Mr. Partnoy of the University of San Diego. “The worry is that the government will go after dealings that Wall Street thought were insulated from review.”

Even some Wall Street executives concede that all the scrutiny makes proprietary trading a bit dubious. “The 20 guys in the room with the shades drawn are toast,” one senior executive of a major bank said.

Slideshow: A Rouges Gallery of Financial Crime
This story originally appeared in the The New York Times

www.cnbc.com/id/37149251

ty sheila and southtexan

[sandi66]

MELTUP - "The Beginning Of US Currency Crisis And Hyperinflation", The Viral Video

Submitted by Tyler Durden on 05/16/2010 06:08 -0500

www.zerohedge.com/article/meltup-beginning-us-currency-crisis-and-hyperinflation-viral-video

Click on the Video!!!!

www.zerohedge.com/article/meltup-beginning-us-currency-crisis-and-hyperinflation-viral-video

-------------------------------------------------------------------------



Fears Intensify that Euro Crisis Could Snowball

Published: Monday, 17 May 2010 | 3:52 AM ET

After a brief respite following the announcement last week of a nearly $1 trillion bailout plan for Europe, fear in the financial markets is building again, this time over worries that the Continent’s biggest banks face strains that will hobble European economies.

In a sign of the depth of the anxiety, the euro fell Friday to its lowest level since the depth of the financial crisis, as investors abandoned the currency as well as stocks in favor of gold and other assets seen as offering more safety.

In trading early Monday morning, the euro declined again, managing at one time to reach a four-year low relative to the dollar.

The president of the European Central Bank, Jean-Claude Trichet, in an interview published Saturday, warned that Europe was facing “severe tensions” and that the markets were fragile.

For Europe’s banks, the problems are twofold. Short-term borrowing costs are rising, which could lead institutions to cut back on new loans and call in old ones, crimping economic growth.

At the same time, seemingly safe institutions in more solid economies like France and Germany hold vast amounts of bonds from their more shaky neighbors, like Spain, Portugal and Greece.

Investors fear that with many governments groaning under the weight of huge deficits, the debt of weaker nations that use the euro currency will have to be restructured, deeply lowering the value of their bonds. That would hit European financial institutions hard, and may ricochet through the global banking system.

Bourses and bank shares in Europe plunged on Friday because of these fears, with Wall Street following suit. Shares were also down in Tokyo and Australia in early trading on Monday.

“This bailout wasn’t done to help the Greeks; it was done to help the French and German banks,” said Niall Ferguson, an economic historian at Harvard. “They’ve poured some water on the fire, but the fire has not gone out.”

The European rescue plan, totaling 750 billion euros, is intended to head off the risk of default but would vastly increase borrowing. That could hamstring Europe’s nascent recovery.

Indeed, it was too much debt that caused the problem in the first place: a new report by the International Monetary Fund warns that “high levels of public indebtedness could weigh on economic growth for years.”

The world’s budget deficit as a percentage of gross domestic product now stands at 6 percent, up from just 0.3 percent before the financial crisis. If public debt is not lowered back to precrisis levels, the I.M.F. report said, growth in advanced economies could decline by half a percentage point annually.

To be sure, not all of the trends are negative. A lower euro will actually make European exports — be it German automobiles or Italian leather — more affordable and more competitive around the world. And Greece, Spain and Portugal took the first steps last week toward enacting austerity measures that would reduce their budget deficits.

Those steps were not enough to prevent a flare-up in money market funds, a crucial but little-noticed corner of the financial system in which American investors provide more than $500 billion in short-term loans to help European banks finance their daily operations.

The cash comes from conservative funds that hold the savings of big American corporations and individual American consumers.

So far, the proposed rescue package has failed to ease worries at these funds, which have cut back on loans to European banks and are demanding higher rates and quicker repayment.

“More people are making the yes or no decision to pull out of the market and keep their money closer to home,” said Lou Crandall, the chief economist of Wrightson ICAP, a money market research firm.

Initially, it was Greek and Portuguese banks that got the cold shoulder from American lenders. But over the last two weeks big banks in Spain, Ireland and Italy have struggled to secure short-term funds from the United States as the anxiety has spread.

By Friday, even banks in solid European economies like France, Germany and the Netherlands were caught in the undertow, according to market analysts and traders.

“Investors are waiting to see whether the stability package can be put into place,” said Alex Roever, a short-term fixed-income analyst for J.P. Morgan Securities. “Until investors get a better feel, we are hung in limbo.”

Because of the pullback by American lenders, the rate banks charge one another for overnight loans, known as Libor for the London Interbank Offered Rate, has been steadily climbing. And the significance of Libor stretches far beyond Europe’s shores: that is the benchmark that helps determine the interest rate on many mortgages and credit cards held by American consumers.

Bank borrowing rates are still well below where they were at the height of the crisis. Fears that the problems in Europe could rebound in the United States, however, led the Federal Reserve to restart lines of credit to the European Central Bank and other central banks in conjunction with the European rescue package announced a week ago.

The move ensured that European institutions would be able to borrow dollars to lend to their clients, but that is more expensive than relying on private investors.

“We didn’t do so out of any special love for Europe,” Narayana R. Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, told a group of small-business owners in Wisconsin on Thursday. “We’re American policy makers, and we make decisions to keep the American economy strong.” However, he said, “The liquidity problems in European markets were showing signs of creating dangerous illiquidity problems in our own country’s financial markets.”

That is not the only domino that could fall.

While the direct exposure of American banks to Greece is minimal, American financial institutions are closely intertwined with many big European banks, which in turn have large investments in the weaker European nations.

For example, Portuguese banks owe $86 billion to their counterparts in Spain, which in turn owe German institutions $238 billion and French banks $220 billion. American banks are also big owners of Spanish bank debt, holding nearly $200 billion, according to the Bank for International Settlements, a global organization serving central bankers.

Furthermore, financial policy makers find themselves running out of weapons in their arsenal.

After borrowing trillions to stimulate their economies and ease credit concerns during the last wave of fear in late 2008 and early 2009, governments cannot borrow trillions more without risking higher inflation and shoving aside other borrowers like individuals and companies. Short-term interest rates, already near zero in the United States, cannot be lowered any further. And vital steps like raising taxes or cutting spending increases could snuff out the beginnings of a recovery in northern Europe and worsen the pain in recession-battered economies like Spain, where unemployment recently passed 20 percent.

With the exception of wartime, “the public finances in the majority of advanced industrial countries are in a worse state today than at any time since the industrial revolution,” Willem Buiter, Citigroup’s top economist, wrote in a recent report.

“Restoring fiscal balance will be a drag on growth for years to come.”

www.cnbc.com/id/37185573

[sandi66]

German Lawmaker Calls for Trichet's Resignation

Published: Monday, 17 May 2010 | 3:26 AM ET

... within the euro zone, a leading German lawmaker has called for ECB President Jean-Claude Trichet to resign.

Frank Schaeffler, an economist for Germany's Federal Democratic Party, said Axel Weber, the head of Germany’s central bank should replace the former head of the French central bank.

In an interview with Germany’s Handelsblatt Monday, Schaeffler said the purchase of junk assets is the "guillotine" for the euro and such developments must be stopped.

Trichet appears far more worried about government spending and has been pushing hard for fiscal consolidation across Europe. In an interview with Der Spiegel over the weekend, the central banker said Europe needs "a quantum leap" in how it collectively manages public finances having previously refrained from demanding an overhaul of fiscal rules.

"There need to be major improvements (in fiscal coordination) to prevent bad behavior, to ensure effective implementation of the recommendations made by peers and real and effective sanctions in case of breaches,” he said.

This is a view backed by German Chancellor Angela Merkel, who is pushing for a tightening of the euro zone's fiscal rules.

German Finance Minister Wolfgang Schauble will push this week for euro members to attempt to all but balance their budgets over the medium term and is expected to unveil plans at a working group meeting on Friday.

It will be difficult for Trichet in his last 18 months as Weber pushes to replace him, but it is unlikely he will have to stand down before his official term ends in 2011, Mark O'Sullivan, a director at Currencies Direct in London, said.

Until the recent debt crisis, Trichet has been seen as a safe pair of hands whose actions during the banking crisis had, to a large extent, been ahead of his peers at the Federal Reserve d ECB. He has worked in the area of debt restructuring for many years following his work at the Paris Club where he oversaw a number of crises in Asia and Latin America.

www.cnbc.com/id/37151238

[sandi66]

Geithner Meeting Barnier on Basel III Creates Capital Pressure

May 17 (Bloomberg) -- Two days after European Union leaders announced an almost $1 trillion plan to shore up debt markets, Michel Barnier, the EU’s financial services commissioner, was eating scones and sipping coffee with Timothy F. Geithner.

Also on the menu at the Washington meeting, Barnier’s first with the U.S. Treasury secretary: new international rules being considered by the Basel Committee on Banking Supervision. In a statement after the talks, the two men affirmed their commitment to push for “stronger capital and liquidity requirements.”

The May 12 meeting, one of a series Barnier held last week with U.S. bankers, regulators and government officials, signals the growing importance of politicians in setting global banking rules. The Basel committee is racing against a December deadline set by the Group of 20 nations, and banks faced with raising what UBS AG estimates may be $375 billion of fresh capital are appealing to nationalist sentiments to ease the pain.

“Governments have realized they need to be more involved in capital standards of their banks,” said V. Gerard Comizio, a former Treasury Department lawyer who is now a senior partner at Paul, Hastings, Janofsky & Walker LLP in Washington. “So the negotiation isn’t only among regulators now but is dragging in finance ministers and even heads of state.”

Driven by Politicians

The 36-year-old Basel committee, which sets international capital standards for banks, is rewriting those rules after the worst financial crisis in more than 70 years. An earlier revision, known as Basel II and initiated by lenders in the late 1990s during an era of deregulation, failed to prevent the collapse of European banks that adopted it. This time the process is driven by politicians, and bankers may have less influence, committee members and bank lobbyists say.

Negotiations over Basel II, which took six years to complete, lowered capital requirements by as much as 29 percent for some banks, according to a 2006 study by the Basel committee. The change represented a paradigm shift: Instead of relying on standardized formulas, Basel II let the largest banks use internal models to calculate the risks of their assets in determining the capital charges against them.

The current round of changes, informally known as Basel III, was spurred by G-20 leaders who urged the committee to improve the quantity and quality of bank capital, strengthen liquidity requirements and discourage excessive leverage.

The stakes are high. In addition to forcing banks to raise hundreds of billions of dollars, the rules could curtail lending, slow economic growth and eat into profits. JPMorgan Chase & Co. predicted in February that annual earnings at 13 of the largest banks would drop by $20 billion.

‘Different Animal’

While the new rules will continue to rely on banks’ risk models, they call for tighter control of what goes into those calculations, a narrower definition of what counts as capital and higher charges against holdings such as derivatives. The committee also may impose an as-yet-undetermined cap on the amount of assets a bank can have in relation to its equity.

“Basel III will be a very different animal,” said Charles Goodhart, a former Bank of England policy maker and professor at the London School of Economics. “We can say with conviction now that Basel II failed. It led to a relaxing of capital minimums. Regulators now understand the lessons and are trying to fix the problems.”

Banks are resisting, appealing to regulators and politicians in their home countries on the grounds that they would be disproportionately affected.

BNP, Deutsche Bank

Michel Pebereau, chairman of BNP Paribas SA, France’s largest bank, and Clemens Boersig, chairman of Deutsche Bank AG, Germany’s biggest, wrote to G-20 leaders last month on behalf of the European Financial Services Round Table, a lobbying group, saying the new rules would harm bank lending more than capital markets. “Most European countries mainly have a banking- dominated financial system,” they wrote, noting that credit outstanding as a percentage of gross domestic product is almost twice as high in the 27-nation EU as in the U.S.

U.S. banks have made opposite arguments in their meetings with regulators and in letters to the Basel committee: The rules will harm them more than European and Asian lenders. New definitions of capital wouldn’t count certain assets used only by U.S. banks, and the liquidity standards underrate the stability of deposits insured by the Federal Deposit Insurance Corp., the lenders said.

“A fair degree of national discretion will be essential,” the American Bankers Association wrote in April.

Liquidity Rules

Proposed liquidity rules, which would require banks to better match the maturities of their assets and liabilities, may cut European bank profits by 10 percent, Credit Suisse Group AG said in a May 10 report. The same rules will force U.S. lenders to raise $2 trillion through the sale of long-term debt, bank treasurers said at a meeting with regulators last month in Washington, according to three people who attended the session.

Deutsche Bank was among European lenders expressing concern that the U.S. might not adopt Basel III, as it didn’t implement Basel II, putting them at a disadvantage to American rivals.

“The United States continues to influence the Basel process but, in effect, treats the guidelines as optional,” Andrew Procter, the bank’s head of government and regulatory affairs, wrote to the committee. “Deutsche Bank believes that no other Basel committee members should move ahead with implementation until there is a clear timetable from the U.S.”

Obama administration officials say they’re committed to full implementation of Basel II by early 2011 and to working with the committee to devise stricter capital requirements. Basel III is scheduled to go into effect by the end of 2012.

Cross-Border Lobbying

While banks are pressing for more time before the rules are completed -- almost every letter they sent to the committee in April made such a plea -- Basel members say they expect agreement on the capital regulations by the end of the year as scheduled. Two said there may be a delay in reaching a consensus on liquidity requirements.

Some banks are looking across borders for allies in their attempts to water down or delay the new rules. The Securities Industry and Financial Markets Association, a U.S.-based trade group, has asked for meetings with Japanese, Brazilian, Chinese and Russian regulators to galvanize opposition, according to a person familiar with the group’s plans. Japanese, French and Canadian officials have argued that their banks didn’t suffer during the 2008 meltdown and don’t need to be punished.

Basel Tower

Regulators, central bankers and finance ministers from all G-20 countries sit on the Financial Stability Board set up last year to oversee the work of groups setting international standards. The FSB, which also includes representatives of organizations such as the International Monetary Fund, replaced the Financial Stability Forum, a think tank with no formal role that was created in 1999 after the Asian financial crisis.

The FSB is the mechanism through which governments can exert pressure, members say. About half of the 64 organizations represented on the FSB also have seats on the Basel committee, which brings together delegates from 44 supervisory agencies in 26 countries and Hong Kong.

The FSB is housed on the 11th floor of a round, 20-story glass tower in Basel, Switzerland, a city of 190,000 people better known for its international art fair and as the headquarters of drugmakers Novartis AG and Roche Holding AG. The executive offices of the Basel committee are one floor below.

The committee gathers four times a year around an oval table in Meeting Room D on the first floor of the building, according to one former participant. It doesn’t disclose the names of its members, publish minutes, or have a press officer. A request by Bloomberg News for a list of people attending meetings of the committee and more than a dozen subcommittees was turned down.

“I don’t think they’ve ever given those names,” said Lisa Weekes, a spokeswoman for the Bank for International Settlements, which is housed in the same tower and provides support staff. She said she didn’t know why.

‘Siamese Twins’

The committee is under pressure to finish negotiations by the end of December, a year after it published the first version of the new rules. The deadline was set by G-20 leaders in September.

Politicians on both sides of the Atlantic need to show constituents that they have addressed the underlying causes of the financial crisis, William Kennard, U.S. ambassador to the EU told European bankers last month. The EU and the U.S. need to collaborate on common rules, he said.

“There is a real imperative to get this right and to work in harmony,” Kennard said in a speech at the BNP Paribas Fortis auditorium in Brussels on April 26. “The notion that we could go in separate directions and both be successful just doesn’t exist. We’re kind of like Siamese twins.”

‘Political Pressure’

There’s enough of a consensus for reform in both the FSB and the Basel committee that national interests likely will be overcome, according to four members who belong to both groups. Issues that can’t be resolved will be settled by the G-20 leaders during a meeting in Seoul in November, they said.

“It’s good that there’s public and political pressure,” said Robert Pozen, chairman of Boston-based MFS Investment Management and author of the 2010 book “Too Big to Save.” “That will help new Basel rules become reality. It’s no longer possible, given what’s happened in the last few years, for the Basel process to be apolitical.”

Slower Growth

A Basel accord is also important for the future of the G- 20, said Barbara Ridpath, chief executive of the International Centre for Financial Regulation, a research organization in London funded by banks and the U.K. government.

“If the G-20 does not manage to get consensus on key financial-sector reforms in most major jurisdictions, it will lose authority,” she said.

Nout Wellink, president of the Dutch central bank and chairman of the Basel committee, has said the planned reforms may lower global economic growth by as much as 1 percentage point. That’s a price worth paying for a stable financial system worldwide, he told the Financial Times on May 4. His comments to the newspaper were confirmed by his office.

National regulators are completing studies this month of the impact the proposed rules will have on their banks. The Basel committee’s Policy Development Group is scheduled to meet in June to evaluate the results. The full committee will take up the matter in July. Another round of studies, on the economic impact of the rules, will be done this year in coordination with the IMF and the FSB.

‘Balancing Act’

“There’s a balancing act that the politicians need to play, between making the system really safe and keeping it relevant,” said Mark Flannery, a finance professor at the University of Florida in Gainesville who has tracked Basel for two decades. “If you restrict the banks too much, financial activity will be curtailed or it will shift to non-banking institutions, making the rules irrelevant.”

The first Basel agreement came about more than two decades ago when the U.S. and U.K. encouraged other countries to adopt their new capital requirements, according to the 2008 book “Banking on Basel” by Daniel K. Tarullo. The rules were aimed at increasing the capital banks had to hold as a buffer against losses after the 1980s Latin American debt crisis, when some U.S. banks failed or were bailed out by the government.

The Basel committee, which had only 12 members at the time, took less than a year to hammer out an agreement. More than 100 nations adopted the rules.

Championed by Banks

Basel II, by contrast, was championed by banks, which argued that a more modern approach to risk management had emerged and needed to become the basis for capital regulation. The push was led by the largest U.S. banks and the Federal Reserve Bank of New York, headed at the time by William McDonough, chairman of the Basel committee during most of the negotiations and later vice chairman of Merrill Lynch & Co., according to four people involved in the talks.

The views of the lenders were incorporated into four drafts produced by the committee, according to the people. Political leaders weren’t involved in the talks, they said.

After the rules were promulgated in 2004, U.S. community banks helped slow their implementation, the people said. They lobbied congressional lawmakers saying the new standards would give an unfair advantage to the largest banks because they were the only ones able to invest in the complicated risk-management systems on which Basel II was based.

Basel II Slowdown

Under pressure from Congress, which held hearings on the matter, the Fed and other regulators drew out the implementation of Basel II, setting up hurdles that needed to be cleared before banks would be allowed to reduce their capital. The largest U.S. banks are on schedule to complete the process by the first quarter of 2011, four years after many European countries put the rules into effect, regulators say.

Goldman Sachs Group Inc., Morgan Stanley, Lehman Brothers Holdings Inc., Bear Stearns Cos. and Merrill Lynch were allowed in 2005 by their regulator, the U.S. Securities and Exchange Commission, to base their capital needs on internal risk models, which led to an increase in leverage levels over two years to 31 times equity on average from 24 before the rule change. Lehman filed for bankruptcy in 2008, while Merrill and Bear Stearns were forced into shotgun marriages with bigger rivals.

“If we had implemented Basel II, we’d be in more trouble,” said Hal Scott, a Harvard Law School professor who specializes in international finance. “One pocket of our financial system did adopt Basel II, the biggest investment banks. Look at what happened to them.”

Rules Arbitrage

The financial crisis was a result of banks taking advantage of different rules on the two sides of the Atlantic, said Goodhart, the London School of Economics professor.

European lenders could buy as many AAA-rated mortgage bonds as they wanted, since they had no leverage caps and their Basel II models treated the securities as almost riskless, he said. U.S. commercial banks, which had leverage limits, kept the riskiest and smallest tranches of the same securities because they didn’t have to post additional capital that Basel II would have required.

Basel III is an attempt to rectify that problem by changing the way banks calculate such risk, proponents say. It also would create a buffer above the minimum capital requirement and force banks to cut dividends if their capital falls below that level as a way of keeping them from lowering capital in good times.

Because the new rules are technical in nature, politicians aren’t involved in the day-to-day debates, members of the Basel committee and its subcommittees said. They will have a say on issues where regulators from different countries can’t resolve their differences, they said.

Geithner, Barnier

Geithner, 48, is expected to get more involved after Congress passes financial reform legislation, according to a European official who has discussed the issue with him.

Barnier, 59, who was in charge of the 1992 Olympic Winter Games in Albertville, France, is already working “hand in hand” with the Basel committee to translate its rules into EU directives, he said last month.

There are still many questions to resolve: how derivatives contracts are netted when they’re calculated in total assets; whether the leverage caps will be binding; how liquid assets are defined; if there should be a supranational regulator. The leverage requirement, favored by European and U.S. politicians and included in two G-20 statements last year, is opposed by some EU regulators, reflecting the largest European banks’ concern that they will have to shrink more than U.S. counterparts under the rule.

Wall Street Workaround

In addition to playing those differences, the banks have another trump card they’ll likely use: FSB chairman Mario Draghi. The Italian central banker, a former Goldman Sachs vice chairman, has been more sympathetic to the banks’ views than most other members, lobbyists say.

The FSB’s top priority this year is to complete the reform of Basel rules, Draghi said at a news conference last month.

“We should not dilute the long-term objectives of the reform, but be open to appropriate transition times not to hurt our banks and our economies,” he said.

Even when new Basel rules get implemented, lenders may find ways around the rules, said Joseph Mason, a professor of finance at Louisiana State University in Baton Rouge.

“Wall Street will always have more lawyers and more accountants and more brains than the regulators,” Mason said. “They’ll always innovate, come up with new things to arbitrage the rules. It’s not really the rules, but how regulators look at the full picture and see problems before they develop. That’s far from certain going forward, regardless of what Basel III achieves in fixing past problems.”

To contact the reporters on this story: Yalman Onaran in New York at [e-mail]; Simon Clark in London at [e-mail]; Joseph Heaven in Zurich at [e-mail].

Last Updated: May 16, 2010 19:01 EDT

www.bloomberg.com/apps/news?pid=20601109&sid=avpB.E2XOO_k&pos=11

[sandi66]

Canada's financial crisis - who can explain this colossal mess?
CALGARY, May 17 /CNW/ - It happened in 1984, and 1998, and again in 2008. Given the mess on Wall Street and the global economy, it's coming again to Canada, of that you can be sure. But why, and who can explain it?


Event: "Colossal Calgary" featuring Lawrence McDonald, Wall Street
insider on the global financial crisis
Date: June 03, 2010
Time: 3:30 pm - 6:00 pm
Venue: TELUS Convention Centre
Tickets: ColossalCalgary.com

Lawrence McDonald, the media's go-to man on the financial crisis, can explain it all, and he's coming to Calgary on June 03. McDonald is the only Wall Street insider on tour, with over 20 media appearances in the past five weeks and now guest-host or contributor on CNBC, BNN, France 24, BBC World, BBC America, Barron's, Channel 4 News London, Bloomberg TV, Fox TV, and CBC News Canada. This is an eye-opening presentation you don't want to miss.

"In today's investing world," says McDonald "you must have a keen eye on all the markets to avoid those 1,000 point right hooks that can knock you out of the game."

We almost got knocked out of the game earlier this month. On May 6, 2010 extraordinary market action was witnessed when the Dow Jones Industrial Average fell by 9% in a few short minutes. Visions of October 2008 flashed before our eyes for a moment before the market rebounded. But what if it hadn't rebounded? Could we bail ourselves out?

It turns out the trillion-dollar European bailout may not have been much of a bailout after all. Even worse, the pundits are using the action stemming from Greece as foreshadowing of what's to come here in the United States and Canada.

Come learn from Lawrence McDonald, a trader who goes beyond foreshadowing, and peels away the layers within Wall Street and high finance. Larry brings Wall Street to Main Street - and we need his insight.

McDonald will bring you inside Wall Street and show you the money making secrets hedge funds and trading desks use to stay one step ahead of the crowd. Risk Management, CDS, High Yield bonds, Convertible bonds, Bank debt and Leveraged Loans, Foreign Exchange, Commercial and residential mortgage backed securities all play a part.

Mr. McDonald will be presenting at "Colossal Calgary" a one-time event June 03, 2010. Information and registration is at ColossalCalgary.com. Tickets are only $125 (plus fees and tax), tables of ten are $1,000 (plus fees and tax).


Event: "Colossal Calgary" featuring Lawrence McDonald, Wall Street
insider on the global financial crisis
Date: June 03, 2010
Time: 3:30 pm - 6:00 pm
Venue: TELUS Convention Centre
Tickets: ColossalCalgary.com

About CIRI - event organizer


CIRI is a professional, not-for-profit association of executives responsible for communication between public corporations, investors and the financial community. CIRI is dedicated to advancing the stature and credibility of the investor relations profession and the competency of its members. Visit www.ciri.org for more information.


About communicatto - event marketing


communicatto is a social media, digital marketing, public relations, and investor relations agency helping companies integrate new and old media. More information on communicatto can be found at www.communicatto.com.


About CNW - official newswire of Colossal Calgary


CNW is celebrating 50 years of connecting organizations to relevant news and information consumers. Established in 1960, CNW is more than just a newswire service, offering communications and disclosure services designed to help clients work more efficiently and meet their objectives. www.newswire.ca


Friends of Colossal


Many thanks to the following organizations for supporting Colossal Calgary: Digital Alberta, CPRS Calgary, CSCS Alberta, IABC Calgary, XBRL Canada


For further information: Rhonda Bennetto, President CIRI Alberta, [phone], [e-mail]; Media inquiries: Doug Lacombe, President, communicatto, [phone], [e-mail]

www.newswire.ca/en/releases/archive/May2010/17/c4207.html

[sandi66]

ICE Futures U.S. President and Chief Operating Officer to Present at Macquarie Global Securities Industry Conference

May 17, 2010, 12:25 p.m. EDT

ATLANTA, May 17, 2010 /PRNewswire via COMTEX/ -- IntercontinentalExchange, Inc. /quotes/comstock/13*!ice/quotes/nls/ice (ICE 117.83, -0.36, -0.31%) , a leading operator of regulated global futures exchanges, clearing houses and over-the-counter (OTC) markets, announced today that Thomas W. Farley, President and Chief Operating Officer of ICE Futures U.S., will speak at the Macquarie Global Securities Industry Conference. The presentation will take place in New York, New York on Tuesday, May 18 at 8:10am ET. The presentation will be broadcast live over the Internet and can be accessed via the "Investors & Media" page of ICE's website at www.theice.com.

(Logo: photos.prnewswire.com/prnh/20090727/CL51999LOGO )

About IntercontinentalExchange

IntercontinentalExchange(R) /quotes/comstock/13*!ice/quotes/nls/ice (ICE 117.83, -0.36, -0.31%) is a leading operator of regulated futures exchanges and over-the-counter markets for agricultural, credit, currency, emissions, energy and equity index contracts. ICE Futures Europe(R) hosts trade in half of the world's crude and refined oil futures. ICE Futures U.S.(R) and ICE Futures Canada(R) list agricultural, currencies and Russell Index markets. ICE(R) is also a leading operator of central clearing services for the futures and over-the-counter markets, with five regulated clearing houses across North America and Europe. ICE serves customers in more than 55 countries. www.theice.com ICE-CORP

The following are trademarks of IntercontinentalExchange, Inc. and/or its affiliated companies: IntercontinentalExchange, Intercontinental Exchange & Design, ICE and ICE Futures U.S. For more information regarding registered trademarks owned by IntercontinentalExchange, Inc. and/or its affiliated companies, see www.theice.com/terms.jhtml.

SOURCE IntercontinentalExchange

www.marketwatch.com/story/ice-futures-us-president-and-chief-operating-officer-to-present-at-macquarie-global-securities-industry-conference-2010-05-17?reflink=MW_news_stmp

[sandi66]

Obama Administration Apologizes to China for Arizona Law - The Diplomacy of Cringing, Craven Groveling

During talks on human rights, Assistant Secretary of State Michael Posner actually apologized to his Chinese counterparts for the Arizona anti illegal immigration law, among other things. Eyebrows are already being raised by the spectacle.

According to the AP:
"Posner said in addition to talks on freedom of religion and expression, labor rights and rule of law, officials also discussed Chinese complaints about problems with U.S. human rights, which have included crime, poverty, homelessness and racial discrimination.

"He said U.S. officials did not whitewash the American record and in fact raised on its own a new immigration law in Arizona that requires police to ask about a person's immigration status if there is suspicion the person is in the country illegally."

Sometimes words nearly fail when confronted by a story like this. China is ruled by a fascist, totalitarian government that, since Mao established the Communist regime in 1949, has slaughtered 100 million of its own people.

Presently China regularly violates the human rights of its own citizens, especially ethnic and religious minorities. China censors the media, including the Internet. China even requires internal passports for its own citizens to travel from one part of the country to another. Finally, China has embarked on a drive for military power and eventual super power supremacy, threatening its neighbors.

Let us not forget the massacre at Tiananmen Square where, 21 years ago, the Chinese regime sent in tanks and troops with bayonets to slaughter a group of peaceful, student protestors.
The reaction by Hot Air's Ed Morrissey was typical:

"It doesn't make the Obama administration sound 'mature' to call Arizona racist for tasking its law enforcement agencies with enforcing the law. It makes them look illiterate, closed-minded, and weak. Maybe Posner should focus on China's long record of oppression, slave labor, political executions, and heavy-handed censorship — and join Arizona in demanding that the federal government start enforcing the laws that have existed for decades on immigration."

sarge_66: Stipulating that the US State Department has had its share of craven people like Michael Posner since probably Thomas Jefferson was Secretary of State, kowtowing to the Chinese about the Arizona anti illegal immigration law pushes the envelope of cringing, craven behavior. It would be as if someone had apologized to Adolf Hitler in the 1930s for segregation in the South. The only difference is that segregation in the South really was a blot on American civilization, whereas the Arizona law is a mild attempt to enforce immigration statutes that the federal government seems unwilling to do.

Michael Posner should resign immediately, of course, and apologize to the American people for besmirching American honor to tyrants. He is not likely to do so. Sadly Posner has not gone rogue, but rather is carrying out Obama administration policy to grovel before the world for sins real and imagined. The work of repairing the damage will be one of years.

Sources: No breakthroughs in US, China human rights talks, Foster Klug, AP. May 14th, 2010

Obama administration to China: Sorry about that racist AZ law, Ed Morrissey, Hot Air, May 17th, 2010

www.associatedcontent.com/article/3010848/obama_administration_apologizes_to.html?cat=9

[sandi66]

China boosts holdings of US Treasury debt by 2 pct

Mon May 17, 12:01 pm ET
WASHINGTON – China boosted its holdings of U.S. Treasury debt for the first time in six months. That development could ease concerns that lagging foreign demand will force the U.S. government to pay higher interest rates to finance its debt.

The Treasury Department reported Monday that China's holdings of U.S. Treasury securities rose in March 2 percent to $895.2 billion, the first increase since last September.

Total foreign holdings of Treasury securities rose 3.5 percent to $3.88 trillion.

The government reported that net holdings of long-term securities, which includes the debt of U.S. companies as well as government debt, rose $140.5 billion in March, the largest one-month gain on record. It surpassed the old record of a net increase of $135.8 billion in May 2007.

The big increase was influenced by two factors: a flight to safety by investors increasingly worried about the debt crisis in Europe; and a rebounding U.S. economy which has sparked greater interest by foreigners in purchasing U.S. corporate debt.

Investors have grown nervous about the ability of Greece and other heavily indebted nations to repay their debt. Last week, European nations and the International Monetary Fund assembled a nearly $1 trillion support package to convince investors that their bond holdings are safe. But markets have remained nervous.

Stocks slid Monday after the euro hit a four-year low. The Dow Jones industrial average fell more than 100 points in midday trading.

Gregory Daco, an economist at IHS Global Insight, said as the Greek debt crisis began to intensify in March, foreign investors sought refuge in the safety of U.S. Treasury bonds and notes. He said the rebound in the U.S. economy was also helping to attract investors to bonds issued by U.S. companies.

The overall U.S. economy, as measured by the gross domestic product, grew at an annual rate of 3.2 percent in the first three months of this year. It was bolstered by the strongest gain in consumer spending in three years.

"The strong first quarter real GDP and productivity growth as well as the recent surge in the dollar should continue to draw in foreign investment," Draco predicted.

Win Thin, senior currency strategist at Brown Brothers Harriman & Co. in New York, said he expected investors to continue to favor dollar-denominated assets over holdings in the euro, the common currency of 16 European countries including Greece.

"Given the debt crisis that Europe is struggling with, flight to safety will most likely favor the United States in quarter two," Thin said. "Really, would any reserve manager be moving aggressively into euros this past few months?"

Net purchases of long-term U.S. debt had increased $47.1 billion in February after an increase of $15 billion in January.

Those gains were seen as a good sign that foreigners continue to be interested in U.S. debt securities even in a period when Treasury debt has soared.

China is the largest foreign holder of U.S. Treasury securities. The $17.7 billion increase in March left its holdings at the highest level since November.

Japan, the No. 2 foreign holder of Treasury securities, also increased its holdings in March. It raised them 2.1 percent to $784.9 billion.

news.yahoo.com/s/ap/20100517/ap_on_bi_ge/us_foreign_holdings


ty nalmann

[sandi66]

U.S. to Press Pakistan on Bomb Plot Inquiry
By ERIC SCHMITT and MARK LANDLER
Published: May 17, 2010

WASHINGTON — The White House is dispatching two senior national security aides to Pakistan this week to press the government there to intensify efforts to investigate the failed Times Square bomb plot and prevent others like it, administration officials said Monday

Gen. James L. Jones, the national security adviser, and Leon E. Panetta, the C.I.A. director, left Washington on Monday night, in the highest-level American visit to Pakistan, the authorities say, since Faisal Shahzad, a naturalized Pakistani immigrant, drove a crude car bomb into Times Square on May 1.

A senior administration official said General Jones would not threaten the Pakistanis, but would convey the risks to the country’s relationship with the United States if a deadly terrorist attack originated there. He plans to prod them to take tougher steps against the Taliban and other insurgent groups, the official said.

The American officials and their Pakistani counterparts are expected to compare information collected by each side on the Times Square case, examine what vulnerabilities it reveals, and decide what additional military, law enforcement and intelligence-gathering actions need to be taken.

“In light of the failed Times Square terrorist attack and other terrorist attacks that trace to the border region, we believe that it is time to redouble our efforts with our allies in Pakistan to close this safe haven and create an environment where we and the Pakistani people can lead safe and productive lives,” Michael A. Hammer, a National Security Council spokesman, said by e-mail Monday night.

While General Jones’s specific requests were not clear, the senior administration official said he might ask Pakistan’s military to push harder into North Waziristan, the main base for the Pakistani Taliban, Al Qaeda and other militant groups. Mr. Shahzad, 30, has told investigators that he trained in North Waziristan, but Pakistan has said it is still preoccupied trying to hold South Waziristan and Swat.

“There is creeping frustration,” said the administration official, speaking on the condition of anonymity because he was not authorized to speak publicly. “Some people are asking, ‘Why are they not going into North Waziristan?’ ”

Among the other possible American requests, this official said, were more intense surveillance of suspected terrorists and allowing more American military advisers to operate in Pakistan.

The United States is also proposing to open a new consulate in Quetta, in southwestern Pakistan, where the C.I.A. would likely have a sizable presence. “Panetta’s devoted a lot of time and energy to building strong relationships with the Pakistanis, and it’s paid off in terms of their cooperation,” said another American official, who was not authorized to discuss the trip.

The official said Pakistani investigators “have done some good work on the Shahzad case, too, and it’s important for them to have as fresh a picture as possible of how the United States views the threat from the tribal areas.”

American intelligence officials have expressed growing concern about the increasingly intertwined network of Islamic extremist groups operating in and around Pakistan’s tribal areas.

Soon after the failed attack, Pakistani authorities arrested Muhammad Rehan, who they said had spent time with Mr. Shahzad during a recent visit to the Pakistani city of Karachi. Mr. Rehan was arrested in Karachi at a mosque known for its links with the militant group Jaish-e-Muhammad.

“Shahzad was able to connect with people in Pakistan who traveled with him to North Waziristan and back,” said another official who has been briefed on the inquiry. “How he did that without the Pakistani intelligence service knowing about it is a worry.”

The official suggested this indicated that the Pakistani Taliban was working with other Islamic militant groups to facilitate their training, logistics and operations. “These guys have been able to subcontract ways around detection,” he said.

The administration is treading carefully to avoid a repeat of the negative reaction in Pakistan to Secretary of State Hillary Rodham Clinton’s recent warning that there would be “very severe consequences” for Pakistan if there were a terrorist attack originating from there.

Instead, the administration sees the Times Square plot as a reason to push the Pakistanis to do several things it has long desired. “Sometimes things like this are an opportunity,” the official said.


www.nytimes.com/2010/05/18/world/asia/18pstan.html