"Ice storm causes blackouts, deaths"

By KEN MILLER, Associated Press Writer

10 December 2007

OKLAHOMA CITY - A wintry storm caked the center of the nation with a thick layer of ice Monday, blacking out more than half a million homes and businesses, and more icy weather was on the way.

At least 13 people were killed on icy highways.

A state of emergency was declared for the entire state of Oklahoma.

In Oklahoma City, the sound of branches snapping echoed through many neighborhoods.

"You can hear them falling everywhere," Lonnie Compton said Monday as he shoveled ice off his driveway.

The National Weather Service posted ice and winter storm warnings Tuesday for parts of Missouri, Kansas, Nebraska, Iowa and Illinois.

Missouri declared an emergency on Sunday and put the National Guard on alert.

Oklahoma utilities said some 400,000 customers were blacked out as power lines snapped under the weight of ice and falling tree branches, and utilities in Missouri said more than 100,000 homes and business had no power there.

Roughly 11,000 were blacked out in southern Illinois and more than 5,000 had no electric heat or lights in Kansas, where Gov. Kathleen Sebelius was expecting requests from several counties for emergency declarations.

Ice was as much as an inch thick on tree limbs and power lines in parts of Missouri.

Schools across Oklahoma were closed and some hospitals were relying on backup power generators.

Fifty generators and three truckloads of bottled water were to be shipped to blacked-out areas of the state.

Tulsa International Airport had no power and halted flight operations, and most morning flights at Will Rogers World Airport in Oklahoma City were canceled because of icy runways.

Greyhound bus passengers were stranded overnight at a shelter in a church in Tulsa, and were joined by some local residents who had no heat.

There was no way to estimate when power might be restored, said Oklahoma Gas & Electric spokesman Gil Broyles.

"This is a big one."

"We've got a massive situation here and it's probably going to be a week to 10 days before we get power on to everybody," said Ed Bettinger, a spokesman for Public Service Company.

"It looks like a war zone."

The Oklahoma City suburb of Jones, a town of 2,500 people, had low water pressure because there was no electricity to run well pumps, and firefighters said an early morning fire destroyed most of the community's high school.

The icy weather stretched into the Northeast, where many schools across upstate New York were closed or started late because of icy roads.

On ice-covered Interstate 40 west of Okemah, Okla., four people died in "one huge cluster of an accident" that involved 11 vehicles, said Highway Patrol Trooper Betsey Randolph.

Eight other people also died on icy Oklahoma roads, and Missouri had one death on a slippery highway.

In addition, a homeless person died of hypothermia in Oklahoma City, the state medical examiner's office said.
___

Associated Press writers Jeff Latzke in Oklahoma City, Marcus Kabel in Springfield, Mo., John Milburn in Topeka, Kan., and Cheryl Wittenauer in St. Louis contributed to this report.

"Ex-CIA agent: Waterboarding OK'ed at top"

By PAMELA HESS, Associated Press

Last updated: 1:53 p.m., Tuesday, December 11, 2007

WASHINGTON -- The CIA's waterboarding of a top al-Qaida figure was approved at the top levels of the U.S. government, a former CIA agent said Tuesday as Congress grilled agency director Gen. Michael Hayden about the destruction of videotapes of terror suspect interrogations.

According to the former agent, waterboarding of Abu Zubaydah got him to talk in less than 35 seconds.

The technique, which critics say is torture, probably disrupted "dozens" of planned al-Qaida attacks, said John Kiriakou, a leader of the team that captured Zubaydah, a major al-Qaida figure.

Kiriakou did not explain how he knew who approved the interrogation technique but said such approval comes from top officials.

"This isn't something done willy nilly."

"This isn't something where an agency officer just wakes up in the morning and decides he's going to carry out an enhanced technique on a prisoner," he said Tuesday in a round of television news show appearances.

"This was a policy made at the White House, with concurrence from the National Security Council and Justice Department."

At the White House, press secretary Dana Perino said the CIA interrogation program approved by the president is safe, tough, effective and legal.

But she said that Hayden will not "talk about techniques and explain to the enemy what we are doing" during two days of questioning before closed sessions of the Senate and House intelligence panels.

"It's no secret that the president approved a lawful program in order to interrogate hardened terrorists," Perino said.

"We do not torture."

"We also know that this program has saved lives by disrupting terrorist attacks."

Kiriakou said that each time CIA agents wished to use waterboarding or any other harsh interrogation technique, they had to present a "well-laid out, well-thought out reason" to top government officials.

In Zubaydah's case, Kiriakou said the waterboarding had immediate effect.

"The next day, he told his interrogator that Allah had visited him in his cell during the night and told him to cooperate," Kiriakou said in an interview first broadcast Monday evening on ABC News' World News.

"From that day on, he answered every question."

"The threat information he provided disrupted a number of attacks, maybe dozens of attacks."

Zubaydah, the first high-value detainee taken by the CIA in 2002, is now being held with other detainees at the U.S. base at Guantanamo Bay, Cuba.

He told his interrogators about alleged 9/11 accomplice Ramzi Binalshibh, and the two men's confessions also led to the capture of Khalid Sheikh Mohammed, whom the U.S. government said was the mastermind behind the Sept. 11 terrorist attacks.

As to the CIA videotapes, President Bush said he didn't know about the tapes or their destruction until last week.

"My first recollection of whether the tapes existed or whether they were destroyed was when Michael Hayden briefed me," Bush said in an interview Tuesday with ABC News.

"There's a preliminary inquiry going on and I think you'll find that a lot more data, facts will be coming out," the president said.

"That's good."

"It will be interesting to know what the true facts are."

Waterboarding is a harsh interrogation technique that involves strapping down a prisoner, covering his mouth with plastic or cloth and pouring water over his face.

The prisoner quickly begins to inhale water, causing the sensation of drowning.

The CIA is known to have waterboarded three prisoners -- Zubaydah, Khalid Sheik Muhammed, and Abd al-Rahim al-Nashiri, whom the U.S. government says coordinated the 2002 attack on the USS Cole.

The CIA has not used the technique since 2003, according to a government official familiar with the program.

Hayden prohibited waterboarding in 2006.

The U.S. military outlawed it the same year.

Hayden told CIA employees last week that the CIA taped the interrogations of two alleged terrorists in 2002.

He said the harsh questioning was carried out only after being "reviewed and approved by the Department of Justice and by other elements of the Executive Branch."

Hayden said Congress was notified in 2003 both of the tapes' existence and the agency's intent to destroy them.

The CIA destroyed the tapes in November of 2005.

Exactly when Congress was notified and in what detail is in dispute.

Senate Intelligence Committee Chairman Jay Rockefeller, D-W.Va., said the CIA claims it told the committee of the tapes' destruction at a hearing in November 2006.

Rockefeller said, however, that the hearing transcript found no mention of that subject.

The House committee first learned the tapes had been destroyed in March 2007, according to Committee Chairman Rep. Silvestre Reyes, D-Texas.

The Justice Department and CIA's independent internal watchdog have begun a preliminary inquiry into the destruction of the tapes.

The review will determine whether a full investigation is warranted, Mukasey said.

He promised an objective review.

Assistant Attorney General Kenneth Wainstein, who is heading the inquiry, "is going to go where the facts lead him," Mukasey said at a news conference.

"If the law leads him someplace we are going to go there too."

Mukasey told reporters he has not determined whether waterboarding is torture, an issue that jeopardized his confirmation by the Senate last month.

He said he is reviewing the Bush administration's legal opinions that underpin the CIA interrogation and detention program to determine if they are sound, and if so, whether the CIA's interrogation program conforms with them.

Mukasey declined to speculate whether an independent prosecutor would be needed to get to the bottom of the matter, calling that "the most hypothetical of hypotheticals."

"Ominous Arctic melt worries experts"

By SETH BORENSTEIN, Associated Press

Last updated: 3:13 p.m., Tuesday, December 11, 2007

WASHINGTON -- An already relentless melting of the Arctic greatly accelerated this summer, a warning sign that some scientists worry could mean global warming has passed an ominous tipping point.

One even speculated that summer sea ice would be gone in five years.

Greenland's ice sheet melted nearly 19 billion tons more than the previous high mark, and the volume of Arctic sea ice at summer's end was half what it was just four years earlier, according to new NASA satellite data obtained by The Associated Press.

"The Arctic is screaming," said Mark Serreze, senior scientist at the government's snow and ice data center in Boulder, Colo.

Just last year, two top scientists surprised their colleagues by projecting that the Arctic sea ice was melting so rapidly that it could disappear entirely by the summer of 2040.

This week, after reviewing his own new data, NASA climate scientist Jay Zwally said:

"At this rate, the Arctic Ocean could be nearly ice-free at the end of summer by 2012, much faster than previous predictions."

So scientists in recent days have been asking themselves these questions:

Was the record melt seen all over the Arctic in 2007 a blip amid relentless and steady warming?

Or has everything sped up to a new climate cycle that goes beyond the worst case scenarios presented by computer models?

"The Arctic is often cited as the canary in the coal mine for climate warming," said Zwally, who as a teenager hauled coal.

"Now as a sign of climate warming, the canary has died."

"It is time to start getting out of the coal mines."

It is the burning of coal, oil and other fossil fuels that produces carbon dioxide and other greenhouse gases, responsible for man-made global warming.

For the past several days, government diplomats have been debating in Bali, Indonesia, the outlines of a new climate treaty calling for tougher limits on these gases.

What happens in the Arctic has implications for the rest of the world.

Faster melting there means eventual sea level rise and more immediate changes in winter weather because of less sea ice.

In the United States, a weakened Arctic blast moving south to collide with moist air from the Gulf of Mexico can mean less rain and snow in some areas, including the drought-stricken Southeast, said Michael MacCracken, a former federal climate scientist who now heads the nonprofit Climate Institute.

Some regions, like Colorado, would likely get extra rain or snow.

More than 18 scientists told The AP that they were surprised by the level of ice melt this year.

"I don't pay much attention to one year ... but this year the change is so big, particularly in the Arctic sea ice, that you've got to stop and say, 'What is going on here?'"

"You can't look away from what's happening here," said Waleed Abdalati, NASA's chief of cyrospheric sciences.

"This is going to be a watershed year."

2007 shattered records for Arctic melt in the following ways:

-- 552 billion tons of ice melted this summer from the Greenland ice sheet, according to preliminary satellite data to be released by NASA Wednesday.

That's 15 percent more than the annual average summer melt, beating 2005's record.

-- A record amount of surface ice was lost over Greenland this year, 12 percent more than the previous worst year, 2005, according to data the University of Colorado released Monday.

That's nearly quadruple the amount that melted just 15 years ago.

It's an amount of water that could cover Washington, D.C., a half-mile deep, researchers calculated.

-- The surface area of summer sea ice floating in the Arctic Ocean this summer was nearly 23 percent below the previous record.

The dwindling sea ice already has affected wildlife, with 6,000 walruses coming ashore in northwest Alaska in October for the first time in recorded history.

Another first: the Northwest Passage was open to navigation.

-- Still to be released is NASA data showing the remaining Arctic sea ice to be unusually thin, another record.

That makes it more likely to melt in future summers.

Combining the shrinking area covered by sea ice with the new thinness of the remaining ice, scientists calculate that the overall volume of ice is half of 2004's total.

-- Alaska's frozen permafrost is warming, not quite thawing yet.

But temperature measurements 66 feet deep in the frozen soil rose nearly four-tenths of a degree from 2006 to 2007, according to measurements from the University of Alaska.

While that may not sound like much, "it's very significant," said University of Alaska professor Vladimir Romanovsky.

Greenland, in particular, is a significant bellwether.

Most of its surface is covered by ice.

If it completely melted -- something key scientists think would likely take centuries, not decades -- it could add more than 22 feet to the world's sea level.

However, for nearly the past 30 years, the data pattern of its ice sheet melt has zigzagged.

A bad year, like 2005, would be followed by a couple of lesser years.

According to that pattern, 2007 shouldn't have been a major melt year, but it was, said Konrad Steffen, of the University of Colorado, which gathered the latest data.

"I'm quite concerned," he said.

"Now I look at 2008."

"Will it be even warmer than the past year?"

Other new data, from a NASA satellite, measures ice volume.

NASA geophysicist Scott Luthcke, reviewing it and other Greenland numbers, concluded: "We are quite likely entering a new regime."

Melting of sea ice and Greenland's ice sheets also alarms scientists because they become part of a troubling spiral.

White sea ice reflects about 80 percent of the sun's heat off Earth, NASA's Zwally said.

When there is no sea ice, about 90 percent of the heat goes into the ocean which then warms everything else up.

Warmer oceans then lead to more melting.

"That feedback is the key to why the models predict that the Arctic warming is going to be faster," Zwally said.

"It's getting even worse than the models predicted."

NASA scientist James Hansen, the lone-wolf researcher often called the godfather of global warming, on Thursday will tell scientists and others at a meeting of researchers in San Francisco that in some ways Earth has hit one of his so-called tipping points, based on Greenland melt data.

"We have passed that and some other tipping points in the way that I will define them," Hansen said in an e-mail.

"We have not passed a point of no return."

"We can still roll things back in time -- but it is going to require a quick turn in direction."

Last year, Cecilia Bitz at the University of Washington and Marika Holland at the National Center for Atmospheric Research in Colorado startled their colleagues when they predicted an Arctic free of sea ice in just a few decades.

Both say they are surprised by the dramatic melt of 2007.

Bitz, unlike others at NASA, believes that "next year we'll be back to normal, but we'll be seeing big anomalies again, occurring more frequently in the future."

And that normal, she said, is still a "relentless decline" in ice.

------

On the Net:

National Snow and Ice Data Center on 2007 Arctic sea ice:

http://nsidc.org/news/press/2007--seaicemi...810--index.html

NASA's "Tipping Points" panel and slide show materials:

http://www.nasa.gov/topics/earth/tipping--points.html

"Wall Street tumbles after interest cut"

By JEANNINE AVERSA, Associated Press

Last updated: 4:33 p.m., Tuesday, December 11, 2007

WASHINGTON -- The Federal Reserve dropped its most important interest rate to a nearly two-year low on Tuesday and left the door open to additional cuts to prevent a housing and credit meltdown from pushing the economy into a recession.

Fed Chairman Ben Bernanke and all but one of his colleagues agreed to trim the federal funds rate by one-quarter percentage point to 4.25 percent.

The rate reduction, the third this year, was needed to energize national economic growth, Fed officials said.

The deepening housing slump is affecting the behavior of consumers and businesses alike, the Fed said.

"Economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending."

"Moreover, strains in financial markets have increased in recent weeks," the Fed said in a statement explaining its decision to cut rates again.

The three rate cuts ordered thus far "should help promote moderate growth over time," the Fed added.

On Wall Street, stocks tumbled, reflecting disappointment among some investors who were hoping for a larger rate cut.

The Dow Jones industrial plunged more than 200 points.

The funds rate affects many other interest rates charged to individuals and businesses and is the Fed's most potent tool for influencing economic activity.

In response, commercial banks, including Wachovia and Wells Fargo, lowered their prime lending rate by a corresponding amount, to 7.25 percent.

The prime rate applies to certain credit cards, home equity lines of credit and other loans.

The fact that the Fed's key rate was lowered again marked an about-face for the central bank.

At its previous meeting in October, Fed officials hinted that their two rate cuts probably would be sufficient to help the economy survive the housing and credit stresses.

Since then, however, financial conditions have deteriorated, prompting Bernanke to signal before Tuesday's meeting that another rate cut may be needed after all as an insurance policy against undue economic weakness.

As another bolstering move, the Fed on Tuesday also lowered its lending rates to banks by one-quarter percentage point.

That was the fourth cut to the discount rate since mid-August.

"Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation," the Fed said in its statement.

Banks, financial companies and other investors who made loans to people with spotty credit or put money into securities backed by those subprime mortgages have lost billions of dollars.

Investors in the U.S. and abroad have grown more wary of buying new debt, thereby aggravating the credit crunch.

Harder-to-get credit has thwarted would-be home buyers, intensifying the housing collapse.

Foreclosures have soared to record highs.

The number of unsold homes have piled up.

Problems are expected to persist well into next year.

The 9-1 decision for a quarter-point reduction to the funds rate was opposed by Eric Rosengren, president of the Federal Reserve Bank of Boston.

He preferred a bolder, half-percentage point cut.

"Fed's language clearly reflects a heightened degree of concern about the economic outlook," said Carl Tannenbaum, chief economist at LaSalle Bank.

"They left open the possibility of additional rate reductions," he added.

If the economy were to take a turn for the worse, another rate cut could come before the Fed's next scheduled meeting on Jan. 29-30, Tannbenbaum said.

The situation poses the biggest challenge yet to Bernanke, who took over the Fed in February 2006.

Some analysts have questioned whether he waited too long to cut the Fed's key rate and whether he has acted aggressively enough to the nation's economic woes.

In September, the central bank dropped the funds rate for the first time in four years.

Then it was a half-point drop; on Oct. 31 came a quarter-point cut.

The rationale behind the lower rates is that they will induce consumers and businesses to boost spending, invigorating economic activity.

With Tuesday's reductions, both the funds rate and the prime rate are now at their lowest levels in nearly two years.

From July through September, the economy logged its best growth in four years.

But it is expected to slow to a pace of just 1.5 percent or less over the final three months of the year as the housing collapse and credit crunch chill consumers, sapping overall economic growth.

The odds of a recession have grown.

With growth cooling, the unemployment rate, now at a relatively low 4.7 percent, is expected to rise.

Analysts expect the jobless rate to climb to 5 percent by early next year.

High oil prices could complicate the Fed's job of trying to keep the economy expanding and inflation low.

Oil prices, which had neared $100 a barrel, have moderated.

But they are still high. High energy prices are a double-edged sword.

They can slow economic activity and spread inflation if they cause the prices of lots of other goods and services to rise.

"Elevated energy and commodity prices, among other factors, may put upward pressure on inflation," the Fed said.

"Inflation risks remain," the Fed said, adding that it "will continue to monitor inflation developments carefully."

Some economists believed the Fed's decision to go with a moderate quarter-point cut was a nod to those inflation concerns.

------

On the Net:

Federal Reserve: http://www.federalreserve.gov/

"Citi taps investment banking head as CEO"

By MADLEN READ, Associated Press

Last updated: 3:33 p.m., Tuesday, December 11, 2007

NEW YORK -- Citigroup Inc. named Vikram Pandit, the head of its investment banking business, as its chief executive officer Tuesday, charging him with restoring the bank's profitability and reputation after missteps in lending and investing left Citi with billions of dollars in losses this year.

The banking company named Sir Win Bischoff, who has been Citi's acting CEO, as its chairman, replacing Robert E. Rubin, who had stepped into the role when former CEO and chairman Charles Prince was ousted last month.

Pandit, who ran a hedge fund bought by Citi earlier this year, is seen as a careful, decisive investment banker -- qualities Citi needs following the revelation that Citi's writedowns of soured mortgages could amount to as much as $17.5 billion by the end of the year.

Bischoff, meanwhile, has led Citi's European businesses, answering many shareholders' complaints that Pandit does not have the overseas experience to guide the sprawling bank's operations in Europe, Asia, Africa and Latin America.

The appointments came after a two-day meeting of Citi's board.

Pandit is well known on Wall Street, having worked at Morgan Stanley for two decades until 2005, when he and a few other disgruntled colleagues left the brokerage and founded the hedge fund Old Lane Partners.

Earlier this year, Citigroup bought Old Lane for $800 million and put Pandit in charge of Citi's alternative investments.

A few months later, Pandit took over the bank's markets and banking unit, too, and then reconfigured the business to mirror the Morgan Stanley structure he was familiar with.

His performance as Citi's leader will undoubtedly be scrutinized by investors until they see positive results -- including his willingness to challenge the Citi strategy of the past several years.

One question on Wall Street is whether Pandit will be beholden to the Citi board, which has remained steadfastly loyal to the Sanford Weill regime.

Weill, a board member, built Citigroup through a series of mergers and acquisitions over the past few decades, and many have attributed the bank's failings this year to the Weill culture: Prince was his hand-picked successor.

Bischoff was the chairman of the British investment bank Schroders PLC, then joined Salomon Smith Barney Inc., a subsidiary of Citi, when it acquired Schroders.

He began his current position in May 2000.

Unlike Merrill Lynch & Co., which took just two weeks to find a replacement for Stan O'Neal, its embattled CEO and another casualty of the mortgage crisis, Citi's search dragged on.

Merrill's nab of John Thain, a Goldman Sachs alum who turned around the once-troubled New York Stock Exchange, eliminated him as a possibility for Citi.

Citi, with all its bad debt -- not to mention the hemorrhaging funds known as structured investment vehicles that it manages -- appeared to be a beast no one wanted to tame.

According to various media reports, Citi's overtures to big names in the banking industry such as Deutsche Bank CEO Josef Ackermann and Royal Bank of Scotland CEO Frederick Goodwin were spurned.

And Citi board member Rubin, the former Treasury Secretary who led the CEO search committee, decided he did not want to stay chairman.

Pandit faces multiple challenges.

He must not only attract more cash to offset Citi's debt and bulk up the bank's risk management, but he also needs to strengthen Citi's lackluster consumer-oriented businesses and clean up its reputation.

Citi has shed about $120 billion in market capitalization this year, putting its market cap below that of Bank of America Corp.

Citi is still the largest U.S. bank by assets, though, so while most major financial companies have seen problems navigating a surge in foreclosures and a freeze-up in credit, Citi's losses have been seen on Wall Street as particularly egregious.

Citi's cash levels will get a boost by the Abu Dhabi Investment Authority, which in late November bought a 4.9 percent stake in Citi for $7.5 billion.

But the investment, while helpful in offsetting some of Citi's bad debt, is not a panacea.

Many analysts and shareholders believe Pandit needs to sell more assets to bring in cash and make the huge conglomerate leaner.

Citigroup has said non-essential assets selloffs are in the works, but many shareholders are hoping for more ruthless spinoffs -- such as Citi's brokerage arm, Smith Barney.

A few analysts have even tossed around the idea of another big bank like JPMorgan Chase & Co. and Bank of America Corp. buying or merging with Citi.

But given regulatory obstacles and the credit market problems facing even the best-positioned banks, other analysts say such a deal is unlikely at this time.

The board has been adamant about not breaking up the bank.

Rubin, who led the search committee, said after Prince's resignation that they were looking for someone to focus on Citigroup's "multiplicity of businesses."

"It is very important that whoever we have has a strong international focus -- not necessarily enormous international experience, but can relate to the globalization of this institution and Chuck's (Prince's) strategy of having to ever increase that involvement," Rubin said at the time.

Pandit, though he spent his childhood in India, has little experience with banking abroad.

His strengths are his Wall Street experience and his analytical mind.

"Under the circumstances, I can't think of anyone better qualified to untangle Citigroup than Vikram Pandit," said Barton Biggs, who was Morgan Stanley's top strategist and worked with Pandit for two decades.

Biggs, now the head of the hedge fund firm Traxis Partners, called Pandit intelligent, and not one to make "lightning-quick decisions."

"That doesn't mean he's not decisive -- he's thoughtful and careful," said Biggs, who is also a Citi shareholder.

"Vikram is a very fair and honest and honorable manager."

"People do like working for him."

"A lot of people followed him from Morgan Stanley to Old Lane."

Even in the years that Morgan Stanley struggled, the investment banking unit did well, said Punk Ziegel & Co. analyst Richard Bove.

"Vikram Pandit was one of the reasons for it," Bove said.

"He proved at Morgan Stanley he could build a strong capital markets business."

Bove noted that Pandit has no experience in consumer banking, however, which brings in half of the company's profit.

Compared to its peers, Citi has seen lackluster results in retail banking, credit cards and consumer finance in recent years.

"I don't think any division of Citi is demonstrating above-average success," Bove said.

"They're behind the curve."

"They're utilizing inappropriate sales techniques."

Also, Pandit has never run a large public company.

And some see his lack of flash and pizazz as a drawback -- though to others, a cool, quiet demeanor in the top spot could be just what is needed at a company often criticized as arrogant.

"Stocks fall after Fed cuts rates"

By JOE BEL BRUNO, Associated Press

Last updated: 5:12 p.m., Tuesday, December 11, 2007

NEW YORK -- Wall Street plunged Tuesday after the Federal Reserve lowered interest rates by a quarter point, disappointing investors who hoped the central bank would move more aggressively to help the economy overcome the credit and mortgage crisis.

The Dow Jones industrial average skidded more than 290 points.

Investors had been expecting policymakers would lower rates for a third straight time, though there was debate over the size of the cut.

Most economists anticipated a quarter-point reduction in the benchmark federal funds rate to 4.25 percent -- but some investors were hoping for a half-point cut from the Fed's final meeting this year, and their disappointment took the market sharply lower.

Wall Street had barreled higher the past two weeks, propelling the Dow up 640 points partly on rising optimism that the Fed would do all it could to prevent the economy from slipping into recession.

While the Fed indicated Tuesday it was doing exactly that, the market's expectations had run well ahead of the central bank's view of the economy and what it needed.

The Fed also lowered its discount rate, the interest it charges banks for loans, by a quarter point to 4.75 percent, making it easier for banks to obtain the cash they need for yearend obligations.

Fed officials did signal that further cuts are possible if a severe downturn in housing and a crisis in mortgage lending worsen, but that was not enough to assuage the market.

Moreover, the central bank did note that the economy has suffered.

The statement accompanying the Fed's decision said "information suggests that economic growth is slowing," and removed language from prior statements stating that risks to the economy are balanced.

But the Fed seemed to stand firm on a quarter-point cut for now.

"Expectations may have been for a more meaningful move based on the swirl in the financial markets."

"But the Fed is acknowledging that maybe things on Main Street aren't as bad as they are on Wall Street," said Bill Knapp, economist and chief investment strategist for MainStay Investments, a division of New York Life Investment Management.

According to preliminary calculations, the Dow fell 294.26, or 2.14 percent, to 13,432.77 after dropping as much as 313.29.

Broader indexes also fell.

The Standard & Poor's 500 index fell 38.31, or 2.53 percent, to 1,477.65, and the Nasdaq composite index fell 66.60, or 2.45 percent, to 2,652.35.

Declining issues outpaced advancers by more than 5 to 1 on the New York Stock Exchange, where volume came to 1.55 billion shares compared with 1.17 billion shares traded Monday.

Bond prices rose sharply.

The 10-year Treasury note's yield, which moves opposite the price, fell to 3.98 percent from 4.16 percent late Monday.

Gold prices fell while the dollar was mixed against other major currencies.

Oil prices rose, but came off of earlier highs after the Fed's decision.

Investors had hoped a deeper cut would help spur the U.S. economy and drive demand from the world's biggest consumer of oil.

Light, sweet crude for January delivery rose $2.16 to settle at $90.02 per barrel on the New York Mercantile Exchange.

"Time will tell if this restores enough confidence in the system."

"They're saying that this with the other cuts that we have done should promote growth over time."

"It's a telegraph that we think this is a sufficient move to alleviate the stresses on the market," Knapp said.

He said also that a half-point cut in the fed funds rate could have stirred fears of inflation, a primary concern for the Fed.

But he said the Fed "didn't go as far as they should have," in lowering the discount rate.

The Fed uses the so-called discount window to lend directly to banks in order to quickly inject liquidity directly into the banking system -- essentially greasing the wheel themselves to prevent the credit markets from freezing up.

The Fed's rate decision and Wall Street's disappointment followed further word of trouble in the banking sector.

Washington Mutual Inc. became the latest lender to resort to a massive stock sale to shore up its finances.

WaMu's plan to sell $2.5 billion worth of convertible preferred stock follows a move by Switzerland-based UBS AG to sell $11.5 billion in shares to Singapore's sovereign wealth fund and an unidentified Middle Eastern investor.

Some of the market's recent concern has stemmed from recent problems at global banks, including Washington Mutual, said MF Global fixed income analyst Jessica Hoversen.

"Sovereign wealth funds are trying to bail out the financial sector, but they're coming in at vulture prices," she said.

"That I think is a big issue for the market."

"While they want to believe there is still value in the financial sector, we've come a long way down."

Washington Mutual shares fell $2.46, or 12.4 percent, to $17.42 after the nation's largest savings and loan also said it will close offices, lay off more than 3,000 workers, and slash its dividend.

The bank also set aside up to $1.6 billion for loan losses in the fourth quarter.

In other corporate news, Citigroup Inc. named Vikram Pandit, the head of its investment banking business, as its chief executive officer, charging him with restoring the bank's profitability and reputation after missteps in lending and investing left Citi with billions of dollars in losses this year.

Citi fell $1.54, or 4.4 percent, to $33.23.

General Electric Co., which like Citigroup is one of the 30 stocks that make up the Dow industrials, issued a 2008 forecast that disappointed investors.

The conglomerate, whose businesses range from aircraft engines to the NBC television network, sees earnings of $2.42 per share and revenue of $195 million.

GE fell 38 cents to $37.03.

AT&T Inc. rose $1.56, or 4.1 percent, to $39.46 after the telecommunications company said it would buy back 400 million shares and raise its dividend 12.7 percent.

The buyback represents about 7 percent of the company's stock and will be completed by the end of 2009.

The Russell 2000 index of smaller companies fell 24.93, or 3.15 percent, to 766.27.

Overseas, Japan's Nikkei stock average closed up 0.76 percent, while Hong Kong's Hang Seng index added 2.55 percent.

Britain's FTSE 100 fell 0.43 percent, Germany's DAX index shed 0.30 percent, and France's CAC-40 dropped 0.45 percent.

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On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

"Fannie, Freddie chiefs see tough 2008"

By MARCY GORDON, Associated Press

Last updated: 5:33 p.m., Tuesday, December 11, 2007

WASHINGTON -- The chief executives of Fannie Mae and Freddie Mac on Tuesday warned their ailing mortgage-finance companies will suffer further in 2008 due to a weakening housing market and rising home-loan defaults.

Freddie's CEO, Richard Syron, said the government-sponsored company could lose an additional $5.5 billion to $7.5 billion over the next few years from soured home loans.

"I honestly think it's going to get tougher before it gets better," Syron said in a discussion with financial analysts in New York.

His company has already logged about $4.5 billion in projected losses during the first nine months of this year.

Freddie's shares fell $3.73, or 10.6 percent, to finish at $31.31 in trading Tuesday.

Fannie CEO Daniel Mudd, also meeting with analysts at the conference, forecast "a very tough 2008" and continued weakness in home prices through 2009.

Mudd called the wave of defaults and foreclosures this year the worst mortgage crisis "in recent memory."

The Washington-based company, which lost $1.4 billion in the third quarter, sold $7 billion in preferred stock last week to raise capital to stabilize its finances.

Mudd said Tuesday that Fannie had no further plans for such sales over the next year.

Mudd said the company could raise additional capital, however, through sales of mortgage investment holdings, increased fees on mortgages and other measures.

Syron said that while the mortgage crisis has brought a rising wave of foreclosure notices into public view, less evident have been "pictures of people standing with furniture on the lawn" after being forcibly evicted from their homes.

"As that begins to happen, and it will happen, I am afraid of the impact that this has."

The chief executives' remarks came a day after Freddie and Fannie said they would change their criteria for purchasing delinquent home loans they've guaranteed, in order to reduce the number they buy from investors.

On Tuesday, McLean, Va.-based Freddie announced it was imposing a 0.25 percent fee on all new home loans it buys or guarantees with settlement dates starting March 9, matching an earlier move by Fannie.

On a $300,000 mortgage, the new fee translates to an extra $750, which is expected to be passed on to homeowners, though the companies aren't saying.

Both companies have begun adding surcharges on loans to borrowers with credit scores below 680 and who are borrowing more than 70 percent of the home's value.

A new plan orchestrated by the Bush administration to help distressed homeowners with a five-year freeze in mortgage rates, provides the relief only to borrowers with credit scores below 660.

Fannie and Freddie, which together own or guarantee around two-fifths of U.S. home-mortgage debt, have cut their dividends and sold billions of dollars of special stock recently to buttress their finances after posting stunning third-quarter losses.

They have been forced to set aside billions of extra dollars to account for bad home loans, eroding their profits at a time when home prices are falling and defaults are spiking on high-risk mortgages made to borrowers with weak credit histories.

Shares of Fannie, the No. 1 financer and guarantor of U.S. home loans, declined $2.62, or 7.1 percent, to $34.29.

The two companies traditionally have been a major source of funding for the home-loan market by buying up mortgages made by banks and other lenders and then bundling them as securities for sale to investors.

They have been under pressure to step up their role to help stabilize the mortgage market during the worst housing slump in more than 20 years.

Freddie lost $2 billion in the third quarter, and Syron said Tuesday that results aren't expected to be any better in the October-December quarter.

"We've reported really ugly numbers; let's face it," Syron said in the meeting with analysts.

Freddie late last month sold $6 billion of preferred stock in a special offering to raise capital and sliced its quarterly dividend in half, to 25 cents -- its first dividend cut since it became a public company in 1989.

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On the Net:

Freddie Mac: http://www.freddiemac.com

Fannie Mae: http://www.fanniemae.com

"WaMu shares fall on outlook worries"

By JESSICA MINTZ, Associated Press

Last updated: 5:22 p.m., Tuesday, December 11, 2007

SEATTLE -- Washington Mutual's move to slash staff and launch a massive stock offering to shore up its finances may smack of desperation, analysts said Tuesday as the bank's shares tumbled nearly 12 percent.

The stock price of the nation's largest savings and loan fell sharply a day after it said it would close offices, lay off more than 3,000 workers, and cut its dividend.

It also worried investors by saying it would set aside up to $1.6 billion for loan losses in the fourth quarter and sell $2.5 billion worth of convertible preferred stock.

WaMu has not yet priced its offering, but Friedman, Billings, Ramsey analyst Paul Miller wrote in a note to investors that he has heard it could yield 8 percent to 8.5 percent; Bear Stearns analyst David Hilder estimated the dividend rate closer to 10 percent.

"We believe that cost could wipe out all of WaMu's 2008 earnings," Hilder wrote, calling the stock offering and dividend cut "desperate measures."

Other recent deals support analysts' concerns that the stock sale will prove expensive for WaMu.

Last month, Citigroup Inc. took a $7.5 billion investment from the Abu Dhabi Investment Authority in exchange for up to 4.9 percent of Citigroup's equity, and government-sponsored mortgage finance companies Freddie Mac and Fannie Mae both recently announced sales of $6 billion and $7 billion in preferred stock, respectively.

In exchange for its cash, the Abu Dhabi fund will get an 11 percent annual yield from Citigroup.

The Freddie Mac offering has a fixed dividend rate of 8.375 percent, almost 2 percentage points higher than its last sale of preferred stock, in September.

Converting preferred shares into common stock dilutes their value for existing stockholders.

In a research note, Citi Investment Research analyst Bradley Ball estimated the WaMu deal will add 106.4 million shares to the float, diluting current prices by about 12 percent.

WaMu shares fell $2.46, or 12.4 percent, to close at $17.42 Tuesday.

What's more, analysts said Tuesday that WaMu's $2.5 billion cash infusion may not be enough.

FBR's Paul Miller wrote that he expects the company to try to raise more money in coming months.

After cutting 1,000 jobs and dismantling much of its subprime mortgage operation in September, Seattle-based WaMu will now get out of the business entirely.

The company said Monday it will close about 190 of its 336 home loan centers and sales offices, shut down nine call centers and eliminate 2,600 home loan workers and 550 corporate and support jobs.

The company also said it will shutter WaMu Capital Corp. and rely on third party broker-dealers to sell mortgage-backed securities.

These changes, meant to address what WaMu called "unprecedented challenges in the mortgage and credit markets," will save the thrift $140 million in the fourth quarter.

But the company still expects to post a loss, due in part to a $1.6 billion charge for the writedown of goodwill associated with the shrinking home loans business.

On top of that, WaMu now expects to set aside between $1.5 billion and $1.6 billion in the fourth quarter for future loan losses, up from the $1.1 billion to $1.3 billion predicted by executives in early November.

For the first quarter of 2008, the company said it expects loan losses to total $1.8 billion to $2 billion.

Loan losses will remain high throughout the year, WaMu added.

"The magnitude of the new loss guidance for 2008 is disconcerting," wrote Morgan Stanley analyst Kenneth Posner in a research note.

The company also slashed its quarterly dividend to 15 cents per share from its most recent dividend of 56 cents per share, for savings of more than $1 billion.

Moody's Investors Service downgraded several long-term and short-term ratings for WaMu and said in a statement that the move "was based on its view that credit losses from WaMu's mortgage operations will be noticeably higher than previously estimated."

The credit rating agency said it doesn't expect WaMu's profitability to begin to recover until 2010.

Fitch Ratings also downgraded WaMu's credit ratings, saying it expects further weakening of quality in its residential mortgage portfolio and moderate deterioration among the bank's consumer loan portfolios, including its credit card portfolio.

"Gold stumbles following rate cut"

By LAUREN VILLAGRAN, Associated Press

Last updated: 5:12 p.m., Tuesday, December 11, 2007

NEW YORK -- Gold prices plummeted in aftermarket trading Tuesday after the Federal Reserve lowered its benchmark interest rate by a quarter point to 4.25 percent.

The dollar bounced higher.

The Fed's move was widely expected and had largely been priced into the value of the dollar and many commodities; the quarter-point cut disappointed some investors who were hoping for a more aggressive half-point reduction.

Commodities prices were mixed following the Fed's decision, although some markets were officially closed and trading took place electronically.

Precious metals slumped as the dollar advanced, while energy prices climbed broadly.

Lower interest rates tend to depress a country's currency and drive investors to shift funds to hard assets, like gold.

But the Fed's third rate cut this year wasn't sharp enough to shock the dollar into further submission, given that the greenback had already fallen ahead of the decision.

February's gold contract slid $10.20 to $803.30 an ounce in aftermarket trading on the New York Mercantile Exchange, after closing up $3.60 at $817.10 an ounce.

March silver futures fell 24 cents to $14.61 an ounce in aftermarket activity, after closing up 1.5 cents at $14.865 an ounce.

The dollar gained against the euro while trading mixed against other major currencies.

The 13-nation euro bought $1.4652 down from $1.4712 late Monday.

Wall Street was disappointed by the Fed's decision.

The Dow Jones industrials plunged 294.26, or 2.14 percent, to 13,432.77.

Ashraf Laidi, chief currency analyst with CMC Markets U.S. said he expects further declines in the stock market and a brief bounce higher in the dollar following the Fed's interest rate cuts.

"That should weigh on gold a little bit," he said.

"I think the FOMC statement ended being more bearish than people thought."

The dollar's weakness, rooted in declining interest rates, has been a powerful force behind the gains made in commodities markets in recent months.

Products priced in dollars -- including oil, wheat and gold -- appear cheaper to foreign buyers as their currencies appreciate versus the greenback.

Oil prices rose amid expectations that the rate cut will stimulate business growth and demand for energy.

Light, sweet crude for January delivery jumped $2.16 to settle $90.02 a barrel on the Nymex just before the market close.

Gasoline futures added 4.13 cents to $2.2914 a gallon, while heating oil futures gained 4.56 cents to $2.523 a gallon.

In its statement, the Fed said, "Strains in financial markets have increased in recent weeks."

"Today's action, combined with the policy actions taken earlier, should help promote moderate growth over time."

Those "strains" include the hefty losses taken by major financial institutions worldwide as a result of rising mortgage defaults.

However, the Fed also cautioned that "elevated energy and commodity prices, among other factors, may put upward pressure on inflation."

That could leave the central bank wary of cutting rates further in the future.

Industrial metals finished mixed on the London Metal Exchange ahead of the Fed's decision, with nickel and zinc pulling higher while copper, lead and tin slipped back.

Nymex copper for March dipped 0.3 cent to $3.09 a pound.

Agricultural futures ended in a mixed range on the Chicago Board of Trade, which closed as the Fed released its statement.

March corn settled up 6.25 cents to $4.24 a bushel, while January soybeans added 9.75 cents to $11.355 a bushel.

Wheat for March delivery lost 19 cents to $9.105 bushel.

"Freddie sees $5.5B-$7.5B more losses"

By MARCY GORDON, Associated Press

Last updated: 12:32 p.m., Tuesday, December 11, 2007

WASHINGTON -- The chief executive of Freddie Mac estimated Tuesday the mortgage finance company will lose an additional $5.5 billion to $7.5 billion over the next few years as the housing crisis worsens and home-loan defaults rise.

The government-sponsored company has already logged about $4.5 billion in projected losses during the first nine months of this year.

"I honestly think it's going to get tougher before it gets better," Richard Syron, the company's chairman and CEO, said in a discussion with financial analysts in New York.

Freddie's shares fell $2.09, or 6 percent, to $32.95 in morning trading.

While the mortgage crisis has brought a rising wave of foreclosure notices into public view, less evident have been "pictures of people standing with furniture on the lawn" after being forcibly evicted from their homes, Syron said.

"As that begins to happen, and it will happen, I am afraid of the impact that this has."

Syron's remarks came a day after Freddie Mac and its larger government-sponsored rival Fannie Mae said they are changing their criteria for purchasing delinquent home loans they've guaranteed, in order to reduce the number they buy from investors.

On Tuesday, McLean, Va.-based Freddie Mac announced it was imposing a 0.25 percent fee on all new home loans it buys or guarantees with settlement dates starting March 9, matching an earlier move by Fannie Mae.

Both companies have begun adding surcharges on loans to borrowers with credit scores below 680 and who are borrowing more than 70 percent of the home's value.

Fannie and Freddie, which together own or guarantee around two-fifths of U.S. home-mortgage debt, have cut their dividends and sold billions of dollars of special stock recently to buttress their finances after posting stunning third-quarter losses.

They have been forced to set aside billions of extra dollars to account for bad home loans, eroding their profits at a time when home prices are falling and defaults are spiking on high-risk mortgages made to borrowers with weak credit histories.

Fannie's shares declined $1.85, or 5 percent, to $35.06.

The two companies traditionally have been a major source of funding for the home-loan market by buying up mortgages made by banks and other lenders and then bundling them as securities for sale to investors.

They have been under pressure to step up their role to help stabilize the mortgage market during the worst housing slump in more than 20 years.

Freddie lost $2 billion in the third quarter, and Syron said Tuesday that results aren't expected to be any better in the October-December quarter.

Fannie's third-quarter loss was $1.4 billion.

"We've reported really ugly numbers, let's face it," Syron said in the meeting with analysts.

Freddie late last month sold $6 billion of preferred stock in a special offering to raise capital and sliced its quarterly dividend in half, to 25 cents -- its first dividend cut since it became a public company in 1989.

----

On the Net:

Freddie Mac: http://www.freddiemac.com

Fannie Mae: http://www.fanniemae.com

"German investor confidence slides"

By GEIR MOULSON, Associated Press

Last updated: 8:52 a.m., Tuesday, December 11, 2007

BERLIN -- German investor confidence dropped to its lowest level in nearly 15 years, weighed down by worries over the global economic outlook and the impact of the strong euro, a closely watched survey showed Tuesday.

The ZEW institute's index, which measures investors' expectations for Europe's biggest economy over the next six months, dropped to minus 37.2 points for December from minus 32.5 last month.

That was the worst showing since January 1993, when the index stood at minus 49.7, and also came in below the minus 34 forecast of economists surveyed by Dow Jones Newswires.

"The financial market experts see clear risks for economic growth in important industrial countries, particularly in the United States," ZEW said in a statement.

"This impairs the export prospects of the German economy."

"The strong euro has furthermore increased uncertainty for German exporters."

The U.S. subprime lending crisis and ensuing market volatility has fueled worries over the health of the American economy -- as well as expectations that the Federal Reserve will continue cutting interest rates.

Those expectations have pushed the euro to all-time highs of nearly $1.50 -- a development that can make European exports less competitive abroad.

Strong exports have been a key element of Germany's current economic upswing.

ZEW said investors expect private consumption to remain "more or less stable" over the next six months, but do not expect consumer spending to pick up.

The institute also cited signs of backtracking on economic reform at home as a problem.

Chancellor Angela Merkel's governing coalition has agreed to introduce more generous jobless benefits for older unemployed people, softening an unpopular reform introduced by her predecessor, Gerhard Schroeder.

"The dilution of domestic reforms and the uncertainty on the financial, currency and commodity markets have left their marks," ZEW president Wolfgang Franz said.

ZEW said that investors' darkening outlook was accompanied by a more pessimistic view of the current economic situation in Germany.

A subindex covering the current situation fell to 63.5 points for December from 70 last month.

Alexander Koch, an economist at UniCredit in Munich, said that the "the current very low level (of the ZEW index) signals a strong deterioration in the growth dynamic."

Still, he also pointed to the survey's volatility, arguing that "the ZEW appears to continuously underestimate the resilience of the German economy."

While other indicators also have been sliding recently, the Ifo institute's index of business confidence unexpectedly rose last month for the first time since April.

"After an expected growth dip at the turn of the year, especially the solid prospects for the industrial sector argue for a continuation of the economic upswing also in 2008," Koch wrote in a research note.

Government figures released Monday showed German exports continuing to grow.

The Federal Statistics Office said Germany exported goods worth 88.9 billion euros ($130.5 billion) in October -- a 6.3 percent increase on the same month last year.

Still, that was a slower pace than the double-digit increases seen earlier this year.

From January to October, exports were up 10 percent.

The monthly survey by the Mannheim-based ZEW, or Center for European Economic Research, was based on a poll of 284 analysts and institutional investors.

"Widows' VA suit thrown out - Federal judge: No evidence terminally ill veterans suffered from fraudulent drug studies at Stratton"

By BRENDAN J. LYONS, Senior writer, Albany, New York Times Union

First published: Tuesday, December 11, 2007

ALBANY -- A federal judge on Monday dismissed a lawsuit filed against the Department of Veterans Affairs by the widows of five veterans who died after being enrolled in corrupt drug experiments at Stratton VA Medical Center.

In dismissing the case at the request of federal attorneys, U.S. District Court Senior Judge Thomas J. McAvoy cited the fact there is no proof the veterans, all of whom were terminally ill cancer patients, had died prematurely or endured added pain and suffering as a result of being fraudulently enrolled in studies designed to test drugs for marketability.

"Sometimes a court has to render a decision it would not like to render," McAvoy said.

He commented from the bench that what went on at Stratton hospital was "egregious conduct" but he is bound to follow "existing law" which sets no basis for the plaintiffs' families to recover damages in the case.

Alan Milstein, a Philadelphia-area lawyer hired by the widows, argued in court that the widows deserve compensation because their husbands suffered in ways that cannot be measured from forged medical records or the opinions of expert physicians.

Milstein also compared the criminal research violations that went on at Stratton to thousands of cases in which body parts have been stolen from corpses as part of an underground network that traffics human remains for research.

In those cases, Milstein said, the victims did not physically suffer but they and their families endured a form of "dignitary harm," which New York courts do not recognize.

The lawsuits against the VA stemmed from a criminal investigation that found dozens of veterans had been subjected to fraud and deception after their medical records were altered to enroll them in drug studies at Stratton.

The government admitted wrongdoing in only one veteran's death because it could be proven in that case that the patient died as a result of receiving experimental drugs, according to court records.

The case involved the death of James J. DiGeorgio, a 71-year-old Air Force veteran from Rensselaer County who died at Stratton in June 2001.

Last December, the government paid $500,000 to settle a lawsuit by DiGeorgio's widow.

That settlement left five other widows who pursued a class-action lawsuit, but Monday's ruling effectively ended their case unless they file an appeal.

"When you use individuals, humans, as guinea pigs, you do them harm," Milstein told McAvoy.

"What happened at the Stratton VA is a black mark in the history of human subject research."

"They and their families deserve to be compensated."

Assistant U.S. Attorney Karen Goodwin, who argued the government's motion, declined comment as she left court.

Two people, including the hospital's former cancer research director, Dr. James A. Holland, pleaded guilty to federal criminal charges in connection with the scandal.

Holland is scheduled to be sentenced next month for his guilty plea to a misdemeanor count of not keeping proper medical records.

A former Stratton research coordinator, Paul H. Kornak, is serving a 71-month prison term in Ohio for negligent homicide and other felony charges.

"A great wrong was committed here," Milstein said in court.

"The question for this court is whether the law will recognize it."

"...They committed every kind of research ethics violation imaginable."

The government argued that while the veterans were fraudulently enrolled in drug studies, some of them may have benefitted from the treatments and may have lived months longer than expected.

The government's attorneys also said there is no proof the men wouldn't have died if they received standard chemotherapy treatments rather than experimental regimens.

Jayne Steubing, whose husband, Carl, died at Stratton VA after being given a breast cancer drug to treat esophageal cancer, was the only widow in court for Monday's hearing.

Steubing and her stepson, Kurt, issued the following statement to the Times Union late Monday:

"We are disappointed in the judicial process and in the judgment itself, as neither brought closure for the families in this case."

"The fact that the judge himself admitted how painful it was for him to render this decision made it all the more difficult to accept."

Carl Steubing's medical records were altered without his knowledge to qualify him for a drug experiment run by Kornak and Holland, according to court records.

Both Kornak and Holland were fired from Stratton in late 2002, almost a year after the first instance of fraud was discovered by a monitor for a Texas drug company funding one of the studies.

Holland blamed Kornak for the scandal, while Kornak has said he was only following orders and that hospital officials knew what was taking place.

Investigators discovered that Kornak, who did not finish medical school, had been posing as a medical doctor when it was widely suspected by hospital staffers -- and reported to Holland -- that Kornak was not a physician.

Holland, who has admitted allowing unqualified workers to handle his medical duties, alleged Kornak sought to earn extra overtime pay by enrolling as many patients as possible in the research studies.

Kornak and at least one other research coordinator gave sworn depositions earlier this year in which they said Holland had pressured them to enroll patients in drug studies because their salaries and job security was at stake.

Steubing was a World War II veteran who enlisted in the Army in 1942 and served for three years, and fought in the Battle of the Bulge.

He was awarded the Bronze Star for bravery after leading his platoon to safety when their commanding officer was shot and a Purple Heart for injuries sustained in combat.

Human research studies at dozens of Veterans Affairs hospitals underwent a review as a result of the scandal at Stratton.

National hiring reforms also were put in place at VA hospitals after it was uncovered that a VA oncologist had hired Kornak despite the fact he had a criminal record for trying to illegally obtain a medical license.

The widows have 30 days to decide whether to appeal McAvoy's decision.

"It's certainly something we're going to think strongly about," Milstein said outside court.

Brendan J. Lyons can be reached at 454-5547 or by e-mail at blyons@timesunion.com.

"Suicide bombing kills 2 in Iraq"

By LORI HINNANT, Associated Press Writer

11 December 2007

BAGHDAD - A suicide car bomber targeted offices of Iraq's former prime minister and a Sunni lawmaker on Tuesday, speeding toward a checkpoint outside the buildings and killing two guards just outside the fortified Green Zone.

The bombing took place in western Baghdad, less than 150 yards from a series of buildings that included offices of Ayad Allawi, Iraq's first post-Saddam prime minister and a secular Shiite, and those of Saleh al-Mutlaq, the head of the Iraqi National Dialogue Front, a Sunni bloc.

Neither was at the offices at the time of the explosion.

Al-Mutlaq, speaking from neighboring Jordan, said when the suicide bomber reached the first checkpoint "he claimed that he was an employee and had access."

The offices are in a residential neighborhood, but many of the homes were converted to work spaces because it is convenient to the Green Zone, where the Iraqi government has its headquarters.

"I turned this house into an office for the Front after all my offices were attacked before," al-Mutlaq said.

He said the attack was yet another demonstration that "it is time to rebuild the police and army."

The car bomber turned off the main road and accelerated toward the checkpoint where the morning shift guards were gathered, police said.

Al-Mutlaq confirmed reports by police and hospital officials that two guards were killed.

Elsewhere in the capital, drive-by gunmen on motorcycles fatally shot the head of Iraq's largest psychiatric hospital as he was returning home from work, police and the health ministry said on Tuesday, speaking on condition of anonymity because they feared reprisal.

Dr. Ibrahim Mohammed Ajil was the head of al-Rashad hospital, Iraq's largest and well-known mental institution, which lies on the outskirts of the sprawling Sadr City district of Baghdad.

According to figures from the Iraqi Health Ministry released earlier this year, 618 medical employees, including 132 doctors, as well as medics and other health care workers, have been killed nationwide since 2003.

Hundreds, possibly thousands, of other medical personnel are believed to have fled to Iraq's northern semi-autonomous Kurdistan region and neighboring countries.

"Democrats' report: White House misleads on climate"

By Deborah Zabarenko, Environment Correspondent

Mon Dec 10, 4:15 PM ET

WASHINGTON (Reuters) - With U.S. policy at the center of debate at a Bali climate change meeting, Democrats in Congress said on Monday that the White House manipulated science for years to cast doubt on reality of global warming.

"The Bush administration has engaged in a systematic effort to manipulate climate change science and mislead policymakers and the public about the dangers of global warming," the House Committee on Oversight and Government Reform said.

Congressional Republicans released their own report, calling the accusations "a partisan diatribe," while White House spokeswoman Dana Perino said the Democrats' charges were rehashed and untrue, and timed to coincide with the Bali conference.

James Connaughton, head of the White House Council on Environmental Quality, denied the accusations:

"Claims that this administration interfered with scientists and with the science are false."

The Democrats reported that the council exerted "unusual control" over what federal scientists could say publicly about climate change, and that it was standard practice for the council to decide whether or not U.S. scientists could give interviews to the media.

This became more apparent after Hurricane Katrina hit the U.S. Gulf Coast in 2005, when the White House and the Commerce Department steered press queries away from government scientists who linked climate change and more intense hurricanes, the Democratic report said.

EDITING CLIMATE CHANGE REPORTS

"There was a systematic White House effort to minimize the significance of climate change by editing climate change reports," they wrote.

They said council staff edited the administration's "Strategic Plan of the Climate Change Science Program" to exaggerate scientific uncertainties or to diminish the importance of the human role in global warming.

The report's release came on the same day that the United States urged participants in the Bali meeting to drop a 2020 target for deep cuts in greenhouse gases by rich nations from guidelines for a new pact to slow global warming beyond 2012.

Harlan Watson, the chief U.S. climate negotiator, said the tough targets included in a draft document in Bali would be "prejudging what the outcome should be."

The draft text suggested that rich countries like the United States should aim to cut emissions of climate-warming gases by between 25 and 40 percent below 1990 levels by 2020.

Watson's statement was consistent with the Bush administration's long-term stance on climate change.

While acknowledging the reality of global warming, the White House has opposed specific targets to reduce the emissions of greenhouse gases like carbon dioxide -- spewed by coal-fired power plants and petroleum-fueled vehicles -- arguing that this would hurt the U.S. economy.

Washington has also stressed that any successor agreement to the Kyoto Protocol, which expires in 2012, must include all countries with high greenhouse emissions, including fast-growing China and India, which were exempt from the Kyoto requirements.

The United States is now the only major developed country outside the Kyoto Protocol.

(Editing by David Wiessler)

"U.S. military command in Iraq shifts"

By ROBERT BURNS, AP Military Writer

11 December 2007

WASHINGTON - The U.S. military in Iraq is undergoing its biggest changeover in senior commanders since Gen. David Petraeus launched a new counterinsurgency strategy nearly a year ago.

The high-level shifts come at a particularly delicate stage in the war as U.S. troop levels begin to decline, Iraqis are handed more security responsibility and Petraeus seeks to ensure that the gains achieved over the past several months continue.

The leadership changes are likely to be disruptive, at least for a brief period, as the new set of commanders — even those with Iraq experience — adjust to rapidly changing conditions.

Even so, with the studied approach the Army and Marine Corps take to rotating units and commanders — keeping the leaders informed daily of developments in Iraq, months in advance of their deployment — it is unlikely that the switches will result in changes to Petraeus' strategy.

With the exception of Petraeus, senior commanders generally arrive and depart with their units, which means most of those now leaving or preparing to leave have been there for up to 15 months.

Topping the list of departures is Petraeus' second-in-command, Army Lt. Gen. Ray Odierno, who is due to leave in February when the 3rd Corps finishes its command tour and returns to Fort Hood, Texas.

He will be replaced by Lt. Gen. Lloyd J. Austin III, commander of 18th Airborne Corps, from Fort Bragg, N.C.

"He's really done an amazing job with this counterinsurgency," said Frederick Kagan, a military historian at the American Enterprise Institute, referring to Odierno.

"He has it all at his fingertips, and there is no way that anyone could come in and immediately be functioning at that level."

But there comes a point where a commander becomes worn down and should be replaced, Kagan said.

He foresees a "temporary degradation" in command effectiveness when Odierno leaves, tempered by the fact that Petraeus and his staff will remain to ensure a degree of continuity.

Odierno is credited with establishing trust among Iraq military and political leaders and applying a flexible approach to shifting his forces around the country as conditions have changed.

Odierno said in an Associated Press interview last week that he sees no reason to back away from the plan President Bush announced in September to withdraw more than 21,000 U.S. troops by July 2008, even though the recent security gains are fragile and Iraqi force improvements are uneven.

"The trends that I've seen have continued now for about 23 weeks — trends of decrease in attacks, decrease in IEDs (roadside bombs), decrease in civilian deaths and ethno-sectarian violence," Odierno said.

"So I'm somewhat confident now that we'll be OK reducing down to 15 brigades."

Barry McCaffrey, a retired Army general who returned Tuesday from a week-long visit to Iraq, said in a telephone interview that he has no concern about the current turnover of commanders.

"The only thing I'd be worried about is, when does Petraeus leave?" McCaffrey said.

"This guy is unusual."

"He's a national treasure."

"I sure hope we keep him there for another year because he may be, in the short run, not replaceable."

McCaffrey also had high praise for Austin, who will replace Odierno.

Like many of the arriving commanders, Austin has extensive Iraq war experience.

He was assistant commander of the 3rd Infantry Division when it led the invasion in March 2003 and captured Baghdad a month later.

After a stint in Afghanistan he was chief of staff at Central Command headquarters, which oversees all U.S. military operations in the Middle East, including the Iraq war.

Conrad Crane, the main author of the U.S. military's new counterinsurgency doctrine, who visited Iraq last month at Petraeus' invitation to assess how it is being applied, said it would be helpful if senior commanders served longer tours, "because the personal connections these guys make are so important."

In a recent interview, Crane, who is director of the Army's Military History Institute, said switching leaders — not just at the upper reaches of the chain of command but also midlevel commanders — is a matter of concern.

"Will the new leaders have the same respectability, the same adaptability and the same cultural sensitivity as the old ones?" he asked, adding that he thinks "generally it will work out OK."

Increasingly, Army and Marine commanders are focusing on non-combat aspects of the Iraq conflict — promoting economic growth, mentoring Iraqi forces and encouraging local, provincial and national political leaders to work out power-sharing arrangements and build civil institutions.

Thus, it will probably help that many of the arriving commanders know Iraq quite well.

For example, Maj. Gen. Jeffery W. Hammond — who is scheduled to assume command of U.S. forces in Baghdad on Dec. 19, replacing Maj. Gen. Joseph Fil of the 1st Cavalry Division — was an assistant division commander in Baghdad in 2004-05.

Hammond is now commander of the 4th Infantry Division.

One of Hammond's two assistant division commanders, Brig. Gen. Will Grimsley, commanded the 1st Brigade, 3rd Infantry Division, on the march to Baghdad at the start of the war.

Grimsley's immediate superior at that point was Austin, and one of Grimsley's fellow brigade commanders was Daniel Allyn, who is now a brigadier general and will be going to Baghdad with Austin as his chief of staff.

In western Iraq, the Marines are in command, led by Maj. Gen. Walter Gaskin.

He is due to be replaced in February by Maj. Gen. John F. Kelly, who was assistant commander of the 1st Marine Division when it converged on Baghdad with the 3rd Infantry Division at the outset of the war.

He did a second Iraq tour, in 2004 when the Marines replaced the Army in commanding forces in the west.

Kelly, like other commanders preparing to return to Iraq, has spent time there recently.

Of the two other major U.S.-commanded sectors, northern Iraq just saw the arrival of a new commander, Maj. Gen. Mark Hertling of the 1st Armored Division.

He replaced Maj. Gen. Benjamin Mixon of the 25th Infantry Division in late October.

Hertling served once before in Iraq with 1st Armored.

The other major command area is south of Baghdad.

It is the only one that will not change commanders.

Maj. Gen. Rick Lynch, commander of the 3rd Infantry Division, is in charge in that area until next summer.
___

On the Net:

Multi-National Corps Iraq at http://www.mnci.centcom.mil/

18th Airborne Corps at http://www.bragg.army.mil/18abn/default.htm

"Midwest plastered by more deadly ice"

By JAMES BELTRAN, Associated Press Writer

11 December 2007

DES MOINES, Iowa - A thick glaze of ice brought down power lines and cut electricity to close to a million homes and businesses, closed schools and canceled flights Tuesday as a major storm blasted the nation's midsection.

At least 23 deaths had been blamed on the storm system since the waves of sleet and freezing rain started during the weekend.

Officials in Missouri, Kansas and Oklahoma had declared states of emergency.

President Bush declared an emergency in Oklahoma on Tuesday, ordering federal aid to supplement state and local response efforts.

A shell of ice as much as an inch thick covered trees, power lines, streets and car windshields Monday in parts of Oklahoma and Missouri, with thinner layers elsewhere.

About an inch of ice was expected Tuesday over parts of Iowa, followed by up to 5 inches of sleet and snow.

"This is a big one."

"We've got a massive situation here and it's probably going to be a week to 10 days before we get power on to everybody," said Ed Bettinger, a spokesman for Public Service Company of Oklahoma.

"It looks like a war zone."

Iowa's largest school district closed for the day in Des Moines, telling its nearly 31,000 students to stay home, and kids across most of Oklahoma and in the Kansas City, Mo., area stayed home for a second day.

Schools also were closed in parts of Wisconsin, including Milwaukee Public Schools with 85,000 students.

"We thought about our kids on foot," said Milwaukee schools spokeswoman Roseann St. Aubin.

Some drivers couldn't even get to their buses, she said.

Nearly 600,000 Oklahoma homes and businesses still had no electricity Tuesday, most of them since Monday when power lines began snapping under the weight of ice and falling branches — the biggest power outage in state history.

Utilities in Missouri reported about 170,000 homes and business without power.

Outages elsewhere affected more than 100,000 customers in Kansas, more than 60,000 in Iowa and nearly 18,000 in Illinois.

The power was on at Big Apple Bagels in Ottumwa, but many others weren't so lucky, said owner Lesley Owczarski.

"Most of the places don't have power so a lot of people have been coming to the bagel shop," she said.

"If they can come in and get warm and have a hot coffee and a latte, why not?"

"I can understand it's boring sitting at home."

The Kansas National Guard was asked to supply generators to several locations, including two nursing homes, said Sharon Watson, Kansas Emergency Management spokeswoman.

The storm even put a crimp on presidential campaigning, with Republican Mike Huckabee canceling stops in western Iowa and former President Bill Clinton calling off appearances in eastern Iowa on behalf of his wife, Hillary Rodham Clinton.

A backup generator enabled a Home Depot store to open in Oklahoma City, but a sign warned customers of shortages: "No Generators, Ice Melt, Scrapers, Lamp Oil, Firewood, Kerosene Heaters, Chainsaws."

One of the store's last kerosene heaters had been grabbed by Jay Garcia, who lost power at his Oklahoma City home two days earlier.

"We have kids in the house and we've got to keep them warm," Garcia said.

"I called the power company, and they said it could be seven to 10 days before we get the power back on."

Des Moines International Airport closed because of ice late Monday and could be closed most of Tuesday, said spokesman Roy Criss.

The airport, which also was shut down by winter weather two weeks ago, has 138 arrivals and departures per day, he said.

"This rain keeps refreezing."

"We put chemicals down, it melts and the freezes again."

"We can't stay ahead of it," Criss said.

"This is not fun."

More travelers were grounded at Chicago, where about 250 flights were canceled Tuesday morning at O'Hare International Airport and departure delays averaging 15 to 30 minutes, said Karen Pride of the city's Department of Aviation.

Kansas City International Airport in Missouri canceled more than 90 flights Tuesday morning, but spokesman Joe McBride said that was probably due to problems at other airports.

Southeastern Nebraska also had power outages Tuesday and some flights in and out of Omaha's Eppley Airfield were canceled.

At least 23 deaths — most of them in traffic accidents — had been blamed on the ice and cold since the weekend, including 15 in Oklahoma, four in Kansas, three in Missouri and one in Nebraska.
___

Associated Press writers Ken Miller in Oklahoma City, Heather Hollingsworth in Kansas City, Mo., and Marcus Kabel in Springfield, Mo., contributed to this report.

"Most Asian markets drop modestly"

By YURI KAGEYAMA, Associated Press

Last updated: 6:02 a.m., Wednesday, December 12, 2007

TOKYO -- Most Asian stock markets fell modestly Wednesday on disappointment that the U.S. Federal Reserve cut interest rates a quarter point, not the more aggressive half-point that some had hoped for.

After tumbling in early trading, benchmark indices across the region pared losses in afternoon trading as investors snapped up shares that had fallen to attractive levels.

"The market decided that the turmoil wasn't going to be that great after all," said Yukio Takahashi, analyst at Shinko Securities Co. in Tokyo.

Japan's Nikkei 225 index finished down 0.7 percent at 15,932.26, after declining more than 2 percent earlier.

Hong Kong's Hang Seng Index, which had lost nearly 3 percent in morning trading, fell 2.4 percent to 28,521.06.

Key indices in Australia and Singapore both fell about 1 percent, but South Korea's benchmark index recovered all its losses to close 0.1 percent higher.

India's stock market also advanced.

Overnight, the Fed lowered its benchmark interest rate a quarter percentage point to 4.25 percent, sending the Dow Jones industrial average down 2.1 percent.

U.S. policymakers were widely expected to lower rates for a third straight time to help the economy overcome a credit and mortgage crisis, though there was debate over the size of the cut.

Most economists anticipated a quarter-point reduction but some were hoping for a half-point cut.

When the Fed settled for the smaller cut, disappointed investors sent Wall Street lower.

Asian investors pay close attention to the American economy because it is a vital export market, and uncertainty over the outlook for the U.S. has dragged on sentiment in recent months.

In Tokyo, traders were cheered by the dollar's recovery to 111 yen levels, which helps Japan's exporters by making their products more competitive overseas.

Sony Corp. ended up 0.2 percent at 6,240 yen after losing as much as 2.2 percent earlier, and Matsushita Electric Industrial Co. recovered to gain 1.3 percent.

Matching the Fed's move, the Hong Kong Monetary Authority also cut its base rate by 25 basis points to 5.75 percent Wednesday.

The territory's rates tend to track those in the U.S. because the local currency is pegged to the dollar.

Property stocks were the biggest decliners in Hong Kong after their recent run-up amid expectations that they would benefit from lower interest rates.

Some analysts said the latest fall makes the territory's stocks attractive.

However, they warned that continued market concerns in the U.S. and inflationary worries in China would weigh on the local bourse in the short term.

"We see any pullback in the local market today, following the overnight U.S. market plunge, as a good buying opportunity, as the asset inflation story in Hong Kong remains solid," said Ernie Hon, a strategist at ICEA.

On the mainland Chinese market, stocks fell as investors sold banks and property developers on worries the government will move to tighten credit after figures released Tuesday showed that inflation rose 6.9 percent in November, the highest in 11 years.

The benchmark Shanghai Composite Index lost 1.5 percent to 5,095.54.

"US, China agree on interdependence"

By CHRISTOPHER BODEEN, Associated Press

Last updated: 5:52 a.m., Wednesday, December 12, 2007

XIANGHE, China -- China and the United States opened thorny trade talks Wednesday amid rising frustration by Washington over Chinese trade barriers and implied threats by Beijing that U.S. protectionist moves would cut both ways.

Both sides stressed the countries' growing economic interdependence, but differed on what steps were needed to shrink China's massive trade surplus.

The start of the two-day China-U.S. Strategic Economic dialogue follows a similar forum in Beijing on Tuesday that produced wide-ranging agreements on boosting Chinese tourism to the U.S., increasing safeguards over Chinese products and opening up mid-sized Chinese cities to American imports.

In opening remarks at a faux imperial palace outside Beijing, U.S. Treasury Secretary Henry Paulson warned that "short-term, politically expedient" protectionist measures would harm prosperity and prospects for working through trade frictions.

"The U.S.-China relationship has become central to each nation's interest and to maintaining a stable, secure and prosperous global economic system," Paulson said.

Leading the Chinese delegation, Vice Premier Wu Yi said Beijing had not sought large trade surpluses, and said the U.S. could boost sales to China by relaxing restrictions on high-tech exports.

"To address the China-U.S. trade imbalance requires the concerted efforts of both sides," Wu said.

Wu reiterated Chinese concerns about the roughly 50 China-related trade bills introduced this year in Congress, hinting China would likely retaliate if its interests were harmed.

"I need to be quite candid about this: If these bills are adopted, they will severely undermine U.S. business ties with China," Wu said.

Washington's trade deficit with China appears set to surpass last year's record $233 billion, according to U.S. Commerce Department figures, amplifying calls in Congress for punitive measures on Chinese imports if Beijing fails to loosen its currency regime.

Critics claim that Beijing keeps the yuan undervalued, giving Chinese exports an unfair advantage and inflating the nation's trade surplus.

China began allowing a slow rise in the yuan's value in July 2005.

Since then, it has appreciated 8.9 percent against the dollar in tightly controlled trading.

However, Commerce Vice Minister Chen Deming said relying entirely on an appreciation of the yuan to balance out trade with the U.S. was "simply not a scientific approach."

Instead, he said Beijing is more concerned with the impact of the dollar's decline on the world economy.

The dollar has fallen sharply against major currencies this year, sinking to a record low against the euro in late November and sliding nearly 7 percent against the Japanese yen, 10 percent versus the Indian rupee and 14 percent against the Canadian dollar.

Chen said the decline of the world's reserve currency threatened to push up prices of strategic goods such as gold and oil and impact on the economic health of countries like China that maintain large U.S. dollar-denominated foreign currency reserves.

"That's why I sincerely wish to see a scenario where the U.S. economy strengthens and the U.S. dollar strengthens," said Chen, who is expected to take over shortly as minister.

China announced Tuesday that its global trade surplus totaled $26.28 billion in November, showing strong foreign demand for low-cost Chinese goods despite product recalls and warnings over faulty or tainted Chinese goods ranging from toothpaste and pet food to toys and tires.

U.S. Commerce Secretary Carlos Gutierrez, also among American officials attending the talks, said righting the trade imbalance depended on boosting U.S. exports rather than limiting imports from China.

However, he appeared to reject Wu's assertions for the need to eliminate restrictions on high-tech goods that were originally imposed to protect key technology secrets and prevent them falling into the hands of China's 2.3 million-member armed forces.

"It's a minuscule amount," Gutierrez said.

While China is currently the fastest growing market for U.S. exports, we "clearly need more" market access, he said.

"CIA destroyed tapes despite court orders"

By MATT APUZZO, Associated Press Writer

12 December 2007

WASHINGTON - The Bush administration was under court order not to discard evidence of detainee torture and abuse months before the CIA destroyed videotapes that revealed some of its harshest interrogation tactics.

Normally, that would force the government to defend itself against obstruction allegations.

But the CIA may have an out: its clandestine network of overseas prisons.

While judges focused on the detention center in Guantanamo Bay, Cuba, and tried to guarantee that any evidence of detainee abuse would be preserved, the CIA was performing its toughest questioning half a world away.

And by the time President Bush publicly acknowledged the secret prison system, interrogation videotapes of two terrorism suspects had been destroyed.

The CIA destroyed the tapes in November 2005.

That June, U.S. District Judge Henry H. Kennedy Jr. had ordered the Bush administration to safeguard "all evidence and information regarding the torture, mistreatment, and abuse of detainees now at the United States Naval Base at Guantanamo Bay."

U.S. District Judge Gladys Kessler issued a nearly identical order that July.

At the time, that seemed to cover all detainees in U.S. custody.

But Abu Zubaydah and Abd al-Rahim al-Nashiri, the terrorism suspects whose interrogations were videotaped and then destroyed, weren't at Guantanamo Bay.

They were prisoners that existed off the books — and apparently beyond the scope of the court's order.

Attorneys say that might not matter.

David H. Remes, a lawyer for Yemeni citizen Mahmoad Abdah and others, asked Kennedy this week to schedule a hearing on the issue.

Though Remes acknowledged the tapes might not be covered by Kennedy's order, he said, "It is still unlawful for the government to destroy evidence, and it had every reason to believe that these interrogation records would be relevant to pending litigation concerning our client."

In legal documents filed in January 2005, Assistant Attorney General Peter D. Keisler assured Kennedy that government officials were "well aware of their obligation not to destroy evidence that may be relevant in pending litigation."

For just that reason, officials inside and outside of the CIA advised against destroying the interrogation tapes, according to a former senior intelligence official involved in the matter who spoke on condition of anonymity because it is under investigation.

Exactly who signed off on the decision is unclear, but CIA director Michael Hayden told the agency in an e-mail this week that internal reviewers found the tapes were not relevant to any court case.

Remes said that decision raises questions about whether other evidence was destroyed.

Abu Zubaydah's interrogation helped lead investigators to alleged 9/11 mastermind Khalid Sheikh Mohammed and Remes said Abu Zubaydah may also have been questioned about other detainees.

Such evidence might have been relevant in their court cases.

"It's logical to infer that the documents were destroyed in order to obstruct any inquiry into the means by which statements were obtained," Remes said.

He stopped short, however, of accusing the government of obstruction.

That's just one of the legal issues that could come up in court.

A judge could also raise questions about contempt of court or spoliation, a legal term for the destruction of evidence in "pending or reasonably foreseeable litigation."

Kennedy has not scheduled a hearing on the matter and the government has not filed a response to Remes' request.
___

Associated Press Writer Lara Jakes Jordan contributed to this report.

"Triple bombing in southern Iraq kills 26"

By QASSIM ABDUL-ZAHRA, Associated Press Writer

12 December 2007

BAGHDAD - Three car bombs exploded in quick succession in the mainly Shiite southern city of Amarah on Wednesday, killing at least 26 people and wounding 100, authorities said.

The explosions were about six minutes apart, beginning about 10 a.m. when an explosives-laden car parked in a garage blew up, local police and an intelligence official said.

Another car about 50 yards away exploded shortly afterward as people gathered to examine the damage from the first, police said.

The third blast occurred across the street from a movie theater, also about 50 yards away, police said.

An official at Zahra General Hospital in Amarah said at least 26 people were killed and 100 wounded.

The official said the hospital was still receiving new casualties.

The officials all spoke on condition of anonymity because they were not authorized to release details of the attack.

There was no immediate claim of responsibility for the attack.

Amarah, a Shiite militia stronghold about 200 miles southeast of Baghdad, has seen violence among rival groups vying for control in Iraq's oil-rich Shiite southern heartland, which has no significant Sunni population.

Al-Qaida is not known to have a significant presence in the region, although the terror group is often blamed for spectacular car bombings elsewhere in Iraq.

The city is the provincial capital of Maysan province, which borders Iran.

Iraqi forces took over control of security from British troops there in April.

The British are expected to turn over neighboring Basra province, the last area under their control, in mid-December.

Prime Minister Nouri al-Maliki was in Basra on Tuesday to discuss reconstruction in the region.
___

Associated Press Writer Sinan Salaheddin contributed to this report.

"Stocks erase sharp gains sparked by Fed"

By JOE BEL BRUNO, Associated Press

Last updated: 4:33 p.m., Wednesday, December 12, 2007

NEW YORK -- Wall Street finished only slightly higher in an erratic session on Wednesday as investors remained unconvinced by a Federal Reserve plan to work with other central banks to alleviate the global credit crisis.

Investors erased a 272-point gain in the Dow Jones industrial average that followed the Fed's announcement of an agreement with the European Central Bank and the central banks of England, Canada and Switzerland to confront what it called elevated pressures in the credit markets.

The Fed said it will create a temporary auction facility to make funds available to banks and set up lines of credit with the European and Swiss central banks for additional resources.

This move is the biggest concerted liquidity injection since the aftermath of the 2001 terrorist attacks and helped boost investor sentiment a day after the Fed disappointed Wall Street with a quarter-point cut in interest rates.

Many investors had hoped for a half-point reduction to help the economy weather the credit and mortgage crises.

But the Fed's latest salvo didn't appear to assuage all of Wall Street's concerns about the spike in bad debt that has caused the credit markets to tighten in recent months, nor did it sew up all of investors' concerns about the nation's economic health.

"There's still no certainty that we're out of the woods ... there's still a risk for recession," said Steven Goldman, chief market strategist at Weeden & Co.

"We did get very positive news from the Fed and other banks chipping in to add liquidity into the system."

"But, the environment hasn't fundamentally changed that the worst is over for the financial system."

He pointed out that the biggest beneficiaries during a period of rate cuts are bank and brokerage stocks.

However, the sector was under pressure Wednesday as investors worried the institutions will take further writedowns after warnings from Bank of America Corp., Wachovia Corp. and PNC Financial Services Group Inc.

According to preliminary calculations, the Dow rose 41.13, or 0.31 percent, to 13,473.90.

The blue-chip index had risen as much as 271.75 in early trading; and was down by as much as 111 points.

Broader stock indicators were also higher.

The Standard & Poor's 500 index rose 8.94, or 0.61 percent, to 1,486.59.

The Nasdaq composite index rose 18.79, or 0.71 percent, to 2,671.14.

Tuesday's stock plunge of 294 points had interrupted Wall Street's attempt at an end-of-the-year rally, but Wednesday's performance brought the possibility of a market recovery back to the table.

The Dow is up more than 6 percent since falling as low as 12,724.09 on Nov. 26.

But analysts were still enthusiastic about the Fed's action on Wednesday.

"I think it's certainly a strong measure to ease this credit crunch, and I think it will encourage banks to use the discounted borrowing."

"If banks won't lend to each other, then at least the central banks will lend to them," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

The plan sent Treasury prices falling, because the prospect of more available credit lessened investors' need for the safe haven that government securities provide.

The 10-year Treasury note's yield, which moves opposite the price, rose to 4.08 percent from 3.97 percent late Tuesday.

The dollar was mixed against other major currencies.

Gold prices rose.

Investors also digested economic data.

The Commerce Department said the U.S. trade deficit rose in October to the loftiest level in three months, driven by record-high oil prices and an influx of Chinese imports.

It also reported that November import prices surged.

If inflation accelerates, it could keep the Fed from lowering rates again.

Energy prices soared after the government reported surprising declines in U.S. stockpiles of crude oil, and surged even further after reports of a fire at an ExxonMobil Corp. refinery in Texas.

A barrel of light sweet crude jumped $4.37 to $94.39 a barrel on the New York Mercantile Exchange.

ExxonMobil shares rose $1.64 to $91.92.

In other corporate news, Wachovia doubled its estimate of loan loss provisions to about $1 billion for the fourth quarter, while BofA pointed to higher writedowns and said he expects current credit market turbulence to extend into 2008.

PNC said the money it will set aside to cover bad loans for the last three months of the year will be more than twice as large as in the third quarter.

Shares of Wachovia fell $3.38 to $40.53, while Bank of America dropped $1.22, or 2.7 percent, to $43.43. PNC fell $3.55, or 2.5 percent, to $68.24.

SLM Corp., the student loan company known as Sallie Mae, slashed its 2008 earnings due to the costs of replacing an interim funding facility.

The company also disclosed it failed to renegotiate a buyout with an investor group that balked several months ago at its original $25 billion cash offer.

SLM shares fell $3.45, or 10.8 percent, to $28.49.

But AT&T Inc. climbed for the second-straight session after the telecom carrier issued solid guidance and lifted its dividend.

AT&T was the biggest gainer among the 30 Dow companies, rising $2.25, or 5.7 percent, to $41.71.

The Russell 2000 index rose 5.44, or 0.71 percent, to 771.71.

Advancing issues led decliners by a 4 to 3 basis on the New York Stock Exchange.

Volume came to 1.59 billion shares.

Overseas, Japan's Nikkei stock average closed down 0.70 percent, while Hong Kong's Hang Seng index closed down 2.41 percent.

Britain's FTSE 100 rose 0.35 percent, Germany's DAX index added 0.83 percent, and France's CAC-40 advanced 0.32 percent.

------

On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

"Fed move doesn't allay Wall Street fears"

By MARTIN CRUTSINGER, Associated Press

Last updated: 4:22 p.m., Wednesday, December 12, 2007

WASHINGTON -- The Federal Reserve on Wednesday announced a novel approach to injecting money into the banking system as it struggles to combat a severe credit crunch that threatens to drag the country into a recession.

The Fed said it would conduct two auctions next week where banks can bid for up to $40 billion in loans, money that they will have to bolster their own reserves.

It marked the Fed's biggest concentrated effort to inject liquidity into the banking system since the Sept. 11, 2001, terrorist attacks.

The hope is that the extra funds will spur increased lending on the part of the banks and combat a serious credit crunch that has made loans harder to obtain for many businesses and consumers.

The announcement initially lifted spirits on Wall Street, with the Dow Jones industrial average up more than 200 points in early trading.

However, stocks could not hold on to those gains as investors worried that the Fed's new auction plan wouldn't be enough to deal with the worsening credit crunch.

In late afternoon trading, the Dow was down nearly 50 points.

That performance followed a huge 294-point drop in the Dow on Tuesday as investors expressed their disappointment at what they viewed as a timid interest rate cut by the Fed.

The central bank trimmed its federal funds rate, the interest that banks charge each other, by a quarter-point.

It was the third cut since September, but many investors had been hoping for a bolder move on the part of the Fed.

The Fed linked the new auction process to an announcement that it was extending a line of credit in dollars to the European Central Bank and the national bank of Switzerland so that those institutions could better deal with credit problems in Europe.

The Fed said it was also coordinating with the central banks of England and Canada.

The efforts are seeking to restore confidence that Federal Reserve Chairman Ben Bernanke and his colleagues at the Fed and the monetary authorities in other countries are doing enough to deal with the spreading global credit crisis.

"They are trying to help hard-pressed banks raise much-needed cash."

"The banking system is under severe pressure because the banks don't want to lend to each other," said Mark Zandi, chief economist at Moody's Economy.com.

The Fed's new program will begin with two auctions next week and another two in January.

The first auction for up to $20 billion will occur on Dec. 17, followed by a Dec. 20 auction for another $20 billion.

The Fed is trying the auction program as an experiment to provide another avenue for providing loans to banks because banks have shied away from borrowing from the Fed's discount window because of the stigma that can be linked to banks who make frequent use of it.

"This is a creative way to try to get more cash into the system without marking anyone as being in trouble," Zandi said.

In a statement timed before the start of trading on Wall Street, the Fed said it would hold two more auctions on Jan. 14 and Jan. 28.

The size of the January auctions will be determined later.

"This is not about particular financial institutions with particular problems."

"It is about market functioning," said a senior Federal Reserve official who briefed reporters on condition of anonymity because of the sensitive nature of the actions.

This Fed official, who spoke to reporters on a conference call, said that the adverse reaction of Wall Street on Wednesday had nothing to do with the timing of the announcement.

This official said discussions with other central banks about an enhanced action plan had been ongoing for some time.

Wall Street investors and private economists generally applauded the Fed's latest effort to combat the country's worst credit crisis in nearly a decade.

But private economists said it still was unclear just how successful the auctions would be in overcoming banks' concerns about getting direct loans from the Fed.

"Clearly, the Fed is feeling its way in the dark here."

"Current conditions are unprecedented in modern times," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.

The Fed said that commercial banks would be able to bid at auction for funds that would be drawn from the newly created Temporary Auction Facility.

The Fed said all banks judged to be in generally sound financial condition by their Fed regional bank would be eligible to participate in the auctions for funds.

The Fed said that the new auction process should "help promote the efficient dissemination of liquidity" when other lines of credit were "under stress."

The experience gained from the four scheduled auctions would be "helpful in assessing the potential usefulness" of this new process to provide funds to U.S. banks, the central bank said.

Fed officials indicated more auctions would be scheduled if the first four were successful.

The Fed statement said the temporary swap arrangements being set up would provide up to $20 billion in reserves for the European Central Bank and up to $4 billion for the Swiss National Bank.

The reserves would be available for up to six months.

"Sallie slashes 2008 profit forecast"

By MARCY GORDON, Associated Press

Last updated: 4:53 p.m., Wednesday, December 12, 2007

WASHINGTON -- Student lender Sallie Mae on Wednesday slashed its profit forecast for the fourth quarter and all of 2008, as it hoards cash to offset bad loans and faces reduced federal subsidies.

The company also said it failed to renegotiate a buyout with an investor group that balked several months ago at its original $25 billion cash offer for Sallie, the nation's largest student lender.

The investor group, led by private-equity firm J.C. Flowers & Co., "does not wish to pursue these opportunities," Sallie, formally known as SLM Corp., said in a press release.

Sallie's shares sank $3.45, or 10.8 percent, to close at $28.49 a share Wednesday.

That is more than 50 percent below the original $60-per-share offer from the investor group, which also includes Bank of America Corp. and JPMorgan Chase & Co.

The investor group had no immediate comment.

The developments come at a stressful time for Sallie, which lost $344 million in the third quarter, and for the student loan industry in general.

Defaults are rising on student loans, and credit-market tremors similar to those linked to the mortgage crisis have begun to show up in the $85 billion student-loan market.

Last Friday, First Marblehead Corp., which packages student loans for sale to investors, said it would suspend that activity during the fourth quarter.

The move by the company, which cited "challenging times" in the capital markets, means less money will be pumped into the market for higher-rate private student loans, those not backed by the government.

Reston, Va.-based Sallie and the Flowers group have been feuding for months over terms of what would be one of the world's largest private-equity takeover deals, and the dispute has landed in court.

The group maintains that a "material adverse effect" has occurred, and therefore it should not have to pay a $900 million breakup fee.

The investors argue that student-loan legislation that has reduced federal subsidies since Oct. 1, and weaker economic conditions, have had a significant negative impact on Sallie, justifying the cancellation of the deal agreed upon in April.

Company officials said in October that they had received expressions of interest from other potential suitors, but no deal has emerged.

On Wednesday, Sallie reduced its forecast for 2008 "core" earnings from $3.25 a share to a per-share range of $2.60 to $2.80.

In the fourth quarter, it expects per-share core earnings, which excludes nonrecurring items, to come in at 52 cents to 57 cents.

Analysts polled by Thomson Financial recently lowered their estimate of Sallie earnings for the fourth quarter to 71 cents a share, on average, down from 74 cents a share a month ago.

Sallie said Wednesday that it "will pursue all available recourse, including its lawsuit against the investor group."

The company said it "offered to consider an alternative transaction with the Flowers group, and to give them the opportunity to update their due diligence and submit a new proposal to acquire the company with no preconditions."

In the third quarter, Sallie wrote off $142.6 million for borrowers missing payments on student loans, more than doubling the $67.2 million writedown of a year earlier.

----

On the Net:

SLM Corp.: http://www.salliemae.com

"Banks see bigger loan losses in 4Q"

By IEVA M. AUGSTUMS, Associated Press

Last updated: 5:23 p.m., Wednesday, December 12, 2007

CHARLOTTE, N.C. -- More troubling news erupted from the financial services sector Wednesday as Wachovia, PNC and Bank of America warned of bigger-than-expected writedowns and hinted that fourth quarter results could be a disappointment.

Wachovia Corp. doubled its estimate of loan loss provisions to about $1 billion for the fourth quarter, while the chief executive of crosstown rival Bank of America Corp. pointed to higher writedowns and said he expects current credit market turbulence to extend into 2008.

A third major bank, PNC Financial Services Group Inc., said the money it will set aside to cover bad loans for the last three months of the year will be more than twice as large as in the third quarter.

The disclosures come as a number of the nations' banks have forecast increasing credit losses in the wake of last summer's subprime mortgage crisis.

In a filing with the Securities and Exchange Commission last month, Charlotte-based Wachovia had said it expected to record a loan loss provision in the fourth quarter between $500 million and $600 million.

In a discussion with financial analysts Wednesday in New York, Wachovia's chief executive Ken Thompson said fourth quarter losses from commercial and consumer mortgages, leveraged finance and structured products, including subprime-backed mortgage securities, had reached about $1.4 billion, similar to the level seen in the third quarter.

Thompson said the updated fourth-quarter writedown estimate "will position us better as we enter 2008," and he added that he is "comfortable" that his bank will "grow earnings" in next year, but gave no specific forecast.

Wachovia shares fell $1.42, or 3.4 percent, to $40.53 on Wednesday, while Bank of America shares lost $1.22, or 2.7 percent, to $43.43 and PNC shares dropped $2.51, or 3.5 percent, to $68.25.

All three were making presentations at an investment conference in New York hosted by Goldman Sachs.

In a client note to investors, Morgan Keegan & Co. analyst Robert S. Patten said:

"There is no good news that we expect from the banks as they work their way through these credit and liquidity issues."

In a separate presentation, Bank of America's chief executive Ken Lewis said, "the economy is definitely slowing."

"We expect weak fourth and first quarters, but at this point we are not forecasting a recession," Lewis said.

"I think you certainly can assume results will again be quite disappointing."

Bank of America said it expects to take a provision expense of $3.3 billion in the fourth quarter and warned write-downs on collateralized debt obligations could grow, adding to fears the nation's housing and mortgage-lending slump might exact a greater toll than in the wretched third quarter -- when industrywide write-downs topped $46 billion.

On Monday, Bank of America decided to liquidate a privately placed, enhanced institutional cash fund, closing it off to new investors, due to withering losses on complex asset-backed securities.

Last month, bank executives estimated pre-tax CDO write-downs of $3 billion, a $300 million write-down of a troubled investment, $600 million in support for cash funds and $230 million for the Visa settlement with Amex.

"Based on conditions today, we expect those writedowns will be larger than have already been reported -- although obviously we won't know our final numbers until we close the fourth quarter," Lewis said Wednesday.

"We will discuss those numbers on the January earnings call."

Bank of America is expected to report fourth-quarter earnings on Jan. 22.

Analysts polled by Thomson Financial, on average, forecast a profit of 70 cents a share.

Those estimates typically exclude one-time items.

Also on Wednesday, PNC Financial Services said in a regulatory filing that it expects to report fourth-quarter earnings in the range of 60 cents to 75 cents a share, and adjusted earnings will be between $1 and $1.15 a share.

Analysts polled by Thomson Financial, on average, forecast a profit of $1.39 a share for the Pittsburgh-based company.

The company said its adjusted provision for credit losses is expected to be about $110 million in the fourth quarter, up $45 million from the previous quarter.

"Fed helps banks deal with credit squeeze"

By JEANNINE AVERSA, Associated Press

Last updated: 4:12 p.m., Wednesday, December 12, 2007

WASHINGTON -- Banks squeezed by a global credit crisis have a new way to get their hands on cash so they can keep making loans to individuals and businesses.

The Federal Reserve, under pressure to take more aggressive action, unveiled a plan Wednesday designed to bring banks and their borrowers relief.

Some questions and answers about what the Fed is doing:

Q: Why is the Fed taking this action?

A: The credit crisis has unhinged Wall Street and threatens to hurt the U.S. economy, which is fighting to avoid a recession.

Q: Why are banks having problems?

A: A meltdown in the housing and credit markets has made banks and other financial institutions reluctant to lend to each other, causing a cash crunch.

Banks have to maintain a certain level of cash reserves, which changes every day.

During normal times -- when credit is smoothly flowing -- a bank, on some days, may be short on its reserves and would need to borrow from another bank to make up the difference.

Or, a bank may have excess reserves, which it is willing to lend to another bank.

Now, however, during the credit crunch, many banks have been hoarding cash -- not wanting to lend or borrow from others banks.

That makes it harder and more expensive for individuals and businesses to obtain credit from banks to finance all sorts of things, such as homes, cars, school and small-business ventures.

Q: Why are banks reluctant to lend to each other?

A: The collapse in the subprime market -- home loans made to people with tarnished credit or low incomes -- triggered the credit crisis.

Banks, financial companies and other investors who made subprime loans or put money into securities backed by those subprime mortgages have lost billions of dollars.

Investors in the U.S. and abroad have grown more wary of buying new debt, thereby aggravating the credit crunch.

Because subprime loans were sliced up and repackaged into an array of complex instruments sold to investors around the globe, there's great uncertainty about where those bad subprime loans pieces will surface and the size of additional losses from those bad investments.

Credit problems have spread to other areas.

Q: How does the Fed's plan help?

A: At the heart of the Fed's plan is the creation of a new temporary facility to provide banks with at least $40 billion in emergency loans.

The Fed is trying to shore up the finances of the banking system.

Q: And how will that help individuals and businesses?

A: If banks have adequate cash on hand, they may be more likely to make loans to people and businesses that need them.

The free flow of credit is the economy's lifeblood.

It allows people to make big ticket purchases and businesses to build and expand.

The plan won't have an immediate impact on the availability and cost of credit to individuals, but it should help over the course of the coming weeks, analysts said.

Q: How does the core of the plan work?

A: The Fed's facility will lend $40 billion in emergency funds to banks through two auctions next week -- Monday and Thursday.

Banks needing cash and that are judged to be in "generally sound financial condition" by their local Federal Reserve bank can participate in the auction.

Banks place bids to get a slice of the money.

The loans are expected to be at rates lower than the 4.75 percent the Fed currently charges banks for direct loans through its discount window.

To secure the short-term, 28-day loans, banks can pledge a broad variety of collateral.

It is the same type of collateral -- such as corporate bonds, real-estate loans, agricultural loans and collateralized mortgage obligations-- allowed if the bank borrowed through the discount window.

Two more auctions are scheduled on Jan. 14 and Jan. 28; the Fed has not yet determined how much money in loans would be available through those auctions.

If the new facility proves popular, the Fed may consider whether it should become a permanent tool in the Fed's arsenal.

Q: Why set up this new, temporary facility if cash-strapped banks already have the option of going to the Fed's discount window for an emergency loan?

A: Tapping the Fed's discount window can put a stigma on a bank if word gets out.

Analysts say it is akin to getting branded with a financial scarlet letter.

Ever since the credit crisis intensified in August, the Fed has been working hard to remove that blot.

But banks remain fearful that market watchers will find out if they got a loan through the window, which could undermine customers' confidence in the institution's soundness.

(The Fed does not reveal the identity of banks using the discount window and said it won't reveal which banks tap the new auction facility for loans.)

Banks using the discount window also pay a higher, penalty rate -- currently 4.75 percent -- on those loans.

That compares with the 4.25 percent federal funds rate that banks now charge each other on overnight loans.

The Fed sliced both rates on Tuesday by a moderate one-quarter percentage point.

It marked the third cut this year in the federal funds rate and the fourth reduction to the discount rate since the middle of August.

Wall Street took a nosedive, disappointed that the rate cuts weren't deeper.

Fed officials insist the discount window is still relevant and don't believe there will be a stigma attached to banks using their new loan facility.

Q: What else is in the Fed plan?

A: The Fed also set up lines of credit with the European Central Bank and the Swiss National Bank that could be used for additional resources.

It said that this temporary arrangement would supply up to $20 billion in reserves to the Europeans' central bank and up to $4 billion to the Swiss central bank.

Q: How long was the plan in the works?

A: The Fed has been negotiating with other central banks since August, when the credit crisis worsened.

When the situation took yet another bad turn over the last couple of weeks, the negotiations intensified.

It had become clear that inter-bank lending markets had deteriorated.

One of the problems that has plagued the global financial system since the summer has been a high London Interbank Offered Rate, known as the LIBOR, which reflected banks' unwillingness to lend to each other.

The rate also is popular for making adjustments to adjustable-rate mortgages.

The Fed's announcement Wednesday was part of a globally coordinated response involving the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank.

Q: Why didn't the Fed announce this on Tuesday, when it sliced the federal funds rate and the discount rate?

Was Wall Street's big tumble after the Fed decision on Tuesday a factor in the timing of Wednesday's announcement?

A: A senior Fed official said the market plunge on Tuesday "had nothing to do with today's announcement" and that it was "in the works for a while."

The official, who briefed reporters on condition of anonymity because of the sensitive nature of the actions, said the Fed waited until Wednesday so that the announcement could be jointly made with the other central banks.

"Treasurys drop on Fed credit plan"

By LESLIE WINES, Associated Press

Last updated: 5:43 p.m., Wednesday, December 12, 2007

NEW YORK -- Treasury prices plunged Wednesday after the Federal Reserve and other central banks announced an ambitious, coordinated program that investors hope will avert a year-end liquidity crisis.

The announcement soothed mounting investor anxieties that a dearth of funding in late month could further slow the economy.

The news initially sparked sharp gains for stocks and sent Treasury prices lower, given that the prospect of more liquid markets lessened investors' need for Treasurys and other safe haven assets.

However, stocks were well off their highs and Treasurys regained some strength by the time the bond market closed.

Wall Street ended only moderately higher.

The Fed and the European Central Bank, the Bank of England, the Bank of Canada and the Swiss National Bank jointly agreed to create a temporary auction facility to keep banks funded.

The central banks' action was designed to address "elevated pressures" in credit markets, according to the Fed.

The pact also will include setting up lines of credit with the European Central Bank and the Swiss Central Bank that could be used for additional resources.

Although the international problems caused by the global spread of bad U.S. mortgage debt are serious and unwieldy, analysts said the concerted effort should, at minimum, produce temporary benefits.

"This is a massive, historical liquidity injection," said T.J. Marta, fixed-income analyst at RBC Capital Markets.

"There is no silver bullet because the problems are so massive, but this is a very significant step."

The likelihood that the program will at least diminish short-term market stress also should reduce the unusually heavy demand for Treasurys seen in recent weeks.

"The facility should reduce funding pressure and, in as much as it does improve liquidity, there will be less fear of a huge system failure at year end," said Kim Rupert, managing director for fixed-income at Action Economics.

"And that reduced demand for Treasurys."

The benchmark 10-year Treasury note fell 20/32 to 101 12/32 with a yield of 4.06 percent, up sharply from 3.97 percent late Tuesday.

The 30-year long bond dropped 17/32 to 107 20/32 with a yield of 4.53 percent, up from 4.47 percent late Tuesday.

The 2-year note gave up 10/32 to 99 31.32 with a yield of 3.12 percent, up from 2.92 percent late Tuesday.

Further selling in after-hours trade pushed yields still higher.

At 5:30 p.m. Eastern time, the 10-year yield rose to 4.09 percent, the 30-year yield advanced to 4.54 percent and the 2-year yield moved up to 3.13 percent.

The 3-month yield fell to 2.91 percent from 2.92 percent on Tuesday and the discount rate dropped to 2.94 percent from 2.85 percent.

The heavy selling Wednesday caused Treasury prices to give back all the gains registered just one day before when the Federal Reserve put in place a rate decision that was not as generous as many investors hoped for.

The Fed on Tuesday ordered 0.25 percentage point reductions in both the overnight federal funds target and the discount rate, the interest at which it makes loans to commercial banks.

The action was viewed by many investors as too paltry, given the unusual pressures that problems in the subprime mortgage sector have put on global financial markets this year.

Severely shaken investors Tuesday staged a heavy stocks sell-off while funneling large amounts of money into Treasurys.

However, Wednesday's bold central bank plan was viewed by investors as a tacit admission by the Fed that small rate reductions would not be enough to bring back to life financial markets paralyzed by subprime fears.

The Fed's foreign exchange swap lines with the European Central Bank and the Swiss National Bank under the new program should allow the central banks to help stabilize the entire London interbank loan, or LIBOR, system, according to RBC Capital Markets' Marta.

LIBOR rates in many currencies have moved sharply higher as credit market problems accelerated and commercial banks grew wary of lending to each other.

Banks are thought to be hoarding cash to build a cushion against possible future writedowns on bad mortgage assets and to square their books at year-end.

The unwillingness of banks to loan to each other has compounded both the liquidity and the confidence crises in the markets.

These problems have restricted currency trade, too.

"If the Fed were only able to flood the system with dollars, the impact would be limited," Marta said.

"But the cross currency swaps will help out all the currencies."

"ECB to offer up to $20B in dollars"

By MATT MOORE, Associated Press

Last updated: 12:12 p.m., Wednesday, December 12, 2007

FRANKFURT, Germany -- The European Central Bank said Wednesday it would make as much as $20 billion available to European banks, in part to fill their demand for scarce dollars, as part of coordinated action with the U.S. Federal Reserve and other central banks.

The Fed said its agreement with the ECB, the Bank of England, the Bank of Canada and the Swiss National Bank was aimed at addressing "elevated pressures" in credit markets.

A decline in interbank lending has produced higher Libor interest rates. Libor is shorthand for the London Interbank Offered Rate and is widely used as a reference rate for such things as variable rate mortgages.

In a statement, the ECB said it would conduct two tenders in conjunction with the Fed, with bids due on Dec. 17 and Dec. 20 that would mature on Jan. 17 and Jan. 31.

The Fed will provide up to $20 billion in dollars to the ECB "by means of a temporary reciprocal currency arrangement," the ECB said.

The move will help the European central banks make more dollar loans to banks in their respective areas and could put downward pressure on interbank dollar rates.

Markets have long worried that since foreign central banks can use only their own currency to inject funds to money markets, that has led to a sort of squeeze on bank funding.

"It probably means that it will give easier access to dollar funds for European banks," said Commerzbank economist Christoph Balz, who added that a similar move was made just after the Sept. 11 attacks in 2001 to provide access to dollars because "at that time there was also a problem for accessing dollar funds for European banks."

Balz said the decision, while not unprecedented, was "a very rare thing."

Since the global credit crunch hit in August, many central banks have injected massive amounts of money into the banking system in an effort to keep credit flowing.

Those efforts have only been partially successful, as banks have become more fearful about extending credit in the wake of a surge in bad loans stemming from the U.S. housing crisis.

The U.S. central bank said that it was creating a temporary auction facility to make funds available to banks and was also setting up lines of credit with the ECB and the Swiss Central Bank that could be used for additional resources.

The Bank of England said it would increase the amount of reserves offered at a 3-month maturity and widen the range of collateral accepted in tenders already scheduled for Dec. 18 and Jan. 15.

The reserves offered will be raised from 2.85 billion pounds ($5.83 billion) to 11.35 billion pounds ($23.22 billion), of which 10 billion pounds ($20.46 billion) will be offered at a 3-month maturity, the bank said.

The bank said it would not make any further changes to those two auctions, but added that it would consider changes to operations scheduled after January "in light of market conditions at the time."

The Swiss National Bank said that in addition to its Swiss franc operations, it would offer a dollar tender auction on Dec. 17 worth up to $4 billion.

It said it may conduct additional U.S. dollar auctions, "subject to evolving market conditions."

Ashraf Laidi, chief foreign currency analyst at CMC Markets in New York, said he was not aware of a specific dollar shortage, but there was a general problem with liquidity in all major currencies ahead of the end of the year.

"The central banks are resorting to the same sort of swap agreements that were used right after 9-11," Laidi said.

"This is a short-term solution that does not alleviate the problems of subprime loans or the housing problems."

"It is unusual that four banks are coordinating it and resorting to swapping instruments among themselves."

Commercial banks in general try to "dress up" the balance sheets at the end of a year.

The crisis in the credit markets puts extra pressure on commercial banks this year.

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AP Business Writers Jane Wardell in London and Leslie Wines in New York and Associated Press writer Alexander G. Higgins in Geneva contributed to this report.

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On the Net:

http://www.ecb.int

"Iraq car bombs kill 33 as Britain poised to return Basra"

by Fadel Mushatat

12 December 2007

AMARA, Iraq (AFP) - Four car bombs killed at least 33 people in Iraq on Wednesday, including 28 in the southern city of Amara, as Baghdad said it would retake control of Basra province from British forces on Sunday.

Triple car bombs in Amara killed at least 28 people and wounded another 151, 10 of them children, said Zamil Shia'a al-Oreibi, director general of Amara health department.

Amara police Lieutenant Ali Kadhim Hassan said the bombs exploded within minutes of each other, the first going off at 10:30 am (0730 GMT).

Hundreds of relatives rushed to hospitals to seek loved ones as Amara police announced a 24-hour curfew, an AFP correspondent reported.

"The security personnel must carefully check all the cars in the city, especially those entering the city," said Ali Hussein, 35, whose 11-year-old brother was wounded in the attack.

Prime Minister Nuri al-Maliki called the bombings a "desperate act aimed at shaking the security and stability in Maysan which had suffered under the former regime."

Amara is the capital of Maysan province.

US National Security Council spokesman Gordon Johndroe said the attacks were by a "determined enemy" that "does not want the Iraqi people to live in security and freedom."

White House spokeswoman Dana Perino said:

"Clearly violence in Iraq is something that has gone down significantly but is still a major problem."

She said Commander of US forces in Iraq General David Petraeus and US Defence Secretary Robert Gates said that the security gains made were "quite significant."

"We in no way are out of the woods yet and we have got, still got a lot of work to do," Perino added.

British troops transferred security control of Maysan province to Iraqi forces in April but the region has seen intense Shiite infighting and battles between militias and Iraqi police.

British soldiers pulled out of Amara in August 2006 and the city of 350,000 residents immediately saw gangs of looters move in and strip the barracks bare.

Shiite gunmen linked to radical cleric Moqtada al-Sadr's Mahdi Army celebrated the British withdrawal as a victory, boasting they had liberated Amara from an occupying force.

Hours after the Amara bombings, a suicide bomber blew up his explosives-rigged car on a bridge connecting villages with the town of Hit in the western province of Anbar, killing five people, said police Major Majid Omar.

Wednesday's blasts were the latest in a series of attacks over the past week after a group linked to Al-Qaeda warned it would unleash a bombing campaign.

The Amara attacks dealt a blow to claims by London and Baghdad that security in southern regions of Iraq was under control.

However, Baghdad on Wednesday announced it would take over security of Basra -- the key southern province which sits on vast oil reserves -- from British troops on Sunday.

"The handover of Basra will take place on December 16," Iraqi government spokesman Ali al-Dabbagh told reporters in Basra.

A military spokeswoman in Basra confirmed the date to AFP.

Dabbagh said Iraqi forces were ready to take control of Basra.

"Our security forces are at a good level" and can manage "security in the province," he said.

Basra police chief Major General Jalil Khalif, who escaped two assassination attempts last month, also expressed confidence.

"We have already been maintaining security since a long time in Basra."

"You can't see any coalition forces deployed here," Khalif said, adding that tribal and political groups had agreed to support the forces.

"They have agreed to give up heavy arms and also not to carry small arms on the streets," he added.

A British parliamentary committee has said that Britain failed in its original aim of bringing security to southern Iraq, however.

"The initial goal of UK forces in southeastern Iraq was to establish the security necessary for the development of representative political institutions and for economic reconstruction," the House of Commons defence committee said.

"Although progress has been made, this goal remains unfulfilled."

Britain has about 5,500 troops in southern Iraq.

They are expected to be cut by more than half to 2,500 by early next year after Iraqis assume control of Basra province.

London says 173 British troops have been killed since the US-led invasion of Iraq to oust dictator Saddam Hussein in March 2003.

"US, China hold pointed trade talks"

By CHRISTOPHER BODEEN, Associated Press

Last updated: 6:33 a.m., Thursday, December 13, 2007

XIANGHE, China -- American and Chinese officials ended two days of economic talks Thursday by calling for calmer heads to avoid trade spats after clashing over who was responsible for Beijing's massive trade surplus.

"We've discussed the importance of balanced growth in both our nations," U.S. Treasury Secretary Henry Paulson said in his closing statement.

"We also both recognize the need to fight economic nationalism in our two nations," he said.

China's top negotiator, Vice Premier Wu Yi, called the China-U.S. Strategic Economic Dialogue, held in a resort outside Beijing, a "complete success."

She cited progress on food safety and environmental protection.

"Both sides need to discuss Sino-U.S. economic relations from a strategic point of view and map out a better blueprint for future U.S.-China economic trade relations and cooperation," Wu said.

Their comments came just hours after the U.S. Commerce Department said the U.S. trade deficit with China jumped 9.1 percent to $25.9 billion in October, a record for a single month.

The rise reflected record imports from China on the back of increased shipments of toys and games and televisions for Christmas.

The demand is still strong despite a string of high-profile recalls of Chinese products from toys with lead paint to defective tires and tainted toothpaste.

So far this year, the U.S. trade imbalance with China is running at an annual rate of $256 billion, on track to surpass last year's record high for any country of $233 billion.

The deficits have triggered a backlash in the U.S. Congress, with dozens of bills introduced seeking to penalize China for what critics see as unfair trade practices contributing to the loss of 3 million U.S. manufacturing jobs since 2000.

U.S. Commerce Secretary Carlos Gutierrez cautioned against those moves, touting achievements in product safety, with agreements signed to safeguard some food and drug imports to the U.S., and another to make it easier for Chinese tourists to visit the United States.

"It's a tremendously complex relationship, and to think somehow that could be solved with a simple act of protectionist legislation I think is a mistake," he said.

But Paulson did push China to open its markets more to U.S. goods and services, while Wu said Beijing can't be blamed for enthusiastic U.S. consumer demand for inexpensive Chinese products and urged Washington to lift restrictions on high-tech exports.

Wu also bristled at any protectionist moves, warning they could be a double-edged sword.

Beijing officials also spoke out against criticism that China's currency, the yuan, is undervalued, giving it exports an unfair advantage and inflating the nation's trade surplus.

China has allowed a slow rise in the yuan's value, but critics have said it was not enough.

Paulson reiterated calls for a faster yuan appreciation, saying it would help China deal more effectively with rising inflation and asset bubbles amid signs its economy was overheating.

But he said people were "misinformed" if they thought the trade imbalance could be significantly affected simply by a rise in the yuan's value.

China's trade surplus was "created by the fact that our nation is growing and not saving and that China has an economy that is built around exports, investing heavily in export industries and has relatively low levels of domestic consumption and very high saving rates," Paulson said.

Fundamentally leveling that imbalance would "take a little while," said Paulson, who met Chinese President Hu Jintao and Prime Minister Wen Jiabao on his return to Beijing.

Wen said environmental protection agreements, including one on developing biofuels, "shows that our strategic dialogue can be productive."

The next round of the Strategic Economic Dialogue was set for Washington in June.

"Asia-Pacific's economy likely to slow"

By GILLIAN WONG, Associated Press

Last updated: 6:42 a.m., Thursday, December 13, 2007

SINGAPORE -- Asia's economic growth is likely to be constrained by an expected slowdown in the U.S. economy and potential spillover from the subprime mortgage crisis, two economic forecasts released Thursday said.

Emerging East Asian economies, which includes China, will likely grow a collective 8 percent next year, down from the 8.5 percent rate forecast for this year, the Asian Development Bank said in a twice-yearly report.

"If the U.S. economy enters a recession and the global economy substantially slows in tandem, the impact on emerging East Asian economies will be potent," the report said.

The U.S. economy -- a major export market for Asia -- has been buffeted by a slowdown in its housing market and a credit crisis after a spike in defaults on mortgages to borrowers with poor credit histories, which has led to losses at major banks and global market turmoil.

Even if the U.S. economy avoids a recession, the ADB predicted financial markets will remain volatile for some time.

Other risks include further tightening of global credit, abrupt changes in exchange rates and a continued rise in oil and commodity prices, the Manila-based bank said.

Similarly, the Pacific Economic Cooperation Council said in a separate report that because of possible fallout from the subprime crisis, the outlook for the broader Pacific Rim region is the most uncertain it has been since the 1997-98 Asian financial crisis.

Still, Singapore-based PECC predicted that the U.S. economy would not enter a recession and that the troubled American housing market will recover by the second-half of 2008.

The think tank, which comprises business executives, government officials and academics from more than 20 economies stretching across the Pacific from Australia and China to Chile and Canada, was "cautiously optimistic" about the region's outlook.

It projected member economies' collective growth to remain at 4.9 percent next year, about the same as this year.

"The risks come principally from the United States," said Woo Yuen Pau, the report's coordinator.

While the U.S. economy barreled ahead at a 4.9 percent rate in the third quarter, many economists expect it to slow to a barely discernible 1.5 percent or even less in the current quarter.

Strong demand from within Asia, particularly China, may be able offset some drag from a likely U.S. slowdown, the report said.

"We think we will be able to dodge the bullet, and that is in part due to very robust domestic demand in Asia, principally from China where import growth is still very strong and domestic demand growth is also very robust," Woo said.

The PECC also cited high energy prices, water pollution and global warming as the top three risks to economic growth in the region.

China's booming growth will slow slightly to 10.5 percent next year from an estimated 11.4 percent this year if government measures to cool the economy begin to take hold, the ADB forecast said.

Economic expansion in the 10-member Association of Southeast Asian Nations will likely slightly moderate to 6.1 percent in 2008, from 6.3 percent this year, the bank said.

But even as growth slows a bit in emerging East Asia, inflation is rearing its head in many economies, it said.

"Slower growth but rising inflationary pressures despite appreciating currencies pose major challenges for the region's policy makers," said Jong-Wha Lee, head of ADB's Office of Regional Economic Integration.

Greater flexibility in exchange rates, a better investment climate and management of capital inflows will help the region support growth, the report said.

Emerging East Asian economies include China, South Korea, Hong Kong, Taiwan plus the 10 ASEAN countries -- Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.

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Associated Press writer Teresa Cerojano contributed to this report from Manila, the Philippines.

"China industrial growth slows in Nov."

Associated Press

Last updated: 7:32 a.m., Thursday, December 13, 2007

SHANGHAI, China -- China's industrial output growth slowed in November to register the second straight month of decline in the expansion rate, according to statistics released by the government Thursday.

The country's value-added industrial production, which includes companies with annual core revenue of more than 5 million Chinese yuan ($679,000), rose 17.3 percent in November from a year ago, according to a report on the Web site of the National Bureau of Statistics.

The slower-than-forecast figure compares with a 17.9 percent increase in October and an 18.9 percent jump in September from their respective months last year.

For the 11 months through November, China's industrial output rose 18.5 percent over the same period a year ago, the Bureau of Statistics said.

The cumulative growth rate for the year has been unchanged for the past three months.

For November, output in nonferrous metals registered the fastest growth at 23.5 percent, the report said.

Automobile output registered growth of 21.7 percent.

Production growth for export continued to slow, climbing 19.5 percent from a year earlier, compared with growth of 22.3 percent in October and 22.8 percent in September.

China's policymakers have vowed to cool economic growth and combat inflation.

Last weekend, the central bank raised the reserve requirement for banks for the 10th time this year, and many expect it to follow with an interest rate increase.

Despite the slowdown in industrial output growth, most data for November has shown few signs such measures have taken hold.

China's inflation benchmark surged 6.9 percent in November compared with the same month last year, the biggest jump since 1996.

Officials blamed food and fuel price increases.

"Japan's Nikkei index tumbles 2.5 percent"

Associated Press

Last updated: 4:22 a.m., Thursday, December 13, 2007

TOKYO -- Japanese stocks tumbled Thursday on pessimism about a key central bank survey to be released Friday that investors expect will show deteriorating confidence among business executives.

The Nikkei 225 index plummeted 395.74 points, or 2.48 percent, to 15,536.52 on the Tokyo Stock Exchange.

On Wednesday, it fell 0.7 percent after climbing to the highest in a month on Tuesday.

Bank issues fell on anxiety that major Japanese banks may have to contribute money to a subprime rescue fund in the United States.

Mitsubishi UFJ Financial Group Inc. sank 7.91 percent to 1,128 yen ($10.14).

Investors were also worried that the Bank of Japan's "tankan" survey of corporate sentiment would show lower business confidence.

Economists polled by Dow Jones Newswires expect the large manufacturers' sentiment index to fall to 21 compared with 23 in previous quarter.

The index measures the percentage of companies reporting positive business conditions minus businesses reporting negative conditions.

A decline in the number means more companies are pessimistic.

The broader Topix index of all first section issues fell 40.83 points to 1,516.10, weighed down by domestic-economy shares.

In currency trading, the dollar bought 111.60 yen at 4:50 p.m. Thursday, down from 112.13 yen late Wednesday in New York.

"Stocks end mixed amid economic reports"

By TIM PARADIS, Associated Press

Last updated: 5:24 p.m., Thursday, December 13, 2007

NEW YORK -- Stocks finished another volatile session mixed on Thursday after a spike in wholesale prices touched off inflation concerns and partially overshadowed a strong increase in retail sales last month.

Despite the uneven economic news, an upbeat forecast from Honeywell International Inc. propped up the Dow Jones industrial average.

Wall Street, which has this week paid close attention to steps by the Federal Reserve to stoke greater movement in moribund credit markets, again looked to economic data for signals about the health of the economy.

In one unwelcome development, prices at the wholesale level jumped 3.2 percent in November -- their biggest increase in 34 years -- after a steep rise in wholesale gasoline prices.

But the news wasn't all bad.

The Commerce Department said retail sales rose in November by the largest amount in six months, and a Labor Department report showed a drop in new claims filed by those seeking jobless benefits.

The modest movement came as investors further examined the Fed's agreement with the European Central Bank and the central banks of England, Canada and Switzerland to combat what it described as elevated pressures in the credit markets.

Scott Fullman, director of investment strategy for I. A. Englander & Co. in New York, said investors struggled with the day's economic readings as well as the Fed's actions.

"It's definitely a mixed picture."

"People are still digesting what came from the Fed."

"You put this all together and it gives you a healthy dose of volatility," he said.

"I really don't think anybody is saying 'I'm very confident to get into this market.'"

The Dow rose 44.06, or 0.33 percent, to 13,517.96, after being down nearly 120 points at one point in the session.

Broader stock indicators showed smaller moves and finished mixed.

The Standard & Poor's 500 index edged up 1.82, or 0.12 percent, to 1,488.41, while the Nasdaq composite index declined 2.65, or 0.10 percent, to 2,668.49.

Declining issues outnumbered advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 1.29 billion shares compared with 1.59 billion shares traded Wednesday.

The market's back and forth trading has likely kept some uneasy investors out of the market, said Robert Schaeffer, vice president of Becker Capital Management Inc. in Portland, Ore.

He pointed to relatively light trading volumes of late as evidence of hesitation by some investors.

"You don't like to stick you neck out because the S&P may be down 30 points in the next five minutes."

"It makes people hesitant to invest."

Bond prices fell.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, jumped to 4.20 percent from 4.06 percent late Wednesday.

The dollar was mixed against other major currencies, while gold prices fell.

The mixed economic readings came in a week already made busy by the Fed's decision Tuesday to lower interest rates for the third time this year and its announcement a day later of the liquidity plan.

Investors since have been debating the effectiveness of the measures.

A slowdown in the housing market remains a concern for Wall Street, as do spiking mortgage defaults that have made banks hesitant to lend to one another amid uncertainty about who might be holding bad debt.

The Fed's actions are aimed at easing the logjam.

The producer price index, which measures inflation at the wholesale level, rose 3.2 percent in November, according to the Labor Department.

But excluding the often-volatile food and energy sectors, inflation rose by 0.4 percent.

While the Fed generally looks at inflation figures excluding food and energy costs, a sharp rise in overall inflation could make it harder for the central bank to continue cutting interest rates.

And retail sales jumped 1.2 percent in November, double the increase economists had expected.

In October, the increase had been a much weaker 0.2 percent.

In corporate news, Honeywell gained after forecasting 16 percent to 21 percent growth in earnings per share for 2008.

Analysts polled by Thomson Financial had been expecting a 17 percent increase.

Honeywell, one of the 30 stocks that comprise the Dow industrials, rose $2.91, or 5 percent, to $60.65.

JetBlue Airways Corp. jumped 90 cents, or 14 percent to $7.15 after German airline Deutsche Lufthansa AG said it plans to pay $300 million for a 19 percent stake in JetBlue.

The Russell 2000 index of smaller companies fell 2.25, or 0.29 percent, to 769.46.

Concerns about the effectiveness of central banks' plans to loosen the world's credit markets weighed on stock markets abroad.

Britain's FTSE 100 fell 2.98 percent, Germany's DAX index lost 1.83 percent, and France's CAC-40 fell 2.65 percent.

In Asia, Japan's Nikkei stock average fell 2.48 percent on the day.

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On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

"Wholesale inflation surges, but sales up"

By MARTIN CRUTSINGER, Associated Press

Last updated: 5:03 p.m., Thursday, December 13, 2007

WASHINGTON -- A record jump in gasoline prices pushed up wholesale inflation in November at the fastest pace in more than three decades, while retail sales showed unexpected strength.

The Labor Department said Thursday that wholesale prices rose by 3.2 percent last month, the biggest increase in 34 years.

The jump reflected a 34.8 percent surge in gasoline prices.

Outside of energy and food, core inflation posted a 0.4 percent jump, double what was expected.

But in more upbeat economic news, the Commerce Department reported that retail sales increased by a better-than-expected 1.2 percent last month.

It was the biggest sales advance in six months and evidence of widespread strength in a number of areas, from department stores to clothing shops and furniture stores.

On Wall Street, stocks posted a modest gain, rising by 44.06 points to close at 13,517.96.

Economists said the retail sales gain should ease concerns the economy is about to tumble into a recession, although they said overall growth in the current quarter is still likely to be weak given the headwinds battering consumers.

Those troubles include the slump in housing, a severe credit crunch and surging energy costs.

All of these problems have pushed consumer confidence down to the lowest point in two years, leading economists to forecast a subpar performance by holiday shoppers this year.

The big jump in wholesale prices was worrisome, economists said, because it was not limited to energy.

That suggests that the relentless surge in energy prices could be spreading into more widespread inflation, something that would raise alarm bells at the Federal Reserve.

"I think the Fed has some worries on inflation," said David Wyss, chief economist at Standard & Poor's in New York.

"We are starting to see some leakage from energy into other areas of the economy."

White House press secretary Dana Perino said one bad report on inflation "doesn't make a trend."

"Inflation has remained remarkably low, even in the face of high energy prices," Perino said.

"We're confident that Chairman Bernanke takes price stability seriously and considers the risk of inflation in the Fed's policy decisions."

The Fed, struggling to get credit flowing again and to ward off a downturn, cut a key interest rate this week for the third time this year.

The Fed also announced a global effort with other central banks to pump fresh cash into the banking system.

Wyss said the stronger-than-expected November retail sales performance would probably cause analysts to lift their forecasts for overall growth in the October-to-December quarter to slightly above 1 percent.

Many had trimmed those projections to less than 1 percent.

They believed a slowdown in consumer spending, which accounts for two-thirds of total economic activity, and the continued drag from housing could push the country close to a recession.

"The retail sales report helps ease some of the worries about a recession, but it doesn't make them go away altogether," Wyss said.

He said he still believed the maximum danger point for a downturn will occur in the first three months of next year.

Half of the November increase in retail sales came from a big jump in gasoline pump prices and therefore was not seen as a sign of strength in consumer demand.

But there were widespread gains across a number of other areas including department stores and stores selling clothing, appliances, furniture and building supplies.

Auto sales, however, fell for a second month, dropping by 1 percent as domestic manufacturers continue to struggle with weak demand.

The 3.2 percent jump in wholesale prices in November followed a much more moderate 0.1 percent rise in October.

Energy costs pushed higher as oil neared $100 per barrel.

Gasoline, diesel fuel and home heating oil all showed big gains.

Food costs were flat last month but the price of new cars and light trucks showed sharp increases.

The department's Producer Price Index measures inflation pressures before they reach the consumer.

The government planned to release its look at consumer prices on Friday.

Analysts were expecting that report to show a hefty gain of 0.6 percent for overall prices, reflecting the energy surge, but a more moderate 0.2 percent increase in core prices.

"Lehman 4Q profit down, beats estimates"

By JOE BEL BRUNO, Associated Press

Last updated: 4:43 p.m., Thursday, December 13, 2007

NEW YORK -- Lehman Brothers Holdings Inc. reported its third straight quarter of losses on Thursday, due to further turmoil in global credit markets, but the company managed to offset most of its problems and easily beat Wall Street expectations.

Lehman, the largest U.S. underwriter of mortgage-backed bonds, relied on a strong performance from its equities business to sidestep losses stemming from the subprime mortgage collapse.

The New York-based investment house was able to offset most of a $3.5 billion writedown with transactions designed to curtail its losses.

"November was absolutely the worst month ever on record for the fixed-income markets," said Lehman Chief Financial Officer Erin Callan.

"We expect it to be challenging for the better part of 2008, and we may see further valuation reductions from here."

However, Callan said she feels optimistic about Lehman's competitive position compared to others on Wall Street -- and that showed in the company's quarterly numbers.

For the three months ended Nov. 30, profit after paying preferred dividends was $870 million, or $1.54 per share, compared to $987 million, or $1.72 per share, a year earlier.

Revenue fell 3 percent to $4.39 billion from $4.53 billion a year earlier.

Analysts polled by Thomson Financial projected a profit of $1.42 per share on revenue of $4.26 billion, according to analysts polled by Thomson Financial.

"Lehman, while not likely the best among the brokers ... should rank among the better performers this quarter," Deutsche Bank analyst Mike Mayo said in a note to clients.

While Morgan Stanley and Bear Stearns are expected to record charges, Goldman Sachs Group Inc. -- which also reports next week -- is expected to fare the best out of the investment banks.

Writedowns from mortgage-backed securities and real-estate holdings reduced revenue by a net of $830 million.

While the actual writedown was $3.5 billion, Lehman managed to offset most of it.

Chris O'Meara, Lehman's head of risk management, said on a conference call with analysts that "subprime was a component" of the writedowns, but that problems had spread into other asset areas -- including prime mortgages and student loans.

He said the investment bank has about $5.3 billion worth of subprime exposure on its books.

"Though we have not emerged unscathed, we've done a good job managing our risk that's allowed us to post solid returns," said O'Meara, who this week became the firm's head of risk after serving as chief financial officer.

He does not expect Lehman will repeat the writedowns despite continued weakness in the U.S. economy, but is not ready to call a bottom.

Fixed-income trading revenue declined 60 percent to $860 million in the quarter, but equity trading revenue more than doubled to $1.9 billion.

Investment banking revenue fell 3 percent to $831 million, though fees from asset management rose 30 percent to $832 million.

"For many investors, it is not necessarily about beating expectations, but the lack of skeletons in the closet in fixed income that investors are hoping to see," said David Easthope, senior analyst with Boston-based financial consulting firm Celent.

"Lehman seems to have fewer skeletons than other banks."

In what may be a sign that the pain is behind it, compensation and benefits at Lehman rose to $9.49 billion in fiscal 2007, up from $8.67 billion a year earlier.

Compensation at the major investment banks is closely watched, particularly for its impact on the New York economy.

Lehman shares fell 45 cents to close at $61.37 Thursday.

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AP Business Writer Stephen Bernard contributed to this report from New York.

"Treasurys off on worries over bank plan"

By LESLIE WINES, Associated Press

Last updated: 3:43 p.m., Thursday, December 13, 2007

NEW YORK -- Treasury prices sold off sharply Thursday as doubts surfaced about a coordinated plan by five central banks to keep stressed capital markets funded at year-end.

The plan, announced Thursday by the Federal Reserve, initially was viewed as likely to funnel enough funds to troubled commercial banks to keep them -- and the capital markets -- from becoming paralyzed in late month.

The Fed, along with the European Central Bank and the central banks of Canada, Britain and Switzerland, announced a new credit auction facility that would provide commercial banks with funds in exchange for a wide variety of collateral.

The central banks are taking extraordinary steps to guarantee liquidity because commercial banks have grown fearful about lending to each other.

Many commercial banks are safeguarding their cash in case they are forced to make new writedowns against sour subprime mortgage assets.

The benchmark 10-year Treasury note fell 27/32 to 100 21/32 with a yield of 4.17 percent, up from 4.09 percent late Wednesday.

Prices and yields move in opposite directions.

The 30-year long bond plunged 1 17/32 to 106 7/32 with a yield of 4.61 percent, up from 4.54 percent Wednesday.

The 2-year note dropped 6/32 to 99 27/32 with a yield of 3.16 percent, up from 3.13 percent Wednesday.

Although the central banks' plan in theory makes sense, analysts questioned whether unusually wary commercial banks can be lured into playing by its terms.

"The Federal Reserve should be given credit for creating something new and different to try to get banks to receive and provide liquidity to a market that so desperately needs it, but the Fed can't really restore trust," said Kevin Giddis, managing director of fixed income at Morgan Keegan.

"The banks will likely need some more time before they are comfortable playing in the same 'sandbox' again and who can blame them," Giddis said.

"Each day one more bank comes clean that the subprime issue is deeper, wider and hairier than they originally thought or were providing cash for."

On Thursday, Lehman Brothers Holdings Inc. said that its fourth-quarter earnings were hurt by losses related to subprime mortgage debt.

Lehman is the largest U.S. underwriter of mortgage-backed bonds.

The company managed to report a quarterly profit that beat analyst expectations, although the latest result was below Lehman's year-earlier level.

Earlier in London, London interbank lending, or LIBOR, rates moved lower for many contracts, indicating the central bank plan at least brought cheaper money into the markets temporarily.

LIBOR rates show the premiums that commercial banks charge each other for loans.

Overall these rates have trended higher since the start of the liquidity crisis in August.

New economic reports are being viewed as secondary in the bond market this week.

But Thursday's reports overall depicted a healthy economy, which is not good for government bonds.

Treasurys tend to perform best when investors are sufficiently worried about the economy to demand assets carrying a government guarantee.

Retail sales last month surged 1.2 percent, outstripping a Thomson/IFR analysts median estimate for a rise of just 0.6 percent.

In more worrisome news for the bond market producer prices shot up 3.2 percent last month, the biggest jump since August, 1973, due to record high rises for energy goods.

Analysts expected an increase of just 1.6 percent.

Other reports showed a decline in initial claims for state unemployment benefits last week and that business inventories in October increased 0.1 percent, a bit below expectations.

"Mortgage rates climb this week"

By JEANNINE AVERSA, Associated Press

Last updated: 12:03 p.m., Thursday, December 13, 2007

WASHINGTON -- Mortgage rates, which had been sliding, went up this week, disappointing news to would-be home buyers.

Freddie Mac, the mortgage company, reported Thursday that 30-year, fixed-rate mortgages averaged 6.11 percent.

That was up from last week's rate of 5.96 percent, which was the lowest in more than two years.

Until this week, rates on 30-year mortgages had been falling or holding steady each week since the middle of October.

Other mortgage rates also moved higher this week.

Rates on 15-year fixed-rate mortgages, a popular choice for refinancing, rose to 5.78 percent, from 5.65 percent last week.

For five-year adjustable-rate mortgages, rates increased to 5.89 percent, compared with 5.75 percent last week.

And, rates on one-year adjustable-rate mortgages moved up to 5.50 percent, from 5.46 percent last week.

The pickup in mortgage rates around the country comes as some prospective home buyers struggle with a credit crunch that has made it more difficult to secure financing for homes and other big-ticket purchases.

The worsening credit crunch has aggravated the housing slump, which is weighing heavily on national economic activity.

The odds of a recession have grown.

"The housing segment of the economy still has a way to go before bottoming out," said Frank Nothaft, Freddie Mac's chief economist.

The mortgage rates do not include add-on fees known as points.

Thirty-year and 15-year mortgages each carried a nationwide average fee of 0.5 point.

Five-year adjustable-rate mortgages and one-year adjustable mortgages each had an average fee of 0.6 point.

A year ago, 30-year mortgages stood at 6.12 percent.

Rates on 15-year mortgages were at 5.86 percent a year ago, while five-year ARMS averaged 5.92 percent and one-year ARMs were at 5.45 percent.

The housing market has been suffering through a severe slump, following five years of heady activity.

Sales turned weak as did home prices.

Foreclosures have climbed to record highs.

The problems in housing are expected to persist well into next year.

The boom-to-bust situation has been especially hard on homeowners with spotty credit and lower incomes.

Overstretched borrowers in some cases have been stuck with mortgages that eclipse the value of their homes.

Against this backdrop, the Bush administration last week unveiled a plan to help some distressed borrowers try to stay in their homes.

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On the Net:

Freddie Mac: http://www.freddiemac.com

"Wholesale prices make big jump"

By JEANNINE AVERSA, Associated Press

Last updated: 10:14 a.m., Thursday, December 13, 2007

WASHINGTON -- Wholesale prices shot up 3.2 percent in November, the biggest jump in 34 years, propelled by a record rise in gasoline prices.

The big inflation pickup in the Producer Price Index, which measures the costs of goods before they reach stores shelves, came after wholesale prices inched up by just 0.1 percent in October, the Labor Department reported Thursday.

When volatile energy and food prices are removed, all other prices rose by 0.4 percent in November, after being flat the month before.

The last time this price barometer registered a bigger increase was one year ago.

The pickup in "core" prices suggested inflation may be seeping into a wider range of goods.

The inflation figures were worse than economists were expecting.

They were forecasting overall wholesale prices to go up by 1.5 percent, and core prices to increase 0.2 percent.

Soaring energy prices were mostly to blame.

They leaped by a record 14.1 percent in November.

Gasoline prices posted an all-time high increase of 34.8 percent last month.

Diesel fuel prices jumped 35.8 percent and home heating oil soared 31.5 percent.

The inflation report "underscores the violence of the latest energy price shock" and the need for Federal Reserve Chairman Ben Bernanke and his colleagues to be vigilant for any signs that these higher costs are being passed along to consumers in the form of higher retail prices, said Kenneth Beauchemin, economist at Global Insight.

The White House was quick to downplay the inflation surge.

"One report doesn't make a trend, but of course we're keeping a watchful eye on it," said White House press secretary Dana Perino.

"Inflation has remained remarkably low, even in the face of high energy prices," she added.

"We're confident that Chairman Bernanke takes price stability seriously and considers the risk of inflation in the Fed's policy decisions."

In another report, new applications filed last week for unemployment benefits dropped by 7,000 to 333,000, the lowest level since the middle of November.

It was an encouraging sign that the employers aren't resorting to large-scale layoffs as they cope with an economy whose growth has been slowed by housing and credit troubles.

The figures were close to analysts' forecasts for claims to dip to 335,000.

Still, new-job creation has clearly lost speed this year as construction companies, factories, mortgage companies and others slash jobs because of the housing collapse and credit crunch.

Rising inflation could complicate the Federal Reserve's job of trying to keep the fragile economy expanding and inflation low.

The Fed on Tuesday sliced a key interest rate to 4.25 percent, the third reduction this year, in an effort to prevent the country from falling into a recession.

Rate reductions are a bracing tonic for weak economic growth, while rate increases are used to combat inflation.

Oil prices, which had neared $100 a barrel, have moderated.

But they are still high.

High energy prices can slow economic activity and spread inflation if they cause the prices of lots of other goods and services to rise.

"Elevated energy and commodity prices, among other factors, may put upward pressure on inflation," the Fed warned on Tuesday.

The Fed pledged to continue to "monitor inflation developments carefully."

Some bright spots in the inflation report: food costs were flat in November, after rising by a sharp 1 percent in October.

And, costs for electronic computers dropped 2.4 percent.

But prices for many other goods moved higher.

Light motor truck prices rose 2.3 percent, the most in one year.

Passenger car prices went up 0.6 percent and platinum and gold jewelry rose 2 percent.

------

On the Net:

Wholesale price report: http://www.bls.gov/

Jobless claims: http://www.doleta.gov/

"Northern Rock CEO departs"

Associated Press

Last updated: 10:13 a.m., Thursday, December 13, 2007

LONDON -- Northern Rock PLC's chief executive will step down immediately rather than in February as planned, the troubled mortgage lender said Thursday.

Adam Applegarth, who has been with the company for 24 years, also will cease to be a director and an employee, the company said.

Northern Rock ran into trouble in September when short-term money markets dried up following the collapse of the U.S. subprime mortgage market.

Heavily reliant on funding from those markets, Northern Rock approached the Bank of England for an emergency loan.

As spooked customers made a run on the bank to retrieve their savings, the government also announced it would guarantee all personal funds held by the lender up to 35,000 pounds ($70,900).

In November, Northern Rock said Applegarth would stay on until the end of a second phase of its strategic review.

His financial settlement "will pay him substantially less than the amount which he would otherwise have been due" because of the company's failure to protect itself from the U.S. prime lending crisis, Northern Rock said.

Applegarth became chief executive in 2001.

His compensation last year totaled 1.36 million pounds ($2.78 million).

Northern Rock added that it is continuing discussions with the Virgin Consortium about a proposed takeover, but is also talking to other parties.

"Northern Rock emphasises that there can be no certainty as to the outcome of these discussions," the company said.

Andy Kuipers succeeds Applegarth as chief executive.

Northern Rock PLC, one of Britain's largest lenders, fell from the FTSE 100-share index Wednesday as the troubled bank's market capitalization fell sharply.

Northern Rock's market capitalization peaked at more than 5 billion pounds ($10.23 billion) in February, but its share price has dropped more than 85 percent to 99 pence ($2.02) Thursday, reducing the bank's value to about 430 million pounds ($880 million).

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On the Net: http://www.northernrock.co.uk/

"H&R Block to take $74.8 million charge"

Associated Press

Last updated: 9:32 a.m., Thursday, December 13, 2007

NEW YORK -- H&R Block confirmed wider second-quarter losses Thursday and the tax preparer said it would record restructuring charges of $74.8 million on the failure of its mortgage arm.

H&R Block confirmed a preliminary report of net losses totaling $502.3 million, or $1.55 per share, for the quarter ended Oct. 31, compared with a loss of $156.5 million, or 49 cents per share, during the same period a year ago.

Of that loss, $366.2 million, or $1.13 per share, came from discontinued operations, including much of its Option One Mortgage Corp., which has suffered as an increase in borrower defaults and the drying up of credit markets has caused dozens of lenders to disappear.

H&R Block said losses from continuing operations would amount to $136.1 million, or 42 cents per share.

Analysts had expected a loss of 35 cents per share on continuing operations.

A $34.9 million charge was taken in the second quarter, and most of the remainder of the restructuring charges will be taken in the third quarter.

The charge, covering expected severance and lease termination costs; write-off of property, plant and equipment; and related shutdown costs, combined with previously announced restructuring activities, brings the company's total restructuring charges for the six months ended Oct. 31 to $77.1 million.

H&R Block said its SEC filing, originally expected on Monday, was delayed because its new auditor, Deloitte & Touche LLP, which was hired Oct. 15 and needed more time.

Revenue from continuing operations rose 9.8 percent to $434.8 million, reflecting growth in the company's remaining three segments.

The mean per-share loss estimate of analysts polled by Thomson Financial was 35 cents on revenue of $463 million.

Last week, the Kansas City-based company canceled its agreement with private equity firm Cerberus Capital Management, where Cerberus would have bought Option One, originally valued at nearly $1 billion.

The two companies cited "widespread changes in mortgage market conditions" and a "substantial reduction in lending" at the unit.

The collapse of the subprime mortgage market led to millions in losses for Option One.

The company had agreed to sell Option One to Cerberus in April, but H&R Block disclosed in August that it was negotiating possible changes to the deal because "certain closing conditions" weren't being met.

In the SEC filing, H&R Block said it does not expect to be in compliance with requirements set by the Office of Thrift Supervision by April 30.

"If we are not in a position to cure deficiencies and if operating results continue to be below our plan, a resulting failure could impair our ability to repurchase shares of our common stock, acquire businesses or pay dividends."

If the company does not meet OTS requirements, the agency could take further regulatory actions, such as a supervisory agreement, cease-and-desist orders and civil monetary penalties.

The OTS could also require H&R Block to sell assets.

"At this time, the financial impact, if any, of additional regulatory actions cannot be determined," the company said.

Shares rose 8 cents in premarket trading to $19.50.

"EU threatens to boycott US climate talks"

By CHRIS BRUMMITT, Associated Press Writer

13 December 2007

BALI, Indonesia - European nations on Thursday threatened to boycott U.S.-led climate talks next month unless Washington accepts a range of numbers for negotiating deep reductions of global-warming emissions at a U.N. conference here.

The move raised the stakes as delegates from nearly 190 nations entered final-hour talks on Bali aimed at launching negotiations for a successor to the Kyoto Protocol.

The United States, Japan and several other governments refuse to accept language in a draft document suggesting that industrialized nations consider cutting emissions by 25 percent to 40 percent by 2020, saying specific targets would limit the scope of future talks.

The European Union and others say the figures reflect the measures scientists say are needed to rein in global warming and head off predictions of rising sea levels, worsening floods and droughts, and the extinction of plant and animal species.

"No result in Bali means no Major Economies Meeting," said Sigmar Gabriel, top EU environment official from Germany, referring to a series of separate climate talks initiated by President Bush in September.

"This is the clear position of the EU."

"I do not know what we should talk about if there is no target."

The U.S. invited 16 other major economies, including European countries, Japan, China and India, to discuss a program of what are expected to be nationally determined, voluntary cutbacks in greenhouse gas emissions.

The Bush administration views the major economies process as the main vehicle for determining future steps by the U.S. — and it hopes by others — to slow emissions.

But environmentalists accuse the U.S. of trying to undermine the U.N. process.

The talks in Bali are scheduled to wrap up Friday.

U.N. climate chief Yvo de Boer said he was worried the U.S.-EU deadlock could derail the process and that a final "Bali roadmap" would contain an agreement to negotiate a new climate deal by 2009, but may not include specific targets for emission reductions.

"I'm very concerned about the pace of things," he said.

"If we don't get wording on the future, then the whole house of cards falls to pieces."

The United States delegation said while it continues to reject inclusion of specific emission cut targets, it hopes eventually to reach an agreement that is "environmentally effective" and "economically sustainable."

But haggling over numbers now was counterproductive, said Jim Connaughton, the chairman of the White House Council on Environmental Quality.

The United States is the world's largest emitter of greenhouse gases and the only major industrial country to have rejected Kyoto, which expires in 2012.

It has been on the defensive since the conference kicked off on Dec. 3.

Pressure has come even from a one-time ally on climate, Australia, whose new prime minister urged Washington to "embrace" binding targets, and from former Vice President Al Gore, who won this year's Nobel Peace Prize for helping alert the world to the danger of climate change.

But U.S. Under Secretary of State Paula Dobriansky, the head of the American delegation, told reporters that the conference was simply the start of negotiations, not the end.

"We don't have to resolve all these issues ... here in Bali," she said.

That did not satisfy environmentalists, who accused Washington of standing in the way of a meaningful deal — and not just on the inclusion of emissions targets.

In the end, however, all parties agree it is vital that the U.S. is on board.

"Everyone wants the United States in so badly that they will be willing to accept some level of ambiguity in the negotiations," said Greenpeace energy expert John Coequyt.

"Our worry is that we will end up with a deal that is unacceptable from an environmental perspective."

The Kyoto Protocol requires 37 industrial nations to reduce greenhouse-gas emissions by a relatively modest average 5 percent below 1990 levels by 2012.

Bush has argued that the pact would harm the U.S. economy and cutbacks should have been imposed on poorer but fast-developing nations such as China and India.

"Gore: US blocking climate talks progress"

By CHRIS BRUMMITT, Associated Press Writer

13 December 2007

BALI, Indonesia - Nobel laureate Al Gore said Thursday the United States is "principally responsible" for blocking progress at the U.N. climate conference, and European nations threatened to boycott U.S.-led climate talks next month unless Washington compromises on emissions reductions.

The former vice president urged delegates to take urgent action to reduce emissions of greenhouse gases blamed for global warming, and told them that the next U.S. president will likely be more supportive of international caps on polluting gases.

"My own country, the United States, is principally responsible for obstructing progress here in Bali," said Gore, who flew to Bali from Oslo, Norway, where he received the Nobel Peace Prize for helping alert the world to the danger of climate change.

White House press secretary Dana Perino said Thursday Gore was wrong in blaming the United States for holding up progress.

"I think he is incorrect," she said.

Kristen Hellmer, a member of the American delegation in Bali, said of Gore's remarks:

"The U.S. is being open and working very constructively with the other countries that are here."

"We are rolling our sleeves up and really working to come up with a global post-2012 framework."

Earlier, the United Nations warned that time was running out for an agreement aimed at launching negotiations for a successor to the Kyoto Protocol when it expires in 2012 and the talks in Bali were in danger of "falling to pieces."

The United States, Japan and several other governments are refusing to accept language in a draft document suggesting that industrialized nations consider cutting emissions by 25 percent to 40 percent by 2020, saying specific targets would limit the scope of future talks.

European nations said they may boycott a U.S.-led climate meeting next month unless Washington compromises.

"No result in Bali means no Major Economies Meeting," said Sigmar Gabriel, top EU environment official from Germany, referring to a series of separate climate talks initiated by President Bush in September.

"This is the clear position of the EU."

"I do not know what we should talk about if there is no target."

It is a continuation of the September White House meetings called the Major Economies Meeting on Energy Security and Climate Change, proposed for Jan. 30-31 in Honolulu, according to Kristy Hellmer, spokeswoman White House Council on Environmental Quality.

The European Union and others say the proposed emissions caps reflect the measures scientists say are needed to rein in global warming and head off predictions of rising sea levels, worsening floods and droughts, and the extinction of plant and animal species.

The U.S. invited 16 other major economies, including European countries, Japan, China and India, to discuss a program of what are expected to be nationally determined, voluntary cutbacks in greenhouse gas emissions.

Perino said that while there were some voices calling for a boycott of the Washington meeting, it did not appear to be the official position of the EU.

She said such comments were "not constructive to a conversation where everybody wants to get together for this meeting to talk about a framework for moving forward."

"And it's not just the United States who has expressed concern and surprise that the draft document included a specific reduction number."

"The specific reduction number was what was supposed to be negotiated after the Bali conference, once a framework was in place," Perino said.

The Bush administration views the major economies process as the main vehicle for determining future steps by the U.S. — and it hopes by others — to slow emissions.

But environmentalists accuse the U.S. of trying to undermine the U.N. process.

Gore urged delegates to reach agreement even without the backing of the United States, saying President Bush's successor, who will take office in January 2009, would likely be more supportive of binding cuts.

"Over the next two years, the United States is going to be somewhere it is not now," he said.

"I must tell you candidly that I cannot promise that the person who is elected will have the position I expect they will have, but I can tell you I believe it is quite likely."

Gore, who helped in the final negotiation of the Kyoto pact in 1997, also called for implementing a successor agreement two years early, in 2010.

The first implementation period of the Kyoto pact expires at the end of 2012.

"We can't afford to wait another five years," he said.

U.N. climate chief Yvo de Boer said he was worried the U.S.-EU deadlock could derail the process and that a final "Bali roadmap" would contain an agreement to negotiate a new climate deal by 2009, but may not include specific targets for emission reductions.

"I'm very concerned about the pace of things," he said.

"If we don't get wording on the future, then the whole house of cards falls to pieces."

The United States delegation said while it continues to reject inclusion of specific emission cut targets, it hopes eventually to reach an agreement that is "environmentally effective" and "economically sustainable."

It also noted that that the conference was the start of negotiations for a new climate pact, not the end.

"We don't have to resolve all these issues ... here in Bali," said Undersecretary of State Paula Dobriansky, the head of the U.S. delegation.

The United States is the world's largest emitter of greenhouse gases and the only major industrial country to have rejected Kyoto, which expires in 2012.

It has been on the defensive since the conference began Dec. 3.

The Kyoto Protocol requires 37 industrial nations to reduce greenhouse-gas emissions by a relatively modest average 5 percent below 1990 levels by 2012.

Bush has argued that the pact would harm the U.S. economy and cutbacks should have been imposed on poorer but fast-developing nations such as China and India.

The talks in Bali are scheduled to wrap up Friday.

"Led by the military, war-weary US awakens to 'soft power'"

by Jim Mannion

Thu Dec 13, 11:51 AM ET

WASHINGTON (AFP) - After six hard years of war, the United States is awakening to the idea that "soft power" is a better way to regain influence and clout in a world bubbling with instability.

And nowhere is the change in thinking more advanced than in the US military, which is pushing for greater diplomacy, economic aid, civic action and civilian capabilities to prevent new wars and win the peace in Iraq and Afghanistan.

US Defense Secretary Robert Gates caught the spirit in a much praised speech at Kansas State University last month, calling for a dramatic increase in spending on civilian instruments of power.

Such an appeal would have been unthinkable not long ago, as Gates himself acknowledged, saying it was a "man bites dog" story.

"I think having stubbed our toe badly on Iraq, people are realizing that we weren't doing that well, and it's time for a change," said Joseph Nye, a Harvard professor and former senior Pentagon official.

Nye popularized the term "soft power" in books and essays which argue that a key source of US clout is its ability to attract friends and allies by investing in the international good.

"Since 9/11, the United States has been exporting fear and anger rather than the more traditional values of hope and optimism," a report by a commission Nye co-chaired with Richard Armitage, the former deputy secretary of state, warned last month.

As a result, it said, "Suspicions of American power have run deep."

The United States needs to pursue a positive vision that goes beyond the war on terrorism, it said.

The response of the Bush administration has been "a mixed bag," Nye said.

"But I do think that the view that we have not had smart power in terms of combining the various instruments we have, that we have underinvested in soft power, is represented in the Gates' remarks," he said.

Gates pointed to the huge disparity between the Pentagon's half trillion dollar budget and the State Department's 37 billion dollars.

Its 6,600 diplomats amount to the crew of a single US aircraft carrier, he said.

The US Agency for International Development has been slashed from 15,000 to 3,000 people, and the US Information Agency was dismantled, he said.

Underfunded and undermanned, US civilian agencies have not kept up with the demand for experts in war zones, leading to bitter complaints from US military officers that they have been left holding the bag.

General James Conway, the Marine Corps commandant, recalled recently that after the march on Baghdad in 2003, his marines were sent to stabilize southern Iraq.

"We were told to expect local governance teams and governance support teams which would help us with those functions and many, many more," he said.

"Those teams did not arrive."

Marines have to be prepared to perform those tasks in future conflicts, he said.

But the right answer is to fund agencies "that we know are going to be players with this soft power (so) that they could develop sort of an expeditionary mentality and people who are anxious to get overseas and get their hands dirty," Conway said.

The State Department is seeking funding for a deployable corps of civilian experts.

But it is the military that has taken the lead in thinking about ways to harness civilian expertise to create security, raising fears in some quarters of a more militarized foreign policy.

The model is a new Africa Command that the Pentagon is establishing to help strengthen security in a troubled continent.

It is supposed to have a senior State Department official as its deputy and components from other civilian agencies.

"The risk is that it may end up being overly military and not enough of the others in part because of money and bodies."

"State for example is very worried about it for that reason," said Robert Hunter, a former US ambassador to NATO.

The military wants civilian agencies to do more to prevent wars, but is not waiting for them to get their act together, analysts say.

Instead, it has stepped up thinking and planning for what it calls "phase zero," military jargon for conflict prevention.

"I think they've come to the conclusion that insurgencies are really hard to fight."

"And so it would be better if they could not have the conflict in the first place," said Robert Perito, an expert at the US Institute of Peace.

"In conflict prevention, of course, there is very little military component to that."

"It's mostly all political and economic."

"That's the other thing that is going on," he said.

"FBI probes Iraq IG on misconduct claims"

By LARA JAKES JORDAN and LOLITA C. BALDOR, Associated Press

Last updated: 6:33 a.m., Friday, December 14, 2007

WASHINGTON -- The FBI is investigating the special inspector general for Iraq reconstruction, Justice Department officials said, following allegations of misconduct from former employees.

The investigation of Stuart Bowen involves possible electronic tampering, including alleged efforts by the inspector general to go through e-mails of employees in his office, said two officials close to the inquiry Thursday.

It is being handled by the FBI's Washington field office, according to law enforcement officials, who like the first officials spoke on condition of anonymity because of the ongoing investigation.

According to one of the officials close to the investigation, the FBI is looking into several issues of possible fraud and abuse and has interviewed a number of former and current employees -- some two or three times.

A grand jury has been impaneled, and has issued subpoenas for documents.

The official said that in addition to the allegations involving Bowen accessing employee e-mails, the FBI is also looking into whether Bowen and his deputy, Ginger Cruz, may have inappropriately used taxpayer funds to pay their legal expenses associated with an administrative investigation that began in 2006.

In addition, the FBI probe may also review whether Bowen misled investigators about the cost of an expensive book project about the special inspector general's activities in Iraq, which is being put together by his office.

A spokeswoman for the Special Inspector General for Iraq Reconstruction said nobody in the office had been notified of any FBI investigation.

"I can neither confirm or deny the existence of any investigation."

"However, no SIGIR official has received notice that they are the subject or target of a criminal investigation," SIGIR spokeswoman Kristine Belisle said.

Belisle also released a copy of a memo written by Bowen that addressed some of the issues raised in the investigation.

In the memo, he said the office paid for $32,700 of Cruz's legal fees and none of his own.

He said that SIGIR's general counsel determined that some of her fees could be paid by the agency since the administrative review "covered actions taken in her official capacity."

Bowen also issued a broad defense of his office -- from its budget and pay policies to employee turnover -- and concluded that, "I take seriously the requirement that SIGIR maintain the highest standards of integrity and transparency as we carry out our demanding oversight effort."

Congress Daily, a publication that focuses on Capitol Hill, first reported the FBI's investigation into the matter on its Web site Thursday.

Bowen denied any wrongdoing and also said he hadn't been notified by the FBI that he was a target, according to the report.

"I am confident that this is going to amount to nothing," Bowen was quoted by Congress Daily.

In May, the White House confirmed that Bowen's office, whose revelations of waste and corruption in Iraq have repeatedly embarrassed the Bush administration, was being investigated by the President's Council on Integrity and Efficiency after complaints from former employees.

The executive branch organization was created to investigate allegations of misconduct by inspectors general at federal agencies.

At the time, the White House rejected suggestions the integrity inquiry was an act of retribution against Bowen, with then-press secretary Tony Snow saying the council was "an independent investigative organization" that did not directly follow the White House's direction.

That investigation, triggered by a lengthy anonymous complaint filed by former staff members, focused on a number of fraud and abuse allegations, as well as descriptions of possible workplace violations, including sexual harassment.

It included charges that Bowen's office overstated the amount of savings that it generated in order to justify a budget request and that money was wasted on the book project.

The council's administrative probe is still under way but has been overtaken by the criminal probe.

"Stocks head for moderately lower open"

By TIM PARADIS, Associated Press

Last updated: 7:42 a.m., Friday, December 14, 2007

NEW YORK -- U.S. stocks headed toward a lower open Friday ahead of a reading on inflation that could help signal how much freedom the Federal Reserve has left to continue a campaign aimed at loosening tight credit markets.

The Fed this week lowered interest rates and announced a plan to align with other key central banks and offer liquidity to pressed lenders around the world.

But while it wants to stimulate the U.S. economy and make lending easier among banks wary of faltering debt, the Fed also has to keep a watchful eye on inflation.

Before the market opens Friday, investors are due to receive the November consumer price index.

A rise in consumer prices like the one revealed Thursday among wholesalers could complicate the Fed's plans.

Stocks finished mixed Thursday after wholesale inflation showed its biggest jump in 34 years.

Besides the report on consumer prices, investors are also awaiting a read on industrial production for last month.

But beyond economic reports, corporate news weighed on investors.

Citigroup Inc. said late Thursday it plans to move assets from seven "structured investment vehicles" onto its books and put up $49 billion to help the SIVs repay their debts.

The bank had said it had no plans to bring the SIVs onto its books.

SIVs are complex investments set up by banks and sold to investors.

They have loomed large on Wall Street in recent months as investors developed a distaste for mortgage investments and other now-risky debt.

The resulting drop in demand hurt the value of the SIVs.

Moody's Investors Service lowered its rating on Citi's long-term debt.

The concerns about inflation and the latest flare-up in the credit markets weighed on stock market futures.

Dow Jones industrial average futures fell 58, or 0.43 percent, to 13,540. Standard & Poor's 500 index futures fell 6.80, or 0.45 percent, to 1,491.70, and Nasdaq 100 index futures fell 5.25, or 0.25 percent, to 2,108.75.

The dollar was mixed against other major currencies, while gold prices fell.

Light, sweet crude rose 72 cents to $92.97 per barrel in electronic trading on the New York Mercantile Exchange.

Overseas, Japan's Nikkei stock average slipped 0.14 percent.

Britain's FTSE 100 rose 0.05 percent, Germany's DAX index rose 0.03 percent and France's CAC-40 fell 0.38 percent.

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On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

"Greenspan: Odds rising for a recession"

By JEANNINE AVERSA, AP Economics Writer

Fri Dec 14, 3:09 AM ET

WASHINGTON - Former Federal Reserve Chairman Alan Greenspan says the odds the U.S. will fall into a recession are "clearly rising" and he believes economic growth is "getting close to stall speed."

Greenspan, who ran the central bank for 18 1/2 years, until early 2006, offered his views on the economy in an interview on NPR News' Morning Edition that will air on Friday.

Excerpts of the interview were released on Thursday.

A severe slump in the housing market, a stubborn credit crisis and turbulence on Wall Street are endangering the country's economic health.

Growth in the current October through December period is expected to have slowed to a feeble pace of just 1.5 percent, or less.

Economists, including Greenspan, have warned that the chances of a recession are growing.

Asked whether the economy will tip into a recession — something that has not happened since 2001 — Greenspan said, "It's too soon to say, but the odds are clearly rising."

He said he felt this way because of the slowing pace of growth.

"We are getting close to stall speed," he said.

"We are far more vulnerable at levels where growth is so slow than we would be otherwise," he added.

"Indeed, it's like someone who has an immune system that's not working very well is subject to all sorts of diseases and the economy at this lever of growth is subject to all sorts of shocks."

Greenspan's remarks come just days after the Federal Reserve, under Chairman Ben Bernanke, sliced a key interest rate for a third time this year to prevent the housing and credit troubles from sinking the economy.

The situation poses the biggest challenge yet to Bernanke since succeeding Greenspan in February 2006.

Some analysts have questioned whether Bernanke waited too long to cut the Fed's key rate and whether he has acted aggressively enough to soothe the economy's woes.

The Fed initially dropped its key rate in September, the first reduction in four years.

That was followed up by additional rate cuts in late October and then again on Tuesday.

Greenspan again rejected criticism that his policy actions helped to feed a housing boom that eventually went bust.

Critics say Greenspan held interest rates too low for too long after the 2001 recession.

To have prevented such euphoria in housing that fed a bubble in prices, Greenspan said the Fed would have had to jack up interest rates so high that it would have damaged the economy.

"That would have broken the back of the economy, and brought the housing boom down," Greenspan said.

"Citigroup to assume control of SIVs"

Associated Press

Last updated: 7:32 a.m., Friday, December 14, 2007

NEW YORK -- Citigroup Inc. plans to assume control of the seven "structured investment vehicles" the bank advises to help them repay their debts.

Citigroup will provide a "support facility" for its seven SIVs with investments totaling $49 billion and incorporate them onto its balance sheet, the bank said Thursday.

The bank previously said it had no plans to bring the SIVs onto its books.

SIVs are complex investment funds established by banks like Citigroup and sold to investors.

SIVs borrow money by selling short-term debt like term notes and commercial paper, then using the borrowed money to buy bank, mortgage and credit card debt that yield higher returns.

The funds profit off management fees and the spread between how much they collect on the investments and how much it costs them to borrow.

SIVs jumped to the forefront of this year's credit crisis when many of the investments they held, particularly mortgage investments, lost a lot of value as demand for risky debt shriveled.

This triggered concern that lenders would be unwilling to keep lending to SIVs.

The viability of a SIV hinges on its ability to continue borrowing short-term money.

If it is unable to renew loans, it has to find new sources of cash or liquidate its investments to repay lenders.

Moody's Investors Service and Standard & Poor's -- two of the three major credit-rating agencies -- were considering downgrading the ratings on several of the world's roughly 30 SIVs, including the seven Citigroup created.

Citigroup will bring the SIVs onto its balance sheet in order to protect their credit ratings and give them time to sell their assets, the bank said.

After Citi's announcement, Moody's downgraded Citigroup's long-term credit rating to "Aa3" from "Aa2," and lowered Citibank's Bank Financial Strength Rating to "B" from "A-," citing the view that Citigroup's capital ratios will remain low.

The company's Tier 1 capital ratio -- its ratio of cash to debt for regulatory purposes -- was about 7.3 percent as of Sept. 30.

Citi said adding the SIVs to the company's balance sheet would reduce the ratio by 0.16 percentage point but it still expects to return to its targeted ration of 7.5 percent in the first half of 2008.

The bank said it expects its SIVs to be able to meet their liquidity needs, which total $35 billion, through the end of next year.

Citigroup expects to provide "little or no" financing.

"After considering a full range of funding options, this commitment is the best outcome for Citi and the SIVs," said Vikram Pandit, who was named Citigroup's chief executive officer Tuesday.

Other banks have made similar moves.

HSBC Holdings PLC said last month that it would put two funds with mortgage exposure on its balance sheet and spend $35 billion to bail them out.

"US firms say China costs rising"

By ELAINE KURTENBACH, Associated Press

Last updated: 7:42 a.m., Friday, December 14, 2007

SHANGHAI, China -- China may be losing its competitive advantage, mainly because of rising costs, according to a survey of companies compiled by the American Chamber of Commerce in Shanghai.

Rampant product piracy was another persistent problem highlighted in a report released Friday that was based on a survey of the group's 1,600 corporate members.

"Some companies mentioned plans to move offshore to India or Vietnam," said Norwell Coquillard, president of Cargill Investments China, an investment holding company of agribusiness giant Cargill Inc.

Still, he noted that most companies with operations in China were still planning to expand capacity on the Chinese mainland, often while moving factories and offices inland to smaller cities where costs are lower.

For many U.S. and other foreign companies, finding, paying for and retaining good employees remains the biggest challenge, the report said.

"More investment has come in and stretched the supply of talent," said Stephanie Liu, human resources director in the Asia Pacific for Armstrong World Industries, a maker of flooring and building products.

"There's no sign of easing in the short term," she said.

Meanwhile, a new labor law, due to take effect next year, has increased uncertainties over hiring and firing practices.

The Labor Contract Law, which takes effect Jan. 1, gives employees who have worked at a company for more than 10 years the right to sign contracts protecting them from being fired without a legitimate reason.

Some companies worry that the law might restore the "iron rice bowl" of lifetime employment practiced by China's state sector during the era of central planning that followed the 1949 communist revolution, said Kent Kedl, general manager of the consulting firm Technomic Asia.

But Kedl said most U.S. companies had little to fear because their employment policies were general in line with international standards, unlike those of smaller local companies that often dismiss workers en masse to avoid paying bonuses, among other things.

"We don't foresee a huge impact here," he said.

The report also said that the recent spate of product recalls of products ranging from tires to toothpaste due to safety and quality concerns is prompting U.S. businesses to become much more vigilant over how their products are made.

Virtually all the companies surveyed were raising standards, stepping up inspections and requiring more detailed specifications, though few said they would stop using products or materials made in China.

Problems with piracy of technology and products remained more or less unchanged from earlier surveys.

Such problems are a perennial headache for both domestic and foreign companies operating in China: U.S. businesses say they lose billions of dollars each year due to the lack of effective enforcement of copyrights, patents and trademarks.

Despite the difficulties of doing business in China's unpredictable, fast changing markets, most companies said they were profitable in 2007 and that their profitability improved.

"Business performance and financial results show many firms are realizing the market potential that China has long promised U.S. companies," the report said.

"Ill., Calif. investigating Countrywide"

By ALEX VEIGA, Associated Press

Last updated: 7:42 a.m., Friday, December 14, 2007

LOS ANGELES -- Attorneys general in California and Illinois are investigating the lending practices of Countrywide Financial Corp., the nation's largest mortgage lender.

The Illinois attorney general launched a probe into the lender's business practices and may expand the investigation to examine how homeowners were approved for mortgages with payments they were unable to afford.

"We're looking at why people who appear to us to not be able to afford the loans they're in are in these loans and how Countrywide contributed to that," said Deborah Hagan, chief of the attorney general's consumer protection division, on Thursday.

A California probe is also under way, a state official familiar with the attorney general's investigation into mortgage lending practices said late Thursday on condition of anonymity, citing the confidential nature of the investigation.

In a statement, the Calabasas-based company said it was cooperating with Illinois' investigation and declined further comment.

A spokesman didn't immediately return an after-hours call inquiring about the California probe.

The company told the Los Angeles Times it had received subpoenas from both states' attorneys general and that it was cooperating with the investigations.

Countrywide, like many in the mortgage industry, has suffered under the weight of the subprime fallout as thousands of customers default on home loans.

Defaults and subsequent foreclosures have been most pronounced on adjustable-rate mortgages made to borrowers with past credit problems.

The subprime loans typically require a lower monthly payment in the first two or three years before resetting to far higher amounts.

Meanwhile, Countrywide on Thursday disclosed details of how its mortgage lending business fared in November.

The lender said its home loan production increased last month by 5 percent from October but dropped 40 percent from the same month last year.

The increase from the previous month came despite ongoing turmoil in the mortgage industry caused by falling home prices, rising loan defaults and a chill in demand by Wall Street for mortgage-backed securities.

The company generated $23 billion in mortgage loans last month.

It continued to scale back subprime mortgages to people with shaky credit histories.

It funded just $17 million in such loans last month, down from $3.06 billion in November 2006.

It also originated fewer adjustable-rate mortgages last month. Funding for those loans totaled $3.3 billion, down from $14.3 billion in the year-ago period.

In all, the lender originated 125,431 mortgage loans in November, compared with 199,929 in the same month last year.

Countrywide said some 6.34 percent of the loans in its servicing portfolio were delinquent last month, up from 4.57 percent in the year-ago period.

Shares of Countrywide fell 45 cents, or 4.3 percent, to $10.08 Thursday.

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On the Net:

Countrywide Financial: http://my.countrywide.com/

"Inflation in euro zone rises in November"

Associated Press

Last updated: 7:42 a.m., Friday, December 14, 2007

BRUSSELS, Belgium -- Inflation in the 13 nations that use the euro surged to an annualized rate of 3.1 percent in November, the highest level since the currency was first used in 2002 and above an earlier estimate, the European Union's statistics agency Eurostat said Friday.

Higher costs for basic foods such as milk, cheese and eggs now join the usual suspects -- transport fuel and heating oil -- as factors pushing up prices from a year ago, it said.

It is now well over a guideline of just under 2 percent that the European Central Bank looks to when it decides whether to raise interest rates to boost borrowing costs.

But the ECB is now under pressure to keep rates on hold to encourage reluctant banks to keep lending to each other in the wake of a credit crisis.

Banks are also worried about taking on extra debt.

Year-on-year inflation in the currency area was 2.6 percent in October and 2.1 percent in September.

The 27-nation European Union also reported inflation of 3.1 percent.

Price changes vary widely across the region with the largest economy, Germany, reporting inflation just above the average at 3.3 percent.

The German government's statistics agency Destatis said the increases there were led by heating oil prices and the cost of diesel used to power trucks and cars.

Destatis said heating oil prices were up 23.7 percent from last year, while the cost of diesel rose 21.6 percent on the year.

Costs for food products also rose, led by higher prices for milk, butter and bread.

Within the euro zone, its newest member Slovenia has the highest rate at 5.7 percent, and the Netherlands has the lowest in the euro area, as well as the wider EU, with 1.8 percent.

Latvia topped the EU list with rocketing inflation of 13.7 percent as the small Baltic nation grows rapidly.

Bulgaria -- which joined the EU this year -- follows behind with 11.4 percent with another Baltic country, Estonia, coming in at 9.3 percent.

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On the Net:

Destatis: http://www.destatis.de