"House panel questions high pay for CEOs"

By JIM ABRAMS, Associated Press

Last updated: 6:33 a.m., Friday, March 7, 2008

WASHINGTON -- The heads of three companies implicated in the mortgage crisis have been asked to explain how they collectively received hundreds of millions of dollars in compensation while their companies were losing money.

Slated to appear Friday before the House Oversight and Government Reform Committee were Angelo Mozilo of Countrywide Financial Corp., the nation's largest mortgage lender; Stanley O'Neal, formerly of Merrill Lynch & Co.; and Charles Prince, formerly of Citigroup Inc.

The committee, chaired by Rep. Henry Waxman, D-Calif., has held several hearings on the issue of high executive compensation.

Last December it looked at large, publicly traded companies that hire compensation consultants who are receiving millions of dollars from corporate executives whose compensation they were supposed to assess.

Republicans on the committee questioned the need for the hearing, saying it falls outside the panel's primary role of investigating waste, fraud and abuse in the federal government.

"A sanctimonious search for scapegoats may feel good, but it benefits no one," said Rep. Tom Davis of Virginia, the top Republican on the committee.

"It's always easy to blame people with a lot of money," said Rep. Darrell Issa, R-Calif., saying Waxman was "going to grind an old ax on an issue organized labor has pushed for years."

Waxman's committee also recently held a highly publicized hearing where lawmakers questioned pitcher Roger Clemens, who denied charges from a former trainer who said he had injected the all-star with steroids and human growth hormones.

According to the committee, Mozilo received $250 million in compensation from Countrywide from 1998, when he became CEO, through the end of last year.

It said that Countrywide announced a $1.2 billion loss in the third quarter of 2007 and lost another $422 million in the fourth quarter.

By the end of the year the company stock had fallen 80 percent from its five-year peak in February.

During the same period, Mozilo received a $1.9 million salary, received $20 million in stock awards contingent upon performance and sold $121 million in stock.

O'Neal received a retirement package of $161 million when he departed last October.

But the committee said that if Merrill Lynch had terminated O'Neal for cause rather than allowing him to retire, he would not have been entitled to $131 million of that in unvested stock and options.

During 2007 the firm reported $18 billion in writedowns related to subprime and other risky mortgages.

Similarly, Prince received a bonus of $10.4 million for the 2007 performance year and was allowed to retain almost $28 million in unvested stock and stock options because Citigroup allowed him to retire rather than terminating him for cause.

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On the Net:

House Oversight Committee: http://oversight.house.gov/

"Japan nominates Bank of Japan chief"

By YURI KAGEYAMA, Associated Press

Last updated: 6:33 a.m., Friday, March 7, 2008

TOKYO -- The government picked Toshiro Muto, a former finance bureaucrat, as Japan's next central bank chief Friday, but legislative approval could be testy amid a broader parliamentary faceoff with the opposition.

A delay in Muto's confirmation would be an embarrassment for Japan on the international stage, reducing investor confidence at a time when global markets are in turmoil.

Economists and investors widely view Muto, a deputy governor at the Bank of Japan, as a safe replacement for Gov. Toshihiko Fukui, whose five-year term ends March 19.

A serious painter who has exhibited his work, Muto has been groomed by Fukui to be his successor and is expected to make a smooth transition in continuing Fukui's policies.

But the opposition claims Muto is too politically connected as a former Finance Ministry bureaucrat, stressing that the central bank should be more clearly separate from the government.

The Bank of Japan has only asserted its independence over the last decade or so.

"We are raising questions about the acceptability of proposing Mr. Muto," Democratic lawmaker Kenji Yamaoka said on nationally televised news.

The prospect that the central bank's governor seat may go vacant has alarmed the ruling Liberal Democratic Party, and Prime Minister Yasuo Fukuda has seemed largely powerless to placate the political jockeying from the opposition.

"Having the governor's seat go vacant simply won't be allowed," said Finance Minister Fukushiro Nukaga, expressing hopes for speedy approval of Muto's nomination.

Also Friday, the Bank of Japan kept its benchmark interest rate unchanged at 0.5 percent at the end of a two-day policy board meeting, Fukui's last.

A prominent Democratic lawmaker, Yukio Hatoyama, has expressed interest in Yutaka Yamaguchi, another deputy governor at the bank, taking the post, fueling speculation that Yamaguchi may be the opposition pick.

Analysts say they don't expect the political scuffling over the Bank of Japan personnel decisions to have any immediate impact on Bank of Japan policies.

"No matter who takes over the BOJ head position, the bank's stance on rates will probably remain unchanged," said J.P. Morgan Chase Bank strategist Tohru Sasaki.

Still, the Nikkei, Japan's biggest business daily, warned that the central bank personnel decision should be carried out quickly and should not become a political tool.

"This abnormal situation will undoubtedly erode Japan's credibility on the international stage," it said in a front-page article earlier this week.

"As the end of the governor's term approaches, we are being forced to confront a nightmare."

Muto will be appearing before committees of both houses of parliament Tuesday next week and will be questioned by lawmakers, a parliamentary official said.

Former BOJ Executive Director Masaaki Shirakawa, 58, now Kyoto University professor, and Takatoshi Ito, 57, professor at the University of Tokyo, who were nominated as BOJ deputies, will also appear, he said.

The appointment of the Bank of Japan governor needs approval from both houses of Parliament.

The Democrats, the major opposition party, control the weaker upper house after a historic electoral victory last year.

The Bank of Japan will be changing leadership at a critical time for the global and Japanese economies amid fears about soaring oil prices, volatile global stock markets, a strengthening yen and declining corporate capital investment.

Fukui said Friday Japan's economic growth cycle has slightly weakened because of uncertainties over the global economy and financial markets.

"The economic mechanism of production, incomes and spending has slightly weakened, but I don't think the cycle is collapsing," Fukui told reporters, while declining comment on the nomination for his successor.

The Bank of Japan in its monthly report was more pessimistic about industrial output and company profit compared to its previous report, saying industrial production was likely to stay flat.

But it maintained the overall assessment of the Japanese economy as expanding moderately, while acknowledging the pace of growth was slowing.

"Japanese shares tumble on weak dollar"

Associated Press

Last updated: 3:02 a.m., Friday, March 7, 2008

TOKYO -- Japanese stocks tumbled Friday as investors sold exporter issues after the dollar weakened further against the yen.

Real estate companies and banks also lost ground.

The Nikkei 225 stock average hit its lowest closing level since Jan. 22, dropping 432.62 points, or 3.27 percent, to 12,782.80 following a 1.88 percent rise Thursday.

Traders think the Nikkei could fall below the 12,500-mark and hit a new low for 2008 if U.S. employment data due out later Friday is weaker than expected and further weakness in the dollar keeps investors away from exporters.

"If the dollar weakens further on worries over a slowdown in the U.S. economy, investors may be buying defensive shares like food and drug shares since exporters are not an option," said Kyoya Okazawa, head of equity research at Credit Suisse.

The dollar was trading at 102.66 yen late afternoon in Tokyo, down from 103.09 yen late Thursday in New York.

The euro rose to $1.5402 from $1.5370.

Exporters lost ground as the yen continued to gain against the dollar.

TDK slipped 7.5 percent to 6,560 yen, while Sony fell 5.1 percent to 4,610 yen.

A strong yen makes goods produced in Japan more expensive and less competitive overseas.

A strong local currency also reduces the value of repatriated earnings from abroad.

Traders also sold banks and real estates.

Mizuho Financial Group lost 5.8 percent to 390,000 yen.

Tokyu Land fell 10 percent to 609 yen after Credit Suisse cut its rating on the stock amid rising construction costs.

The Topix index of all the Tokyo Stock Exchange First Section issues fell 39.78 points, or 3.1 percent, to 1,247.77.

It rose 1.87 percent Thursday.

"Bank of Korea sets new benchmark rate"

Associated Press

Last updated: 1:52 a.m., Friday, March 7, 2008

SEOUL, South Korea -- The Bank of Korea set its new benchmark interest rate at 5 percent Friday amid data showing that risks from rising inflation have begun to outweigh those from a slowing economy.

The central bank said in a statement that it set the seven-day repurchase rate at 5 percent, the same as the previous benchmark overnight call rate target for loans to commercial banks.

The bank has left the overnight call rate target at 5 percent for six straight months through February.

The new benchmark, known as the "base rate," is a reference rate applied to transactions between the central bank and financial institutions such as repurchase agreements.

The central bank's Monetary Policy Committee has been focusing on the risks of both slower growth and inflation, but the minutes of the January policy meeting indicated that the bank believes inflation is the greater risk for now.

The consumer price index rose 3.6 percent on year in February, staying above the central bank's target band for the third consecutive month.

The bank has set an inflation target range of 2.5 percent to 3.5 percent for 2007-09.

Friday's move was widely expected.

Ten out of 12 economists recently polled by Dow Jones Newswires had expected the bank to set the new target rate at 5 percent amid solid recent economic data suggesting that an ease in monetary policy was not yet urgent.

Two economists had expected a rate cut.

All, however, agreed that the Bank of Korea is poised to embark on an easing cycle for the first time in three years.

They expect a quarter percentage point cut in the policy rate as early as the second quarter of this year, as a global economic downturn is likely to lead to slower growth in exports and weaken the momentum of the local economy.

"Dangerous cracks appearing in job market"

By JEANNINE AVERSA, Associated Press

Last updated: 6:33 p.m., Friday, March 7, 2008

WASHINGTON -- Dangerous cracks in the nation's job market are deepening.

Employers slashed jobs by the largest amount in five years and hundreds of thousands of people dropped out of the labor force -- ominous signs that the country is falling toward a recession or has already toppled into one.

For the second straight month, nervous employers got rid of jobs nationwide.

In February, they sliced payrolls by 63,000, even deeper than the 22,000 cut in January, the Labor Department reported Friday.

The grim snapshot of the country's employment climate underscored the heavy toll the housing and credit debacles are taking on companies, jobseekers and the economy as a whole.

"It sounds like the recession bell is ringing for the U.S. economy, although it is still faint," said Stuart Hoffman, chief economist at PNC Financial Services Group.

On Wall Street, stocks tumbled.

The Dow Jones lost 146.70 points, a little more than 1 percent to close at 11,893.69.

The Dow was down 370 for the last two days of the week.

The worsening situation will prompt the Federal Reserve to cut a key interest rate deeply -- perhaps by as much as three-quarters of a percentage point -- at its next meeting March 18, or possibly sooner, to help brace the teetering economy, analysts predicted.

The shower of pink slips was widespread.

Factories, construction companies, mortgage brokers, real-estate firms, retailers, temporary-help firms, child day-care providers, hotels, educational services, accounting firms and computer designers were among those shedding jobs.

All those cuts swamped job gains at hospitals and other health care sites, bars and restaurants, legal services and the government.

"Losing a job is painful, and I know Americans are concerned about our economy; so am I," said President Bush.

"It's clear our economy has slowed."

The big question: Just how much?

The weak employment report pushed an increasing number of private economists into believing the economy is probably shrinking now.

Under one rough rule, the economy would have to contract for six months for the country to be considered in a recession.

The unemployment rate actually dipped slightly from 4.9 percent to 4.8 percent, as 450,000 people left the labor force for any number of reasons.

Economists thought many people probably gave up looking for work.

"It stands to reason that a large share of the people left because they didn't feel like anything was there for them -- that the market was too weak to be searching for a job at this point," said Mark Zandi, chief economist at Moody's Economy.com.

To relieve persistent credit problems, the Federal Reserve announced Friday that it will increase the amount of loans it plans to make available to banks this month to $100 billion.

The Fed already has provided a total of $160 billion in short-term loans to cash-strapped banks since December.

The Fed, in another step, said it will make $100 billion available to a broad range of financial players through a series of separate transactions.

Crumbling employment conditions are feeding fears the economy will fall victim to all the stresses.

Until recently, the positive forces of job and wage growth have helped to offset the negative forces hitting people from the housing and credit crises.

Now people and businesses alike are more cautious, spelling more trouble for the economy.

"The debate should no longer be about whether there is or is not a recession, only about how deep it will be," said Nigel Gault, chief economist at Global Insight.

The elimination of 63,000 jobs in February was the most since March 2003 and marked the second month in a row of job losses.

The last time the economy suffered two consecutive months of job losses was in May and June 2003, when the labor market was still struggling to recover from the blows of the 2001 recession.

"Businesses got cold feet, and when that happens the easiest thing to do is to put hiring on hold and wait until the dust clears," said Ken Mayland, economist at ClearView Economics.

Economic growth slowed to a near standstill of just a 0.6 percent pace in the final quarter of last year.

Before Friday's employment report, many thought growth would weaken further -- around a 0.4 percent pace.

Now, however, a growing number think the economy is contracting.

Bush's top economic adviser, Edward Lazear, acknowledged Friday that the economy may dip into negative territory in the current quarter.

Lazear's comment was the most pessimistic assessment heard out of the White House.

He would not discuss whether the White House believes the economy will actually fall into a recession.

The Bush administration was hoping the government's speedily enacted economic stimulus package -- including tax rebates for people and tax breaks for businesses -- will help bolster the economy in the second half of this year.

"I know this is a difficult time for our economy, but we recognized the problem early and provided the economy with a booster shot," Bush said.

"We will begin to see the impact over the coming months," the president predicted.

Democrats, however, said more relief is needed now.

House Speaker Nancy Pelosi, D-Calif., spoke of charting a "new direction for our economy."

Rep. Barney Frank of Massachusetts, chairman of the House Financial Services Committee, called for action to stem record-high home foreclosures.

The Democratic presidential contenders, Sens. Hillary Rodham Clinton of New York and Barack Obama of Illinois, blamed the job losses on what they believe are failed Bush policies.

"The news should put to rest any doubts that our economy is in deep trouble," Clinton said.

Obama said the employment news meant "more heartache and struggle" for Americans.

On the employment front, workers with jobs saw modest wage gains.

Average hourly earnings for jobholders rose to $17.80 in February, a 0.3 percent increase from the previous month.

Over the last 12 months, wages were up 3.7 percent.

With lofty energy and food prices, though, workers may feel like their paychecks are shrinking.

Spreading fallout from the housing and credit troubles are the main factors behind the economic slowdown.

People and businesses alike are feeling the strains and have turned cautious.

Adding to the stresses on pocketbooks, budgets and the economy: skyrocketing energy prices.

Oil prices, which have set a string of record highs in recent days, now top $105 a barrel.

Gasoline prices have marched higher, too.

All those problems are putting consumers in a gloomy state of mind.

Consumer confidence sank to a new low of 33.1 in early March, according to the RBC Cash Index.

That was the worst since the index began in 2002.

To help shore up the economy, Federal Reserve Chairman Ben Bernanke signaled last week that the central bank is prepared to lower interest rates again.

Economists are now predicting a deep rate reduction by the Fed on or before its regularly scheduled meeting March 18.

The Fed, which has been slicing the rate since September, recently turned more forceful.

It slashed the rate by 1.25 percentage points during just eight days in January -- the biggest one-month reduction in a quarter-century.

"Fed takes new steps on credit crisis"

By JEANNINE AVERSA, Associated Press

Last updated: 10:52 a.m., Friday, March 7, 2008

WASHINGTON -- The Federal Reserve is taking bigger steps to ease the nation's credit crisis, including increasing the amount of loans it plans to make available to banks this month to $100 billion.

The Federal Reserve announced Friday that it will boost the size of auctions planned for March 10 and March 24 to $50 billion each.

That is up from the $30 billion limits it had previously announced.

The auctions serve as short-term loans to get banks the cash they need to keep lending to their customers.

The Fed, in a statement, said it planned to continue the auctions for at least six months, and would move to even larger auction amounts if needed.

In a second step, the Fed said it will make $100 billion available to a broad range of financial players through a series of separate transactions starting on Friday.

The Fed has been working to pump billions of dollars into the banking system to aid an economy rocked by the subprime mortgage crisis and the severe tightening of credit.

The central bank started its new type of auction in December to provide short-term loans to cash-strapped banks in hopes of keeping them lending.

So far, the Fed has made available a total of $160 billion in short-term loans to banks through six auctions.

Fears are growing that the country is teetering on the edge of a recession, if one has not already begun.

The picture worsened just after the Fed's announcement Friday when the Labor Department released a report showing employers slashed another 63,000 jobs in February, the most in five years.

Senior Federal Reserve officials said the steps announced Friday were geared to providing relief to credit markets, which have deteriorated further in recent days, and not related to the weak employment figures.

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.

Financial companies wracked up multibillion-dollar losses as investments in mortgage-backed securities soured with the housing market's bust.

Problems first started in the market for subprime mortgages-- those made to people with blemished credit histories.

However, troubles have spread to other areas.

"Stocks tumble following jobs report"

By TIM PARADIS, Associated Press

Last updated: 6:33 p.m., Friday, March 7, 2008

NEW YORK -- Wall Street ended a dreadful week with another big loss Friday after the government surprised investors with a report that employers eliminated 63,000 jobs last month.

The news compounded fears that the U.S. economy, already hampered by an unrelenting credit crisis, is succumbing to recession.

The Dow Jones industrial average fell 146 points, bringing its two-day slide to 370.

This week's declines in the three major stock indexes to their lowest settlements since 2006 came despite the Federal Reserve's announcement that it would take steps to aid the credit markets.

The Labor Department's report that employers cut jobs by 63,000 last month -- the most since March 2003 -- unnerved investors worried about the health of the economy and who had been expecting a 25,000 gain in jobs.

While the unemployment rate fell to 4.8 percent, the decline reflects people leaving the labor force.

The payroll numbers arrived minutes after the Federal Reserve announced it would take fresh steps to ease credit troubles, including boosting the amount of money it will auction to banks.

The central bank said it will increase the size of its March 10 and 24 auctions to banks to $50 billion each.

The auctions had been slated for $30 billion apiece and Fed officials said subsequent auctions could be bigger if need be.

The Fed also said that it would begin a series of repurchase transactions expected to reach $100 billion.

Craig Peckham, an equity trading strategist at Jefferies & Co., said besides the weak job figures, investors were worried about an apparent lack of effectiveness of the Fed's campaign.

"There is a growing sense that the Fed is trying to pull out all the stops and use all the tools they have but with little net effect," he said.

"It just doesn't appear to be the quick-fix that investors had been hoping for."

"What we've seen is people continuing to press very bearish bets."

The Dow fell 146.70, or 1.22 percent, to 11,893.69.

On Thursday, the Dow's 214-point drop came on resurgent concerns about the health of the credit markets.

The index has not closed below 11,900 since October 2006, but on Jan. 22 dropped during intraday trading to 11,634.82.

Broader stock indicators also declined.

The Standard & Poor's 500 index fell 10.97, or 0.84 percent, to 1,293.37 -- its lowest settlement since August 2006.

The Nasdaq composite index fell 8.01, or 0.36 percent, to 2,212.49, the lowest the tech-dominated index has finished since September 2006.

Bond prices jumped as investors sought defensive positions amid concerns about the economy.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.54 percent from 3.59 percent late Thursday.

It's been a rough week for Wall Street -- the Dow fell 3.04 percent, the S&P fell 2.80 percent and the Nasdaq fell 2.60 percent.

The market had been eager for a read on the jobs picture.

While unemployment remains low by historical standards the increase in unemployment stirred concern among investors worried that it will result in a consumer slowdown.

The well-being of the consumer, whose spending accounts for more than two-thirds of economic activity, is key to investors' hopes of avoiding more economic pain amid the ongoing pullback in home values and credit troubles.

Paul Nolte, director of investments at Hinsdale Associates, said the job losses in February weren't surprising.

"The trend for the last year and a half has been either job losses or very small gains."

"This what you would expect in a contracting economy and we think the economy has been in a recession for two or three months," he said.

The employment figures came a day after concerns about home foreclosures and credit woes rippled across Wall Street.

The start of the week had been relatively quiet.

While investors chewed over a slew of economic data, the major indexes didn't end the first three sessions of the week with huge changes.

While the closing numbers belied some of the volatility, Wall Street had to contend with in the early part of the week, investors' indecision turned to fear Thursday when credit concerns took on new life.

The week also saw the dollar continue to drop, helping push several commodities to record highs.

Many commodities are traded in dollars and so a weak greenback can make their prices rise.

Gold, often regarded as a defensive investment, surged to near the psychological benchmark of $1,000 an ounce.

The Fed's plans announced Friday seemed to shore up investor confidence early in the session -- briefly sending stocks higher -- but failed to quell Wall Street's nervousness about the economy.

Steven Lehman, manager of Federated's Market Opportunity Fund, was doubtful of the effectiveness of the Fed's efforts.

"There is a profound lack of understanding of markets and economies, and there is still persistent lingering faith that the authorities effectively have a magic wand they can wave to make everything fine," Lehman said.

"Economies and markets do go down -- particularly after a multi-decade credit boom."

The dollar hit a fresh record low against the euro following release of the payroll numbers, while gold prices fell.

Light, sweet crude slipped 32 cents to close at $105.15 per barrel on New York Mercantile Exchange, but only after briefly surpassing $106.

The Russell 2000 index of smaller companies fell 2.67, or 0.40 percent, to 660.11.

Declining issues outnumbered advancers by about 5 to 3 on the New York Stock Exchange.

Consolidated volume came to 4.44 billion shares, up from 4.18 billion on Thursday.

Overseas, Japan's Nikkei stock average closed down 3.27 percent after Wall Street's decline.

Britain's FTSE 100 closed down 1.15 percent, Germany's DAX index lost 1.17 percent, and France's CAC-40 slid 1.26 percent.

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The Dow Jones industrial average ended the week down 372.70, or 3.04 percent, at 11,893.69.

The Standard & Poor's 500 index finished down 37.26, or 2.80 percent, at 1,293.37.

The Nasdaq composite index ended the week down 58.99, or 2.60 percent, at 2,212.49.

The Russell 2000 index finished the week down 26.07, or 3.80 percent, at 660.11.

The Dow Jones Wilshire 5000 Composite Index -- a free-float weighted index that measures 5,000 U.S. based companies -- ended Friday at 13,052.41, down 403.55 points, or 3.00 percent, for the week.

A year ago, the index was at 14,271.61.

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On the Net:

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

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

"Oil falls after setting new record"

By JOHN WILEN, Associated Press

Last updated: 4:42 p.m., Friday, March 7, 2008

NEW YORK -- Oil prices jumped to a new record above $106 Friday but settled lower, extending their recent pattern of choppy trading after a weak jobs report convinced many traders that the Federal Reserve's interest rate cutting campaign will continue.

Employers cut 63,000 jobs in February, the biggest drop in five years, the Labor Department said.

Investors can react to such news in one of two ways: by selling on the prospect that the economy, and demand for oil, is cooling, or by buying on a conviction that bad economic data makes it more likely the Fed will cut rates.

On Friday, investors engaged in a little of both, sending oil prices down more than a dollar at one moment, and propelling them to new records the next.

"The higher the market goes, the more volatile it becomes," said Darin Newsom, senior analyst at DTN in Omaha, Neb.

"Does it mean that the rally is over?"

"No."

Light, sweet crude for April delivery fell 32 cents to settle at $105.15 a barrel on the New York Mercantile Exchange.

But prices fluctuated widely, setting a new trading record of $106.54 and falling as low as $103.91.

At the pump, meanwhile, gas prices extended their march toward new records, rising 0.4 cent to a national average of $3.189 a gallon, according to AAA and the Oil Price Information Service.

Gas prices are 68 cents higher than a year ago, and within a nickel of last May's record price of $3.227 a gallon.

Many analysts expect prices to jump much higher as driving demand picks up in the spring.

Lower interest rates tend to weaken the dollar, and many analysts believe the weak dollar is the reason why oil set new inflation-adjusted records four times this week, and has risen 23 percent in less than a month.

Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is falling.

On Friday, the dollar set a new low against the euro Friday before rising.

But most investors believe that despite occasional rebounds, the dollar is likely to continue falling as the Fed continues to cut rates.

"The swings in the dollar are still the most critical item," said Jim Ritterbusch, president of Ritterbusch and Associates, an energy consultancy in Galena, Ill.

Concerns about a possible conflict between oil producers Venezuela and Colombia also supported oil prices Friday.

Earlier this week, rebels attacked and shut down a a Colombian oil pipeline that transports 60,000 barrels of oil a day in retaliation for a Colombian raid into Ecuador.

Venezuela threatened to slash trade and nationalize Colombian-owned businesses, and Venezuela and Ecuador have sent troops to their borders with Colombia.

Many analysts believe oil is overvalued, arguing that oil supplies are at high levels and the demand is falling.

In its latest inventory report, the Energy Department said overall demand for oil dropped 3.4 percent over the last four weeks compared to the same period last year.

"We don't see oil demand accelerating while the price has its foot on the throat of consumers," said Tim Evans, an analyst at Citigroup Inc., in a research note.

But while analysts expect oil's underlying supply and demand fundamentals to eventually pull down its price, few are willing to predict when that will happen.

Meanwhile, oil could continue rising to as high as $120 in the short term, according to some forecasts.

Goldman Sachs, a widely watched oil price prognosticator, said oil could average $110 a barrel by 2010, up from a previous forecast of $80, and said a price spike as high as $200 a barrel is possible, according to Dow Jones Newswires.

Other energy futures were mixed Friday.

April gasoline futures rose 4.11 cents to settle at $2.6943 a gallon, while April heating oil futures fell 2.63 cents to settle at $2.947 a gallon after earlier hitting a new trading record of $2.9863 a gallon.

April natural gas futures rose 2.7 cents to settle at $9.769 per 1,000 cubic feet.

In London, April Brent crude fell 23 cents to settle at $102.38 a barrel on the ICE Futures exchange.

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Associated Press writers Pablo Gorondi in Budapest and Gillian Wong in Singapore contributed to this report.

"More trouble at Carlyle Capital"

Associated Press

Last updated: 1:22 p.m., Friday, March 7, 2008

LONDON -- Lenders to Carlyle Capital Corp. Ltd. have begun to liquidate securities held in its $21.7 billion portfolio and the fund said Friday it was considering "all available options."

The margin calls against Carlyle portend an ominous development one day after the fund was served with default notices, convulsing already skittish markets.

Shares in the fund, a listed mortgage-bond fund managed by private equity firm the Carlyle Group, were suspended Friday.

The stock closed down Thursday almost 60 percent at $5.00 on Euronext Amsterdam.

Carlyle Capital said it received additional margin calls and default notices Thursday from banks that help finance its portfolio of residential mortgage-backed securities.

It said it may not be able to meet the increased requirements.

The fund said it was unable to meet margin calls from four banks Thursday, raising fears that its entire portfolio could be unwound.

Securities have dropped sharply in recent weeks as banks pull back on their lending, forcing investment vehicles and funds like Carlyle to dump assets.

In Friday's statement, Carlyle Capital said it had received "substantial additional margin calls and additional default notices from its lenders."

It also said that lenders were selling off securities held as collateral.

Carlyle Group has a $150 million credit facility with Carlyle Capital.

"But we don't expect it to have any material impact" on the parent company, said Emma Thorpe, director of European communications.

Donald Fandetti, a Citi analyst, said in a research note Thursday that Carlyle Capital appears to have fully drawn down the credit line.

"If Carlyle Group does not provide another backstop, (Carlyle Capital) could be forced into significant asset sales into a weak market or could face bankruptcy," Fandetti wrote.

Carlyle spokesman Christopher Ullman, based in Washington, D.C., wouldn't comment on the status of the credit line.

He also declined to comment on if Carlyle would take additional steps to support the fund.

Carlyle Capital is the first of Carlyle's 55 funds to lose money, he said.

Last September, private equity firm Kohlberg, Kravis Roberts & Co. spent $270 million to bail out a similar fund that invested in mortgages and corporate debt.

KKR founders Henry Kravis and George Roberts personally injected cash into the fund.

Carlyle is one of the world's largest private-equity firms with $76 billion in assets under management.

Risk premiums on residential mortgage-backed securities widened Thursday, stocks fell, and U.S. Treasurys rallied as investors sought safety.

Carlyle Capital said Friday it is in continued discussions with its lenders about its financing situation, but warned shareholders that the additional margin calls and increased collateral requirements to keep funding in place could quickly deplete its liquidity and impair its capital.

Carlyle Capital leverages its $670 million equity 32 times to finance a $21.7 billion portfolio of residential mortgage-backed securities issued by U.S. housing agencies Freddie Mac and Fannie Mae.

To do this, it enters into repurchase agreements with banks, which involve posting the mortgage securities as collateral in exchange for cash.

If the value of the security held as collateral falls, the lender will ask for more collateral -- a "margin call" -- in order to secure the loan.

If the borrower does not meet the margin call by putting up more collateral, the lender may sell the security.

Highly leveraged funds have become increasingly vulnerable because their cash cushions are tiny compared with actual assets.

Sudden price moves in the underlying assets can send margins spiraling, quickly depleting a fund's cash.

Carlyle Capital said Friday that, as of last week, it believed it had sufficient liquidity.

It had reassured investors on its funding situation in its annual report Thursday, saying it had $2.4 billion in unused repo lines and a $130 million (84.86 million euros) liquidity cushion.

"In the past several days there has been a rapid and severe deterioration in the market for U.S. government agency AAA-rated residential mortgage-backed securities," Carlyle Capital said Friday.

The fund is managed by a unit of Washington D.C.-based Carlyle Group.

It initially was launched as a private fund in 2006, then floated on Euronext Amsterdam in July.

Within weeks of the listing, it was forced to hit up the Carlyle Group for $200 million in emergency funding and it sold a $900 million loan portfolio at a loss to meet margin calls.

Last week, Chief Executive John Stomber said the fund "can and will do better" after the difficulties in 2007.

Net asset value per share sank 30 percent last year, to $13.11 at Dec. 31 from $18.65 shortly before the listing.

The stock, which had been offered at $19, also performed poorly, losing 37 percent before Thursday's announcement.

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AP Business Writer Christopher S. Rugaber in Washington contributed to this report.

"CEOs defend their high pay on Hill"

By JIM ABRAMS, Associated Press

Last updated: 3:42 p.m., Friday, March 7, 2008

WASHINGTON -- Three corporate executives called in for a shaming by Democratic lawmakers Friday defended raking in hundreds of millions of dollars despite contributing to the subprime mortgage crisis that has their companies reeling from losses and the nation on the edge of recession.

"There's a complete disconnect with reality," said Rep. Henry Waxman, D-Calif., chairman of the House Oversight and Government Reform Committee.

But the CEOs testifying before the committee, Angelo Mozilo of Countrywide Financial Corp.; Stanley O'Neal, formerly of Merrill Lynch & Co; and Charles Prince, formerly of Citigroup Inc.; defended their pay as appropriate.

"As our company did well, I did well," said Mozilo, founder of Countrywide, the nation's largest mortgage lender and a key player in the subprime problem.

"But when our company did not do well, as in 2007, my direct compensation and the value of my holdings declined materially, which is as it should be."

Republicans on the committee generally agreed.

"This is a hearing in search of bad guys," said Rep. Darrell Issa, R-Calif.

"All of you complied with the transparency rules and the best practices rules."

The hearing was the second held by Waxman on the issue of executive pay, which Forbes magazine said averaged $15.2 million for the CEOs in the largest 500 U.S. companies in 2006, an increase of 38 percent in one year.

He questioned how all three CEOs could profit handsomely at a time when their companies were losing billions of dollars and stock values were plunging.

"You're in the middle of an enormous debacle," Waxman said.

"It seems like everyone is hurting except for you."

"It's only in the wacky world of CEOs where you get severance for failing," said Nell Minow, editor of The Corporate Library and one of the economic experts testifying.

Committee figures showed that Countrywide suffered a $1.2 billion loss in the third quarter of 2007 and then lost another $422 million in the fourth quarter.

By the end of the year, the company's stock had fallen 80 percent from its five-year peak in February.

During the same period, Mozilo received a $1.9 million salary, $20 million in stock awards contingent upon performance and sold $121 million in stock.

Some of those stock sales occurred at the same time the company was borrowing $1.5 billion to repurchase its shares.

Rep. Elijah Cummings, D-Md., questioned Mozilo's insistence -- documented in a November 2006 e-mail -- that he be reimbursed for taxes owed when his wife traveled on Countrywide's corporate jet.

Mozilo related how he had started Countrywide in 1969, sitting in the kitchen of his small New York apartment.

He said his direct compensation and the value of his stock holdings declined substantially last year and he had not received, and will not receive, a bonus for 2007 and 2008.

Mozilo also said he would give up some $37 million in severance pay if Bank of America proceeds with plans to acquire Countrywide.

O'Neal received a retirement package of $161 million when he was pushed out as Merrill Lynch CEO last October.

But the committee said that if the company had terminated O'Neal for cause rather than letting him retire, he would not have been entitled to $131 million of that in unvested stock and options.

During 2007, the firm reported $18 billion in writedowns related to subprime and other risky mortgages.

O'Neal countered that he had received no bonus in 2007 and no severance pay.

He was defended by John Finnegan, chairman of Merrill Lynch's compensation committee.

"All of the $161 million related to prior-period performance and all were amounts to which Mr. O'Neal was entitled as a retirement-eligible employee."

The lawmakers also asked why Citigroup, which saw its stock fall 48 percent at the end of 2007 compared with a year earlier, would award Prince a cash bonus worth $10.4 million after he stepped down as CEO last November.

He also received $28 million in unvested stock and options and $1.5 million in annual perquisites upon his departure.

"I'm proud of my accomplishments," Prince said, speaking of his contributions over almost three decades to Citigroup's growth and the company's efforts to assist homeowners facing foreclosure.

Rep. Tom Davis of Virginia, top Republican on the committee, noted that Mozilo's total compensation package in 2007 was about $22 million, half that of 2006, while Prince also saw his compensation halved in 2007 to about $12 million.

Linking executive pay to the subprime crisis "only seems to muddle the issue further," he said.

Several of the executives did acknowledge public resentment over the fact that large company CEOs now receive about 600 times what the average worker earns, compared to about 40 times in 1980.

The question, said Richard Parsons, chairman of Citigroup's personnel and compensation committee, is "how do we remain competitive without contributing to something that could be tearing at the fabric of society."

------

On the Net:

House Oversight and Government Reform Committee: http://oversight.house.gov/

"Consumers increase borrowing in January"

By JEANNINE AVERSA, Associated Press

Last updated: 3:32 p.m., Friday, March 7, 2008

WASHINGTON -- Consumers increased their borrowing in January, especially relying on credit cards to finance their purchases.

The Federal Reserve reported Friday that consumer credit increased at an annual rate of 3.3 percent in January.

That was up from a 1.8 percent growth rate in December and marked the fastest pace since November.

The pickup in January pushed up total consumer debt by $6.9 billion to $2.52 trillion.

That was on target with economists' expectations.

The increase in borrowing was led by heavier use of revolving credit, primarily credit cards.

Demand for revolving credit rose at a 7 percent pace in January.

That was up from a 2.8 percent growth rate in December.

Demand for nonrevolving credit used to finance cars, vacations, education and other things, rose at an annual rate of 1.1 percent for the second month in a row.

Consumers have been moving to put more of their purchases on their credit cards as banks have tightened up on their lending standards for home equity loans in response to the deepening credit crisis.

The Fed's measure of consumer borrowing does not include any debt secured by real estate such as mortgage or home equity loans.

"Treasurys mixed amid complex news flow"

By LESLIE WINES, Associated Press

Last updated: 6:02 p.m., Friday, March 7, 2008

NEW YORK -- Treasurys closed mixed Friday, after being buffeted by a complex mix of news developments, including heavy monthly job losses on the one hand and a generally successful stock sale by bond insurer Ambac Financial Group Inc. on the other.

In addition, the Federal Reserve took major steps to increase liquidity in the financial system at a time when money is exceptionally tight.

Given an unnerving wave of liquidations of securities by hedge funds desperate to raise cash this week, investors were more focused on the financial market developments than the worrisome economic numbers.

"At this point the market is beyond economic data," said Tom di Galoma, head of Treasurys trading at Jefferies & Co.

"The market doesn't have the liquidity it once had."

"There used to be buyers and sellers."

"There are just sellers now."

"But the selling overall has been good for Treasurys as that is all anyone wants to buy."

Treasury prices gave back some gains Friday after Ambac raised $1.5 billion by selling stock and convertible securities to protect its stellar "AAA" rating.

That development should ease tension in the municipal bond market, which was rocked in February by worries that Ambac and MBIA Inc., the major insurers in the U.S. market, would lose their crucial "AAA" ratings.

Still, any sign that things could return to normal in the municipal bond market lessens the appeal of government bonds as low-risk assets.

The 2-year note rose 4/32 to 100 31/32 with a yield of 1.5 percent, down from 1.53 percent late Thursday, according to BGCantor Market Data.

Immediately after the February jobs report, the yield slipped to 1.40 percent, its weakest level since July 16, 2003.

The 10-year note gained 9/32 to 99 23/32 with a yield of 3.53 percent, down from 3.59 percent late Thursday.

Prices and yields move in opposite directions.

But there was selling of the 30-year long bond linked to inflation concerns.

Investors tend to sell the long bond to push its yield higher to conform to their expectations for long-term inflation.

A recent commodities rally has stoked inflation worries.

The 30-year bond fell 17/32 to 97 with a 4.57 percent yield, up from 4.56 percent.

After hours trade had some impact on yields.

At 5:30 p.m. Eastern time, the 2-year yield was 1.53 percent, the 10-year yield was 3.54 percent and the 30-year yield was 4.56 percent.

The yield on the 3-month note rose to 1.42 percent from 1.40 percent late Thursday as the discount rate advanced to 1.39 percent from 1.38 percent.

The Fed Friday stepped up its efforts to ease the credit crisis by increasing the amount of money it will auction to banks this month to $100 billion from $60 billion.

The central bank also said it will execute larger-than-usual repurchase agreements, or repo, transactions to allow it to pump up to $100 billion into the financial system at any one time.

In early trade, Treasurys rallied sharply Friday after news of heavy job losses last month suggested a recession is under way.

The Labor Department said the economy gave up 63,000 jobs in February, the heaviest losses in five years.

The unemployment rate dipped to 4.8 percent in February from 4.9 percent in January.

But that change may only indicate that many people are discouraged about their prospects and have left the work force permanently.

The February report showed the first monthly back-to-back job losses since May and June 2003, when the job market was still struggling to recover from the 2001 recession.

The weak jobs report was widely seen as indicating the Federal Reserve will have to continue cutting rates to stimulate the economy.

The central bank has cut the overnight fed funds rate to 3 percent.

Before the credit crisis began last fall, it had remained at 5.25 percent for many months.

The Fed will hold its next monetary policy meeting on March 18.

On Friday, Dallas Fed President Richard Fisher, who has voted against recent rate cuts, warned that the markets shouldn't expect more.

Still, fed funds futures contracts on Friday showed investors are betting on a rate cut of up to 0.75 percentage point.

The biggest challenge for both the Fed and the economy is that inflation is rising although the economy is wobbly.

Fed Vice Chairman Donald Kohn on Friday acknowledged that rising commodities prices have taken the Fed by surprise.

If prices do not level out, as the central bank has projected, there will be "important implications" for monetary policy, he said.

Kansas City Fed President Thomas Hoenig, in a speech on the recent financial turmoil in Brazil, warned that inflation pressures will increase if monetary policy "remains too easy for too long."

Hoenig also said there is too much burden on interest rates to fix the economy and financial crises, and that there are consequences to excessive reliance on monetary policy.

"CEO pay rise shenanigans"

By RACHEL BECK, Associated Press

Last updated: 1:02 p.m., Friday, March 7, 2008

NEW YORK -- Financial company CEOs often talk about needing better incentives to perform.

How about this one: You're lucky to have a job when many of your peers don't.

But that's not how it's working in the marketplace.

Despite being hard hit by the housing and mortgage slump, some companies -- including Washington Mutual Inc. and Toll Brothers Inc. -- have made surprising changes in benchmarks for executive bonuses going forward.

What they are doing is moving the goal posts in a way that all but guarantees executives will score big paydays.

That's the result when you take out the bad stuff that could drag down compensation and include things that will likely prop it up.

It makes you wonder what boards of directors are thinking in the midst of a housing and mortgage crisis.

Billions of dollars in shareholder value have vanished since last summer, leading to the ouster of CEOs at Citigroup Inc., Merrill Lynch & Co. and other companies.

Corporate boards, already under attack from shareholder groups for not properly monitoring risk, should be doing what they can to avoid controversy.

Instead, some of them seem to be inviting more of it.

"Six years after Enron, and it's still clear there isn't a culture of board accountability," said Richard Ferlauto, director of pension and benefits policy at the American Federation of State, County and Municipal Employees, a Washington-based labor group representing government workers.

"They are doing things that promote risk-taking with little downside for executives."

The compensation committee on Washington Mutual's board looked like it was on the right track by not giving CEO Kerry Killinger a cash bonus in 2007.

After all, operating earnings fell 40 percent last year and the shares of the nation's largest thrift tumbled 68 percent in price.

But that kind of pay-for-performance accountability seems destined to slip away in 2008.

The Seattle-based company late Monday disclosed in a securities filing that its board changed the executive pay structure to exclude certain credit costs when calculating cash bonuses.

Now, 30 percent of the bonuses will be tied to operating profits excluding expected mortgage defaults or the costs of real estate foreclosures.

Another 25 percent of the calculation will exclude some restructuring and business resizing costs as well as foreclosures.

The board will "subjectively" evaluate the company's performance in credit-risk management.

Washington Mutual acknowledged it faces a "challenging business environment" when disclosing the new pay metrics.

But that now seems like something WaMu shareholders have to worry about more than executives, especially since the revised pay structure gives them little incentive to minimize credit costs, said analyst Frederick Cannon of the investment firm Keefe, Bruyette & Woods.

"This management incentive structure could result in executive focus away from issues that we feel are critical to the success of Washington Mutual in 2008," Cannon said, who is calling on the board to "revisit" this plan.

Upscale home builder Toll Brothers also didn't give CEO Robert Toll a bonus in fiscal 2007 for the first time in 16 years.

That happened after the housing slump resulted in the Horsham, Pa.-based company's first quarterly loss in 21 years and sent the stock plunging more than 35 percent in 2007 alone.

Yet things might not stay sour for Toll for long; the board's compensation committee signed off on a new way to calculate his annual bonus that will better allow him to be rewarded in a boom or a bust.

Previously, the bonus had been based on a percentage of net income, which had to exceed 10 percent return on equity and a stock-price growth adjustment was applied, according to The Corporate Library, an independent corporate governance research organization.

Starting this year, the board is proposing a plan whereby Toll stands to get 2 percent of the company's pretax income before subtracting from earnings the compensation expenses related to the actual cost of his bonus.

Toll's bonus will also depend on the performance of a host of other factors, ranging from gross revenue and cash flow to issuance of new debt, acquisition of companies, overhead cost cuts and worker morale.

His bonus will be capped at $25 million a year.

The good news is that investors get a say in Toll Brothers' pay changes -- if they vote against the plan, as two proxy advisory firms are recommending, the company will use the previous pay structure.

"It appears that the company has introduced this proposal as a way to ensure that (Robert) Toll receives a cash incentive even when company performance is suffering," one of the advisory firms, Proxy Governance Inc., said in a report to clients.

Toll Brothers, in a securities filing Tuesday, defended the plan as being geared toward performance -- if there is no pretax income before bonus then the CEO doesn't get paid.

It also noted that the compensation committee can give zero discretionary bonus if it so chooses.

Sounds good on paper, but will it happen in practice?

Let's hold them to it if business keeps going south.

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Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org

"World markets slide as US economy groans"

By TOBY ANDERSON, Associated Press

Last updated: 8:22 a.m., Friday, March 7, 2008

LONDON -- Markets in Europe and Asian slid Friday, signaling alarm over a broadening deterioration in the U.S. housing sector that is beginning to resonate worldwide.

Carlyle Capital Corp. said it had received additional margin calls and default notices for its $21.7 billion portfolio of residential mortgage-backed securities.

Shares in the fund were suspended Friday on Euronext Amsterdam.

Japan's Nikkei 225 index fell 3.3 percent to close at 12,782.80 as investors sold exporters' shares amid the dollar's drop to a three-year low against the yen during Asian trading.

The U.K.'s benchmark FTSE 100 sank 1 percent, while Germany's DAX fell 1.2 percent.

France's CAC 40 declined 1.1 percent.

"Equities look set to finish the week in something of a downbeat mood," said Matt Buckland, a trader at CMC Markets in London.

Hong Hong's Hang Seng index closed down 3.6 percent, bringing its decline since the start of the year to 19 percent.

Yet early Friday, Dow futures rose 6, or 0.05 percent, to 12,076.

S&P 500 futures advanced 1.60, or 0.12 percent, to 1,309.50, and the Nasdaq 100 index rose 4.75, or 0.28 percent, to 1,719.00.

Bond prices rose.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.54 percent from 3.59 percent late Thursday.

The Mortgage Bankers Association said Thursday that the proportion of U.S. mortgages falling into foreclosure jumped to a record 0.83 percent in the final quarter of 2007.

The Federal Reserve reported that Americans' home debt exceeded their equity for the first time since the central bank began tracking the figures in 1945.

Homeowners' percentage of equity fell to 47.9 percent in the fourth quarter.

"We are worried about the U.S. market," said Shim Jae-youb, a strategist at Meritz Securities Co. in Seoul.

Investors were bracing for a key U.S. jobs report Friday.

Economists on average were predicting a modest gain in February payrolls, though some expect a decline.

Shim said investors were "pessimistic" about what it would say.

In Tokyo, investors sold exporters' shares like Sony Corp. and TDK Corp. after the dollar fell against the yen.

In early European hours, the U.S. currency extended declines, trading at 102.05 yen.

Shim also said potential credit defaults in the United States were weighing on sentiment.

He pointed to Thornburg Mortgage Inc., which this week failed to make a margin call, or a payment to guarantee a much larger debt or investment.

Turmoil has engulfed global equities since last summer as rising default rates among U.S. mortgage holders with poor credit histories -- or subprime loans -- raised concerns of a spillover effect that could lead to recession in the world's largest economy.

U.S. consumer confidence dropped to a new low amid worries about growth prospects, the housing and credit markets and high energy prices.

Traders said that more bearishness could be expected.

"We still have some downside left in the market, which is sad to say, but that's the way it is looking trend-wise, it is still looking heavy," CMC Markets senior dealer Dominic Vaughan said of Australia's market.

Elsewhere, the Philippine Stock Exchange Index plunged 2.8 percent to a six-week low, while in mainland China the Shanghai Composite Index fell a more moderate 1.4 percent.

----

Kelly Olsen in Seoul, South Korea contributed to this article.

"Rebate letters to cost $42 million"

By DEVLIN BARRETT, Associated Press Writer

7 March 2008

WASHINGTON - At a cost of nearly $42 million, the IRS wants you to know: Your check is almost in the mail.

The Internal Revenue Service is spending the money on letters to alert taxpayers to expect rebate checks as part of the economic stimulus plan.

The notices are going out this month to an estimated 130 million households who filed returns for the 2006 tax year, at a cost $41.8 million, IRS spokesman John Lipold confirmed.

That works out to about 32 cents to print, process and mail each letter.

It doesn't include the tab for another round of mailings planned for those who didn't file tax returns last year but may still qualify for a rebate.

Democrats accused the Bush administration of wasting time and postage.

"There are countless better uses for $42 million than a self-congratulatory mailer that gives the president a pat on the back for an idea that wasn't even his," Sen. Charles Schumer said Friday, arguing the IRS could more effectively spend the money to catch tax cheats.

Keith Hennessey, director of the president's National Economic Council, said the letters are being sent to explain how the tax rebates will work.

"Any time you do something as a government tens of millions of times, there is ample room for people to get confused."

"And so if you're going to have tens of millions of taxpayers getting checks, you want to get the information out so that you have as few people as possible confused about what's happening, they understand what's coming, and it reduces the number of incoming requests that IRS and Treasury have to figure out how to deal with it," said Hennessey.

"Dear Taxpayer," the letters will begin, going on to say the IRS is pleased to inform the recipient that Congress passed and President Bush signed into law a plan that will provide payments of up to $600 for individuals who qualify or $1,200 for married couples filing jointly.

The rebates are the centerpiece of a $168 billion economic stimulus package.

The actual rebate checks are scheduled to go out starting in May, after the IRS has finished separately mailing out routine refunds for the 2007 tax year.

The letters will be a reminder that people need to file a 2007 tax return so they will receive the rebate if they are eligible for it.

Similar notices will go out later to some Social Security recipients and those who receive veterans benefits — groups that often do not file tax returns.

For those people to get a rebate check, they will need to file a tax return if they received at least $3,000 from a combination of certain Social Security benefits, veterans benefits and earned income.

The minimum payment for this group will be $300 for an individual and $600 for a couple filing jointly.

Not everyone will be eligible.

Singles with income of more than $75,000 and couples with more than $150,000 get only partial rebates, if any.

People who earn less than $3,000, illegal immigrants and anyone who does not file a tax return will miss out.

Singles with incomes exceeding $87,000 and couples with incomes exceeding $174,000 also won't qualify, although those caps rise by $6,000 per child.
___

Associated Press Writer Deb Riechmann contributed to this report.
___

On the Net:

Internal Revenue Service: http://www.irs.gov

"Oil rally may be economy's undoing"

By JOE BEL BRUNO, Associated Press

Last updated: 5:42 a.m., Saturday, March 8, 2008

NEW YORK -- Preoccupied the last few months with shrinking credit and a slumping economy, Wall Street has all but ignored the relentless rise in oil prices that has taken a barrel of crude to a once-unthinkable $106.

But the market may not be able to look the other way much longer -- especially when consumers, already hurting from the soaring cost of gasoline, find themselves paying even more to fill their tanks come spring.

"Investors are just getting used to higher oil prices in what has really been a stealth rally," said Peter Dunay, chief investment strategist with Meridian Equity Partners.

He said lofty oil prices "should be getting lots of attention" by Wall Street.

But, investors have instead been distracted by a nearly endless stream of bad news about the economy -- from banks taking steep write-downs for soured mortgages to the loss of tens of thousands of jobs.

To be sure, there is a lot for Wall Street to worry about these days.

Major stock indexes have slid by double digits since the start of the year as economists fear the economy might already be in a recession.

And, the summer's subprime mortgage collapse continues to threaten financial institutions around the world.

Although there certainly were many days last year that Wall Street tumbled in response to the punishing march in oil prices, the advance toward $100 a barrel at 2007's end and the surpassing of that milestone this year might actually have been welcomed by some investors.

Institutions have been piling into crude -- along with other commodities -- to flee not just sagging stocks but also the flailing U.S. dollar.

The greenback's fall against other major currencies has helped drive buying across commodities as investors overseas view dollar-denominated assets as relatively cheap.

Meanwhile, big institutional investors have used hard assets like oil as a hedge against inflation.

On Friday, oil prices jumped to a new record above $106 on the New York Mercantile Exchange.

At the pump, gas prices are 68 cents higher than a year ago, and within a nickel of last May's record price of $3.227 a gallon.

And they can only go higher as the summer driving season, which always sends gas climbing, arrives.

Those prices, which have sent the cost of almost everything in the economy higher, are expected to translate into a further increase in inflation.

A growing number of economists are becoming concerned that the Federal Reserve, which has been cutting rates in hopes of reinvigorating the economy, will be forced to stop because of the overall effect of more expensive energy.

Should the central bank cut rates at its March 18 meeting, which is widely expected, that move could also further weaken the dollar -- and possibly keep the cycle of rising oil prices going.

Then there is the problem of an even greater impact on the consumer -- whose growing hesitation about spending has been reflected in weak retail sales, even during the holiday season.

What happens as gasoline prices in particular increase?

The fear is that Americans, forced to pay more money for gasoline and overwhelmed by other economic issues, will continue to hunker down.

"The U.S. consumer, who has carried the economy for the past half-dozen years, is in full defensive mode, battered by falling housing values, spiking food and energy prices, tightening lending standards, the teetering stock market and hints of weakening in the labor market," said T.J. Marta, economic and fixed income strategist for RBC Capital Markets.

He said the consumer is clearly pulling back, and the retrenchment could dramatically pick up speed as energy prices rise.

Losing the consumer -- whose spending accounts for more than two-thirds of the U.S. economy -- would have disastrous effects, analysts said.

Wal-Mart Stores Inc. reported better-than-expected same-store sales for February this past week.

However, investors' cheer was short-lived as the gains appeared to come from bargain-seeking consumers who appeared to pare their purchases elsewhere.

Dunay said monitoring earnings and sales reports at the world's largest retailer is a good way to gauge the mood of consumers.

And it's not just big-ticket purchases like televisions and computers used to determine if consumers are nervous.

"Many Wal-Marts have started to stock more food on their shelves," he said.

"And, that's a really telling sign."

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

AP Business Writer John Wilen contributed to this report.

"5 years on, Iraq war has changed lives"

By KIMBERLY HEFLING, Associated Press Writer

8 March 2008

Laura Youngblood clutched her husband's photo as she drove alone to the hospital.

She'd become pregnant nearly nine months earlier, the day he'd left for training for Iraq.

Hours later, after the baby was born, she placed the photo in the bassinet next to the infant he'd named Emma in his last letter home.

He would never hold her.

Petty Officer 3rd Class Travis L. Youngblood, 26, had died two months earlier, killed by an improvised explosive device.

Laura Youngblood is just 29 years old, but she insists she will not remarry.

Her life is her children, now ages 2 and 7.

One day, she says, she'll be buried in the plot with her husband at Arlington National Cemetery.

"I tell people I'm a happily married woman," she says, crying.

Five years after U.S. troops invaded Iraq, there are many tears — though not everyone is crying.

For the great majority of Americans, this is a war seen from afar.

They turn off the news and forget about what is happening a world away.

Then there's the other war, the one that's a very vivid and present part of some Americans' lives.

It's the war that more than a million U.S. soldiers have fought, leaving nearly 4,000 dead and more than 29,000 wounded in action.

The one in which thousands of contractors rushed in to serve and to make a buck — though some paid the ultimate price, as well.

Around military bases across America, vacations are planned around deployment schedules.

Mini baby booms occur nine months after troops come home.

Support groups for widows and injured soldiers have come together.

At small town National Guard armories, the focus has shifted from one weekend a month to filling out life insurance forms and packing a rucksack for war.

"'How did I end up in this kind of a situation?'"

"There were a lot of guys that said that," says Jeff Myers, 48, a tech sergeant in the Pennsylvania Air National Guard from Pillow, Pa.

His lips still discharge shrapnel shreds, the residue of two roadside bombs he survived in 2004; a neurologist monitors the concussions he sustained.

In his job as a gunner guarding Army convoys, he saw men so paralyzed by fear they wouldn't go outside the wire.

He saw others die 15 minutes after he was chatting with them.

It's not a matter of whether you will have to deal with things like irritability and nightmares after you get home, he says:

"It's how you deal with it when it does happen."

And how you deal with your fellow Americans who experience Iraq from a distance.

Amanda Jordan, whose Marine husband was killed three days into the war, says she doesn't know what bothers her more — the days that go by when no one speaks of the war, or the punditry.

At a local diner she frequents with her 11-year-old son near their home in Enfield, Conn., she's contemplated standing up and leaving so he doesn't hear when people say Iraq was unnecessarily invaded.

"This is like my life."

"You're saying my spouse, my child's father, is dead for no reason," says Jordan, a 39-year-old former paralegal who is studying to be a therapist specializing in grief.

"That's a pretty harsh thing to hear all the time."

___

Some can tell you exactly when their lives changed.

For Hazel Hoffman, from outside Grand Rapids, Mich., it was when the phone rang and she learned her son, Josh, was shot by a sniper.

He was left a quadriplegic, unable to speak.

"I cried so hard that I had tears of blood."

"I remember looking down wondering, where is all this blood coming from?"

"And it took a few seconds for me to realize this was coming out of me," says Hoffman, who has lived more than a year in an apartment with her son's girlfriend near his hospital in Richmond, Va.

Suzanne Stack, 48, was soaking in the bathtub in their house at Fort Campbell, Ky., when the doorbell rang.

There were two officers at the door.

Afterward, still numb from the news of her husband's death, she walked her kids to the school bus.

She sensed that people were looking at her fearfully, as if they were afraid they would be next.

Even before the funeral, one spouse told her there was a waiting list for post housing.

When would she be moving out?

"One day you're one thing."

"The next thing you're not."

"It's really quite a shock," says Stack, of Fredericksburg, Va., who now volunteers as an advocate for widows on Capitol Hill.

Walter Lajuane Williams, 33, of Fremont, Calif., was stoned when his turning point came.

He was couch surfing, unemployed and in an abusive relationship after he left the Army, which took him to Iraq and Afghanistan.

Even his service was criticized:

"I had a person tell me, 'How could you kill another person?'"

He went to the nonprofit Swords to Plowshares, looking for help finding work.

A caseworker, wise to his drug use, took him aside.

"I'm going to tell you candidly how I feel and what I smell," he said.

"I'm going to work with you."

"Don't make me regret it."

Williams now helps other vets find jobs.

"All we need is a chance," Williams says.
___

Recently, an Iraq veteran came to Daniel Fox's office and asked to take a screening exam for post-traumatic stress disorder a second time.

He'd lied the first time, he said.

"When I asked him why he wasn't honest, he said because I had just gotten home and everybody's like saying, 'Welcome home hero,'" Fox says.

"And how could he tell him that this hero was not doing well?"

Fox, 47, works for the Department of Veterans Affairs as a case manager, assisting Iraq and Afghanistan veterans.

For a year, Fox, an Army Reservist, worked as an intensive care nurse at Landstuhl Regional Medical Center in Germany; the injured would be airlifted from Iraq and Afghanistan.

Fox and his fellow nurses called themselves the ICU angels on the ICU angels tour.

To lighten the mood, they made T-shirts with the slogan.

Their bravado just helped mask their intense emotions.

"You had a mom and dad and the new wife with the babies in their arms standing in the door of this patient's room and he's got a gunshot wound to the head," says Fox, of Wichita, Kan.

"How do you explain that to them?"

"You can't console them."

"After a while, you go home and you cry about it," he says.

He used to be more macho and unemotional.

Today, "I have more sympathy, more compassion," he says.

Lt. Col. Douglas Etter's job was sympathy and compassion.

Etter, a minister, was a chaplain with the Pennsylvania National Guard in Al Anbar Province; his battalion lost 13 soldiers and two Marines.

He laid his hands on some of the men and delivered last rites.

One morning, after he memorialized two of the dead, he says his stoicism dissolved; jogging by the Euphrates River, he cried.

In blunt newsletters home, he chronicled what the troops were seeing and experiencing, from delivering shoes and school supplies to happy Iraqi children to the story of a dead soldier wrapped in a flag by his fellow soldiers in the middle of a firefight because nothing else was available.

"As excited as we are to go home, many are equally afraid," he wrote in one of his last letters.

When Etter himself returned on leave to Pennsylvania to officiate at the funeral of a close friend, he turned to his wife and said he wanted to go home.

"I said, 'OK, get in the car.'"

"'Let's go home,'" said Jodi Etter.

"And you said, 'No, my home in Iraq.'"

"'I just want to go home.'"

When his tour was over, and he went with his wife to buy furniture for their new house in Lebanon, Pa., he had to remind himself that it was important to her — even if it seemed trivial to him after the war.

He drove fast, and bought a BMW so he could do it.

One day, Jodi pointed out that he was drinking more.

With time, his life settled down, and he came to feel that his months in Iraq were a time of growth.

Now executive director of the Pennsylvania Bureau of Veterans Affairs, Etter says a deployment is like a magnifying glass.

"Personalities that are strong become stronger," he says.

"Personalities which are weaker are made to become weaker."
___

Phil Nesmith came away from Iraq with a certain clarity.

It wasn't the money that lured him to Iraq, he insists.

He was like most of the U.S. troops he was living with at the time — idealistic about the mission.

He had been an Army paratrooper, but now he was among the first group of government contractors to arrive in Iraq after the invasion in 2003.

His task was to help get telecommunications running.

At night, rockets flew into their compound.

Sometimes they missed and hit apartments nearby, killing Iraqis.

On the ground near where he was sleeping, a young officer shot and killed himself.

Violence did not account for all the stress.

While he was there, Nesmith says, his relationship with his girlfriend of three years ended and she got pregnant by another man.

"Pretty much every other soldier around me, husband, wife, boyfriend, girlfriend, whatever, had left them or they suspected them cheating on them."

It was hard.

"You've left your life and you're wanting to maintain some kind of connection with that, but everything you left behind is continuing on even though your life is kind of suspended while you're there."

As he left Iraq, he crossed paths with a contractor who bragged about what he was going to buy with the money he was going to make in Iraq.

"I was just like, well, 'You know, everybody's got their reasons, but I've got to ask you this: You lose both your legs, is that $160,000 going to be worth it?'" he says.

By that point, Nesmith says he knew what he wanted, what was important.

He wanted to backpack through Australia, visit Montana, and go to photography school.

He did all three.

He had taken pictures in Iraq.

Now he took some of those shots and manipulated them to look like they were taken in the Civil War era.

They were shown at Washington, D.C.'s Irvine Contemporary Gallery in Washington, D.C., and priced at $1,500 each.

One photo depicts a single soldier standing alone in the desert.

It reminds him of his own plight.

"I knew I was on my journey back and when I got there I was going to be alone," Nesmith says.

"No one was going to understand what that year was like."

Another photo, his favorite, is of an Iraqi flag flying outside a government utility office.

Some Iraqis had just put it up.

It was a time of optimism.

But now, he says, "it just seems like a more naive time, when you thought there was so much more that could possibly happen."
___

Before Travis Youngblood left for Iraq, he and his wife watched a TV interview with a pregnant woman whose husband had died in Iraq.

Laura Youngblood cried.

"I felt so sorry for her," Youngblood says.

But then, "When my husband died, my first words were, 'I became her.'"

Today in nearly every room of her Florida house, there's a photo of her husband.

"It is hard."

"I feel bad for my son because he's 7."

"He doesn't know how to ride a two-wheel bike."

"His daddy was going to teach him," she says.

"I can't do all the boy things that he wants to do."

She put together videos so her daughter will know the father she never met.

"I'm a survivor of the war."

"I'm a surviving spouse," Youngblood says.

"That's the best way I can say it because every day you're surviving."

"Bush explains veto of waterboarding bill"

By JENNIFER LOVEN, Associated Press Writer

8 March 2008

WASHINGTON - President Bush said Saturday he vetoed legislation that would ban the CIA from using harsh interrogation methods such as waterboarding to break suspected terrorists because it would end practices that have prevented attacks.

"The bill Congress sent me would take away one of the most valuable tools in the war on terror," Bush said in his weekly radio address taped for broadcast Saturday.

"So today I vetoed it," Bush said.

The bill provides guidelines for intelligence activities for the year and includes the interrogation requirement.

It passed the House in December and the Senate last month.

"This is no time for Congress to abandon practices that have a proven track record of keeping America safe," the president said.

Supporters of the legislation say it would preserve the United States' ability to collect critical intelligence and raise country's moral standing abroad.

House Speaker Nancy Pelosi said Congress would work to override Bush's veto next week.

"In the final analysis, our ability to lead the world will depend not only on our military might, but on our moral authority," said Pelosi, D-Calif.

But based on the margin of passage in each chamber, it would be difficult for the Democratic-controlled Congress to turn back the veto.

It takes a two-thirds majority, and the House vote was 222-199 and the Senate's was 51-45.

Senate Majority Leader Harry Reid said Bush often warns against ignoring the advice of U.S. commanders on the ground in Iraq.

Yet the president has rejected the Army Field Manual, which recognizes that harsh interrogation tactics elicit unreliable information, said Reid, D-Nev.

"Democrats will continue working to reverse the damage President Bush has caused to our standing in the world," Reid said.

Jennifer Daskal, senior counterterrorism counsel at Human Rights Watch, said Bush "will go down in history as the torture president" for defying Congress and allowing the CIA to use interrogation techniques "that any reasonable observer would call torture."

"The Bush administration continues to insist that CIA and other nonmilitary interrogators are not bound by the military rules and has reportedly given CIA interrogators the green light to use a range of so-called 'enhanced' interrogation techniques, including prolonged sleep deprivation, painful stress positions, and exposure to extreme cold," Daskal said.

"Although waterboarding is not currently approved for use by the CIA, Attorney General Michael Mukasey has refused to take it off the table for the future."

The intelligence bill would limit CIA interrogators to the 19 techniques allowed for use by military questioners.

The Army field manual in 2006 banned using methods such as waterboarding or sensory deprivation on uncooperative prisoners.

Bush said the CIA must retain use of "specialized interrogation procedures" that the military does not need.

The military methods are designed for questioning "lawful combatants captured on the battlefield," while intelligence professionals are dealing with "hardened terrorists" who have been trained to resist the techniques in the Army manual, the president said.

"We created alternative procedures to question the most dangerous al-Qaida operatives, particularly those who might have knowledge of attacks planned on our homeland," Bush said.

"If we were to shut down this program and restrict the CIA to methods in the field manual, we could lose vital information from senior al-Qaida terrorists, and that could cost American lives."

The 19 interrogation techniques include the "good cop/bad cop" routine; making prisoners think they are in another country's custody; and separating a prisoner from others for up to 30 days.

Among the techniques the field manual prohibits are:

_hooding prisoners or putting duct tape across their eyes.

_stripping prisoners naked.

_forcing prisoners to perform or mimic sexual acts.

_beating, burning or physically hurting them in other ways.

_subjecting prisoners to hypothermia or mock executions.

It does not allow food, water and medical treatment to be withheld.

Dogs may not be used in any aspect of interrogation.

But waterboarding is the most high-profile and contentious method in question.

It involves strapping a person down and pouring water over his cloth-covered face to create the sensation of drowning.

It has been traced back hundreds of years to the Spanish Inquisition and is condemned by nations around the world and human rights organizations as torture.

The Detainee Treatment Act of 2005 includes a provision barring cruel, inhuman and degrading treatment for all detainees, including CIA prisoners, in U.S. custody.

Many people believe that covers waterboarding.

There are concerns that the use of waterboarding would undermine the U.S. human rights efforts overseas and could place Americans at greater risk of being tortured when captured.

The military specifically prohibited waterboarding in 2006.

The CIA also prohibited the practice in 2006 and says it has not been used since three prisoners encountered it in 2003.

But the administration has refused to rule definitively on whether it is torture.

Bush has said many times that his administration does not torture.

The White House says waterboarding remains among the interrogation methods potentially available to the CIA.

"Because the danger remains, we need to ensure our intelligence officials have all the tools they need to stop the terrorists," Bush said.

"Reports: FBI investigating Countrywide"

Associated Press

Last updated: 5:53 a.m., Sunday, March 9, 2008

LOS ANGELES -- Federal authorities are investigating Countrywide Financial Corp. for securities fraud, according to media reports.

The FBI is in the early stages of an inquiry into whether company officials misrepresented its financial position and the quality of its mortgage loans, The Wall Street Journal first reported Saturday, citing law enforcement officials and finance executives with knowledge of the development.

The Justice Department is also involved in the investigation into the nation's largest mortgage lender, said the New York Times, which also cited anonymous sources who said they were not authorized to discuss ongoing criminal matters.

"We are not aware of any such investigation," Countrywide spokeswoman Susan Martin told the Times.

FBI spokesman Richard Kolko declined to confirm for the Times that an investigation had been opened.

Investigators are looking at evidence that may suggest that company executives knew their mortgage securities would see many more defaults than predicted in its public documents, one source told the Journal.

The inquiry is part of a larger probe involving as many as 15 companies and comes in the midst of the subprime mortgage crisis.

Bank of America Corp. is in the process of acquiring California-based Countrywide for about $4 billion in stock.

Bank of America agreed to the acquisition in January, and the transaction is expected to close in the third quarter.

A spokesman for Bank of America declined to comment.

Countrywide CEO Angelo Mozilo was one of three mortgage industry executives brought before a Congressional committee Friday to defend their exorbitant pay at a time the industry was reeling.

Congressional figures showed that Countrywide lost $1.2 billion in the third quarter of 2007 and another $422 million in the fourth quarter.

The company's stock fell 80 percent between February and the end of the year.

During the same period, Mozilo received a $1.9 million salary, $20 million in stock awards contingent upon performance and sold $121 million in stock.

"AP: Water makes US troops in Iraq sick"

By LARRY MARGASAK, Associated Press Writer

9 March 2008

WASHINGTON - Dozens of U.S. troops in Iraq fell sick at bases using "unmonitored and potentially unsafe" water supplied by the military and a contractor once owned by Vice President Dick Cheney's former company, the Pentagon's internal watchdog says.

A report obtained by The Associated Press said soldiers experienced skin abscesses, cellulitis, skin infections, diarrhea and other illnesses after using discolored, smelly water for personal hygiene and laundry at five U.S. military sites in Iraq.

The Pentagon's inspector general found water quality problems between March 2004 and February 2006 at three sites run by contractor KBR Inc., and between January 2004 and December 2006 at two military-operated locations.

It was impossible to link the dirty water definitively to all the illnesses, according to the report.

But it said KBR's water quality "was not maintained in accordance with field water sanitary standards" and the military-run sites "were not performing all required quality control tests."

"Therefore, water suppliers exposed U.S. forces to unmonitored and potentially unsafe water," the report said.

The problems did not extend to troops' drinking water, but rather to water used for washing, bathing, shaving and cleaning.

Water used for hygiene and laundry must meet minimum safety standards under military regulations because of the potential for harmful exposure through the eyes, nose, mouth, cuts and wounds.

KBR said its water treatment "has met or exceeded all applicable military and contract standards."

The company took exception to many of the inspector general's assertions.

"KBR's commitment to the safety of all of its employees remains unwavering," the company said in a statement to the AP.

KBR is a former subsidiary of Halliburton Co., the oil services conglomerate that Cheney once led.

"AP probe finds drugs in drinking water"

By JEFF DONN, MARTHA MENDOZA and JUSTIN PRITCHARD, Associated Press

Last updated: 1:03 p.m., Sunday, March 9, 2008

A vast array of pharmaceuticals -- including antibiotics, anti-convulsants, mood stabilizers and sex hormones -- have been found in the drinking water supplies of at least 41 million Americans, an Associated Press investigation shows.

To be sure, the concentrations of these pharmaceuticals are tiny, measured in quantities of parts per billion or trillion, far below the levels of a medical dose.

Also, utilities insist their water is safe.

But the presence of so many prescription drugs -- and over-the-counter medicines like acetaminophen and ibuprofen -- in so much of our drinking water is heightening worries among scientists of long-term consequences to human health.

In the course of a five-month inquiry, the AP discovered that drugs have been detected in the drinking water supplies of 24 major metropolitan areas -- from Southern California to Northern New Jersey, from Detroit to Louisville, Ky.

Water providers rarely disclose results of pharmaceutical screenings, unless pressed, the AP found.

For example, the head of a group representing major California suppliers said the public "doesn't know how to interpret the information" and might be unduly alarmed.

How do the drugs get into the water?

People take pills.

Their bodies absorb some of the medication, but the rest of it passes through and is flushed down the toilet.

The wastewater is treated before it is discharged into reservoirs, rivers or lakes.

Then, some of the water is cleansed again at drinking water treatment plants and piped to consumers.

But most treatments do not remove all drug residue.

And while researchers do not yet understand the exact risks from decades of persistent exposure to random combinations of low levels of pharmaceuticals, recent studies -- which have gone virtually unnoticed by the general public -- have found alarming effects on human cells and wildlife.

"We recognize it is a growing concern and we're taking it very seriously," said Benjamin H. Grumbles, assistant administrator for water at the U.S. Environmental Protection Agency.

Members of the AP National Investigative Team reviewed hundreds of scientific reports, analyzed federal drinking water databases, visited environmental study sites and treatment plants and interviewed more than 230 officials, academics and scientists.

They also surveyed the nation's 50 largest cities and a dozen other major water providers, as well as smaller community water providers in all 50 states.

Here are some of the key test results obtained by the AP:

--Officials in Philadelphia said testing there discovered 56 pharmaceuticals or byproducts in treated drinking water, including medicines for pain, infection, high cholesterol, asthma, epilepsy, mental illness and heart problems.

Sixty-three pharmaceuticals or byproducts were found in the city's watersheds.

--Anti-epileptic and anti-anxiety medications were detected in a portion of the treated drinking water for 18.5 million people in Southern California.

--Researchers at the U.S. Geological Survey analyzed a Passaic Valley Water Commission drinking water treatment plant, which serves 850,000 people in Northern New Jersey, and found a metabolized angina medicine and the mood-stabilizing carbamazepine in drinking water.

--A sex hormone was detected in San Francisco's drinking water.

--The drinking water for Washington, D.C., and surrounding areas tested positive for six pharmaceuticals.

--Three medications, including an antibiotic, were found in drinking water supplied to Tucson, Ariz.

The situation is undoubtedly worse than suggested by the positive test results in the major population centers documented by the AP.

The federal government doesn't require any testing and hasn't set safety limits for drugs in water.

Of the 62 major water providers contacted, the drinking water for only 28 was tested.

Among the 34 that haven't: Houston, Chicago, Miami, Baltimore, Phoenix, Boston and New York City's Department of Environmental Protection, which delivers water to 9 million people.

Some providers screen only for one or two pharmaceuticals, leaving open the possibility that others are present.

The AP's investigation also indicates that watersheds, the natural sources of most of the nation's water supply, also are contaminated.

Tests were conducted in the watersheds of 35 of the 62 major providers surveyed by the AP, and pharmaceuticals were detected in 28.

Yet officials in six of those 28 metropolitan areas said they did not go on to test their drinking water -- Fairfax, Va.; Montgomery County in Maryland; Omaha, Neb.; Oklahoma City; Santa Clara, Calif., and New York City.

The New York state health department and the USGS tested the source of the city's water, upstate.

They found trace concentrations of heart medicine, infection fighters, estrogen, anti-convulsants, a mood stabilizer and a tranquilizer.

City water officials declined repeated requests for an interview.

In a statement, they insisted that "New York City's drinking water continues to meet all federal and state regulations regarding drinking water quality in the watershed and the distribution system" -- regulations that do not address trace pharmaceuticals.

In several cases, officials at municipal or regional water providers told the AP that pharmaceuticals had not been detected, but the AP obtained the results of tests conducted by independent researchers that showed otherwise.

For example, water department officials in New Orleans said their water had not been tested for pharmaceuticals, but a Tulane University researcher and his students have published a study that found the pain reliever naproxen, the sex hormone estrone and the anti-cholesterol drug byproduct clofibric acid in treated drinking water.

Of the 28 major metropolitan areas where tests were performed on drinking water supplies, only Albuquerque; Austin, Texas; and Virginia Beach, Va.; said tests were negative.

The drinking water in Dallas has been tested, but officials are awaiting results.

Arlington, Texas, acknowledged that traces of a pharmaceutical were detected in its drinking water but cited post-9/11 security concerns in refusing to identify the drug.

The AP also contacted 52 small water providers -- one in each state, and two each in Missouri and Texas -- that serve communities with populations around 25,000.

All but one said their drinking water had not been screened for pharmaceuticals; officials in Emporia, Kan., refused to answer AP's questions, also citing post-9/11 issues.

Rural consumers who draw water from their own wells aren't in the clear either, experts say.

The Stroud Water Research Center, in Avondale, Pa., has measured water samples from New York City's upstate watershed for caffeine, a common contaminant that scientists often look for as a possible signal for the presence of other pharmaceuticals.

Though more caffeine was detected at suburban sites, researcher Anthony Aufdenkampe was struck by the relatively high levels even in less populated areas.

He suspects it escapes from failed septic tanks, maybe with other drugs.

"Septic systems are essentially small treatment plants that are essentially unmanaged and therefore tend to fail," Aufdenkampe said.

Even users of bottled water and home filtration systems don't necessarily avoid exposure.

Bottlers, some of which simply repackage tap water, do not typically treat or test for pharmaceuticals, according to the industry's main trade group.

The same goes for the makers of home filtration systems.

Contamination is not confined to the United States.

More than 100 different pharmaceuticals have been detected in lakes, rivers, reservoirs and streams throughout the world.

Studies have detected pharmaceuticals in waters throughout Asia, Australia, Canada and Europe -- even in Swiss lakes and the North Sea.

For example, in Canada, a study of 20 Ontario drinking water treatment plants by a national research institute found nine different drugs in water samples.

Japanese health officials in December called for human health impact studies after detecting prescription drugs in drinking water at seven different sites.

In the United States, the problem isn't confined to surface waters.

Pharmaceuticals also permeate aquifers deep underground, source of 40 percent of the nation's water supply.

Federal scientists who drew water in 24 states from aquifers near contaminant sources such as landfills and animal feed lots found minuscule levels of hormones, antibiotics and other drugs.

Perhaps it's because Americans have been taking drugs -- and flushing them unmetabolized or unused -- in growing amounts.

Over the past five years, the number of U.S. prescriptions rose 12 percent to a record 3.7 billion, while nonprescription drug purchases held steady around 3.3 billion, according to IMS Health and The Nielsen Co.

"People think that if they take a medication, their body absorbs it and it disappears, but of course that's not the case," said EPA scientist Christian Daughton, one of the first to draw attention to the issue of pharmaceuticals in water in the United States.

Some drugs, including widely used cholesterol fighters, tranquilizers and anti-epileptic medications, resist modern drinking water and wastewater treatment processes.

Plus, the EPA says there are no sewage treatment systems specifically engineered to remove pharmaceuticals.

One technology, reverse osmosis, removes virtually all pharmaceutical contaminants but is very expensive for large-scale use and leaves several gallons of polluted water for every one that is made drinkable.

Another issue: There's evidence that adding chlorine, a common process in conventional drinking water treatment plants, makes some pharmaceuticals more toxic.

Human waste isn't the only source of contamination.

Cattle, for example, are given ear implants that provide a slow release of trenbolone, an anabolic steroid used by some bodybuilders, which causes cattle to bulk up.

But not all the trenbolone circulating in a steer is metabolized.

A German study showed 10 percent of the steroid passed right through the animals.

Water sampled downstream of a Nebraska feedlot had steroid levels four times as high as the water taken upstream.

Male fathead minnows living in that downstream area had low testosterone levels and small heads.

Other veterinary drugs also play a role.

Pets are now treated for arthritis, cancer, heart disease, diabetes, allergies, dementia, and even obesity -- sometimes with the same drugs as humans.

The inflation-adjusted value of veterinary drugs rose by 8 percent, to $5.2 billion, over the past five years, according to an analysis of data from the Animal Health Institute.

Ask the pharmaceutical industry whether the contamination of water supplies is a problem, and officials will tell you no.

"Based on what we now know, I would say we find there's little or no risk from pharmaceuticals in the environment to human health," said microbiologist Thomas White, a consultant for the Pharmaceutical Research and Manufacturers of America.

But at a conference last summer, Mary Buzby -- director of environmental technology for drug maker Merck & Co. Inc. -- said:

"There's no doubt about it, pharmaceuticals are being detected in the environment and there is genuine concern that these compounds, in the small concentrations that they're at, could be causing impacts to human health or to aquatic organisms."

Recent laboratory research has found that small amounts of medication have affected human embryonic kidney cells, human blood cells and human breast cancer cells.

The cancer cells proliferated too quickly; the kidney cells grew too slowly; and the blood cells showed biological activity associated with inflammation.

Also, pharmaceuticals in waterways are damaging wildlife across the nation and around the globe, research shows.

Notably, male fish are being feminized, creating egg yolk proteins, a process usually restricted to females.

Pharmaceuticals also are affecting sentinel species at the foundation of the pyramid of life -- such as earth worms in the wild and zooplankton in the laboratory, studies show.

Some scientists stress that the research is extremely limited, and there are too many unknowns.

They say, though, that the documented health problems in wildlife are disconcerting.

"It brings a question to people's minds that if the fish were affected ... might there be a potential problem for humans?" EPA research biologist Vickie Wilson told the AP.

"It could be that the fish are just exquisitely sensitive because of their physiology or something."

"We haven't gotten far enough along."

With limited research funds, said Shane Snyder, research and development project manager at the Southern Nevada Water Authority, a greater emphasis should be put on studying the effects of drugs in water.

"I think it's a shame that so much money is going into monitoring to figure out if these things are out there, and so little is being spent on human health," said Snyder.

"They need to just accept that these things are everywhere -- every chemical and pharmaceutical could be there."

"It's time for the EPA to step up to the plate and make a statement about the need to study effects, both human and environmental."

To the degree that the EPA is focused on the issue, it appears to be looking at detection.

Grumbles acknowledged that just late last year the agency developed three new methods to "detect and quantify pharmaceuticals" in wastewater.

"We realize that we have a limited amount of data on the concentrations," he said.

"We're going to be able to learn a lot more."

While Grumbles said the EPA had analyzed 287 pharmaceuticals for possible inclusion on a draft list of candidates for regulation under the Safe Drinking Water Act, he said only one, nitroglycerin, was on the list.

Nitroglycerin can be used as a drug for heart problems, but the key reason it's being considered is its widespread use in making explosives.

So much is unknown.

Many independent scientists are skeptical that trace concentrations will ultimately prove to be harmful to humans.

Confidence about human safety is based largely on studies that poison lab animals with much higher amounts.

There's growing concern in the scientific community, meanwhile, that certain drugs -- or combinations of drugs -- may harm humans over decades because water, unlike most specific foods, is consumed in sizable amounts every day.

Our bodies may shrug off a relatively big one-time dose, yet suffer from a smaller amount delivered continuously over a half century, perhaps subtly stirring allergies or nerve damage.

Pregnant women, the elderly and the very ill might be more sensitive.

Many concerns about chronic low-level exposure focus on certain drug classes: chemotherapy that can act as a powerful poison; hormones that can hamper reproduction or development; medicines for depression and epilepsy that can damage the brain or change behavior; antibiotics that can allow human germs to mutate into more dangerous forms; pain relievers and blood-pressure diuretics.

For several decades, federal environmental officials and nonprofit watchdog environmental groups have focused on regulated contaminants -- pesticides, lead, PCBs -- which are present in higher concentrations and clearly pose a health risk.

However, some experts say medications may pose a unique danger because, unlike most pollutants, they were crafted to act on the human body.

"These are chemicals that are designed to have very specific effects at very low concentrations."

"That's what pharmaceuticals do."

"So when they get out to the environment, it should not be a shock to people that they have effects," says zoologist John Sumpter at Brunel University in London, who has studied trace hormones, heart medicine and other drugs.

And while drugs are tested to be safe for humans, the timeframe is usually over a matter of months, not a lifetime.

Pharmaceuticals also can produce side effects and interact with other drugs at normal medical doses.

That's why -- aside from therapeutic doses of fluoride injected into potable water supplies -- pharmaceuticals are prescribed to people who need them, not delivered to everyone in their drinking water.

"We know we are being exposed to other people's drugs through our drinking water, and that can't be good," says Dr. David Carpenter, who directs the Institute for Health and the Environment of the State University of New York at Albany.

--------

The AP National Investigative Team can be reached at investigate (at) ap.org

"Dinallo defends monolines handling"

By Aline van Duyn, Francesco Guerrera and Ben White in New York

Published: February 21 2008 22:09 | Last updated: February 21 2008 22:09

Eric Dinallo, New York’s insurance regulator, has defended his handling of the bond insurer crisis, saying his decision to call in Wall Street’s top banks last month for talks was an effort to flag up problems and not the heavy-handed intervention portrayed by critics.

Mr Dinallo rebuffed criticism that he was focused on protecting municipal bond issuers at the expense of Wall Street institutions and investors.

“Not doing anything is doing something, it is accepting the status quo,” he said in an interview with the Financial Times.

“I knew this would land on our door if we didn’t get pro-active."

"Then I would have been accused of being asleep at the wheel.”

Mr Dinallo hit out at characterisations of his plans as a ruse to make Wall Street pay for bond insurer losses resulting from their guarantees of risky subprime mortgages, which have left holes in their capital.

Mr Dinallo has been attacked for putting pressure on Wall Street to commit up to $15bn and prevent rating downgrades of Ambac, MBIA and FGIC.

But Mr Dinallo said the liquidity injection was only one of the options discussed at the meeting, adding that his intention was to find a solution that would help all parties.

“The meeting was like Nixon going to China."

"I said at the end of the meeting ‘I am trying to get ahead of the curve and am taking a big risk here.'"

"'I hope you will reward the risk I am taking’."

"Only by rewarding regulators who take these risks will we be able to change the regulatory paradigm.”

He said it was possible banks did not fully appreciate his experience, such as his three years at Morgan Stanley and at the insurance broker Willis, and associated him with his former role at the attorney-general’s office under Eliot Spitzer, governor of New York state.

“I expect people to be judged by their actions, not their reputations,” he said.

“Everything we’re doing is aimed at helping the ratings for the banks, which are policyholders.”

Rating agencies have since cut FGIC’s credit ratings, and Ambac and MBIA will have to come up with a plan soon to avoid cuts from Moody’s Investors Service and Standard & Poor’s.

http://www.ft.com/cms/s/fa50d510-e0ab-11dc...00779fd2ac.html

"Studies: Iraq costs US $12B per month"

By CHARLES J. HANLEY, AP Special Correspondent

9 March 2008

The flow of blood may be ebbing, but the flood of money into the Iraq war is steadily rising, new analyses show.

In 2008, its sixth year, the war will cost approximately $12 billion a month, triple the "burn" rate of its earliest years, Nobel Prize-winning economist Joseph E. Stiglitz and co-author Linda J. Bilmes report in a new book.

Beyond 2008, working with "best-case" and "realistic-moderate" scenarios, they project the Iraq and Afghan wars, including long-term U.S. military occupations of those countries, will cost the U.S. budget between $1.7 trillion and $2.7 trillion — or more — by 2017.

Interest on money borrowed to pay those costs could alone add $816 billion to that bottom line, they say.

The nonpartisan Congressional Budget Office (CBO) has done its own projections and comes in lower, forecasting a cumulative cost by 2017 of $1.2 trillion to $1.7 trillion for the two wars, with Iraq generally accounting for three-quarters of the costs.

Variations in such estimates stem from the sliding scales of assumptions, scenarios and budget items that are counted.

But whatever the estimate, the cost will be huge, the auditors of the Government Accountability Office say.

In a Jan. 30 report to Congress, the GAO observed that the U.S. will be committing "significant" future resources to the wars, "requiring decision makers to consider difficult trade-offs as the nation faces an increasing long-range fiscal challenge."

These numbers don't include the war's cost to the rest of the world.

In Iraq itself, the 2003 U.S.-led invasion — with its devastating air bombardments — and the looting and arson that followed, severely damaged electricity and other utilities, the oil industry, countless factories, hospitals, schools and other underpinnings of an economy.

No one has tried to calculate the economic damage done to Iraq, said spokesman Niels Buenemann of the International Monetary Fund, which closely tracks national economies.

But millions of Iraqis have been left without jobs, and hundreds of thousands of professionals, managers and other middle-class citizens have fled the country.

In their book, "The Three Trillion Dollar War," Stiglitz, of Columbia University, and Bilmes, of Harvard, report the two wars will have cost the U.S. budget $845 billion in 2007 dollars by next Sept. 30, end of fiscal year 2008, assuming Congress fully funds Bush administration requests.

That counts not just military operations, but embassy costs, reconstruction and other war-related expenses.

That total far surpasses the $670 billion in 2007 dollars the Congressional Research Service says was the U.S. price tag for the 12-year Vietnam War.

Although American military and Iraqi civilian casualties have declined in recent months, the rate of spending has shot up.

A fully funded 2008 war budget will be 155 percent higher than 2004's, the CBO reports.

The reasons are numerous: the "surge" of additional U.S. units into Iraq; rising fuel costs; fattened bonuses to attract re-enlistments; and particularly the need to "reset," that is, repair or replace worn-out, destroyed or damaged military equipment.

Almost $17 billion is appropriated this year for advanced armored vehicles to protect troops against roadside bombs.

Looking ahead, both the CBO and Stiglitz-Bilmes construct two scenarios, one in which U.S. troop levels in Iraq and Afghanistan drop sharply and early — to 30,000 by late 2009 for the CBO, and to 55,000 by 2012 for Stiglitz-Bilmes — and a second in which the drawdown is more gradual.

Significantly, the two studies view different time frames, the CBO calculating possible costs met in the next 10 years, while Stiglitz and Bilmes also include costs incurred during that period but paid for later, such as equipment replaced in post-2017 budgets.

This factor figures most in the category of veterans' medical care and disability payments, where the CBO foresees $9 billion to $13 billion in costs by 2017.

Stiglitz and Bilmes, meanwhile, project $422 billion to $717 billion in costs over the lifetime of soldiers who by 2017 are wounded or otherwise mentally or physically disabled by the wars.

"The CBO is only looking 10 years out on everything," Bilmes noted in an interview.

For its part, a CBO critique suggested that Bilmes and Stiglitz might be overstating the expense of treating veterans' brain injuries, a costly category.

The two economists say their calculations are conservative, because they don't encompass many "hidden" items in the U.S. budget.

Their basic projections also exclude the potentially huge debt-service cost — on which CBO approximately agrees — and the cost to the U.S. economy of global oil prices that have quadrupled since 2003, an increase analysts blame partly on the Iraq upheaval.

Estimating all economic and social costs might push the U.S. war bill up toward $5 trillion by 2017, they say.

Their book already figures in the stay-or-leave debate over Iraq.

When Stiglitz testified on Feb. 28 before the congressional Joint Economic Committee, the ranking Republican, New Jersey's Rep. Jim Saxton, complained that such projections are too imprecise to help determine relative costs and benefits of the Iraq war.

Saxton said a rapid U.S. pullout could lead to full-scale civil war and Iranian domination of Iraq, "enormous costs" that he said should be weighed in any calculation.

"Stocks head for higher opening"

By JOE BEL BRUNO, Associated Press

Last updated: 7:43 a.m., Monday, March 10, 2008

NEW YORK -- Wall Street headed toward a higher opening Monday as investors smarting from a pummeling last week awaited data that will give more clues about consumer spending and inflation.

The market was expected to trade very nervously after worries about the economy and the continuing fallout from the credit crisis pounded stocks at week's end.

Investors appeared to be waiting for direction early Monday rather than heading toward major moves.

The key economic data was coming later in the week -- the Commerce Department's retail sales report comes out Thursday, and the Labor Department issues the consumer price index on Friday.

Monday does bring first-quarter earnings from Hovnanian Enterprises Inc.

Investors are hoping that the homebuilder sees some signs that will point to a pickup in home sales and in turn, an end to the housing slump.

Dow Jones industrial futures were up 50 at 11,941, Standard & Poor's 500 futures were up 6.10 at 1,298.60, and Nasdaq 100 futures are up 8 at 1,716.8.

Last week, the Dow ended down 3.04 percent, the S&P 500 index was off 2.80 percent, and the Nasdaq composite index closed with a loss of 2.60 percent.

The market may have gotten some support early Monday from a mild pullback in commodities prices, including gold and oil.

A raging rally in commodities has sent the dollar skidding, and in turn raised concerns about rising inflation even as the economy slows.

Wall Street will also be watching for any clues from the Federal Reserve as to its plans for interest rates.

The central bank meets next Tuesday and is widely expected to drop key rates at least half a percentage point.

However, there is great concern in the market that the Fed's moves might not be enough to keep the sagging economy out of recession.

News from the Labor Department Friday that the economy lost 63,000 jobs last month helped set off another steep drop in stocks.

Most Asian markets sank Monday, some in response to Wall Street's losses last week, with Tokyo's market falling to a 2 1/2-year low.

In Tokyo, the Nikkei 225 stock average tumbled 250.67 points, or 1.96 percent, to 12,532.13 points, its lowest since September 2005.

Hong Kong's market bucked the trend, with a recovery in afternoon trading driven by bargain-hunting and gains banking giant HSBC.

The Hang Seng Index rose 203.72 points, or 0.9 percent, to 22,705.05.

Stocks were higher on European exchanges.

"NY governor linked to prostitution ring"

By AMY WESTFELDT, Associated Press Writer

10 March 2008

NEW YORK - Gov. Eliot Spitzer has told senior advisers that he had been involved in a prostitution ring, The New York Times reported Monday, citing an anonymous top administration official.

Spitzer, who is married with three daughters, was scheduled to make an announcement Monday afternoon.

Spitzer officials wouldn't immediately comment on the story.

The Times reported that a person with knowledge of the governor's role believes the governor is identified as a client in court papers.

Four people allegedly connected to a high-end prostitution ring called Emperors Club VIP were arrested last week.

The Web site of the Emperors Club VIP displays photographs of scantily clad women with their faces hidden, along with hourly rates depending on whether the prostitutes were rated with one diamond, the lowest ranking, or seven diamonds, the highest.

The most highly ranked prostitutes cost $5,500 an hour, prosecutors said.

Prosecutors said the defendants arranged connections between wealthy men and more than 50 prostitutes in New York, Washington, D.C., Los Angeles, Miami, London and Paris.

The Times reported that the governor's travel records show he was in Washington in mid-February, and that one of the clients arranged to meet with a prostitute on the night of Feb. 13.

The case is being handled by prosecutors in the Public Corruption unit of U.S. Attorney Michael Garcia's office.

Garcia spokeswoman Yusill Scribner said the office had no comment.

Spitzer, 48, built his political legacy on rooting out corruption, including several headline-making battles with Wall Street while serving as attorney general.

He stormed into the governor's office in 2006 with a historic share of the vote, vowing to continue his no-nonsense approach to fixing one of the nation's worst governments.

Time magazine had named him "Crusader of the Year" when he was attorney general and the tabloids proclaimed him "Eliot Ness."

But his stint as governor has been marred by several problems, including an unpopular plan to grant driver's licenses to illegal immigrants and a plot by his aides to smear Spitzer's main Republican nemesis.

Spitzer had been expected to testify to the state Public Integrity Commission he had created to answer for his role in the scandal, in which his aides were accused of misusing state police to compile travel records to embarrass Senate Republican leader Joseph Bruno.

Spitzer had served two terms as attorney general where he pursued criminal and civil cases and cracked down on misconduct and conflicts of interests on Wall Street and in corporate America.

He had previously been a prosecutor in the Manhattan District Attorney's Office, handling organized crime and white-collar crime cases.

His cases as state attorney general included a few criminal prosecutions of prostitution rings and into tourism involving prostitutes.

In 2004, he was part of an investigation of an escort service in New York City that resulted in the arrest of 18 people on charges of promoting prostitution and related charges.
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Associated Press Writer Mike Gormley contributed to this report from Albany, N.Y.

"Japan opposition doubts bank nominee"

By JOSEPH COLEMAN, Associated Press

Last updated: 1:42 p.m., Sunday, March 9, 2008

TOKYO -- Japan's opposition suggested Sunday it would fight the government's choice of a nominee for the central bank chief, setting the scene for a divisive fight in the country's stalled parliament.

The government on Friday nominated Toshiro Muto, a deputy governor at the Bank of Japan, to take over later this month.

The term of the current bank head, Toshihiko Fukui, ends March 19.

But the opposition camp, which rules the upper house of the country's parliament and has blocked most of the ruling party's legislative initiatives in recent months, voiced serious doubts about Muto.

"Five years ago, the party opposed Muto's appointment to the BOJ deputy governor post."

"Unless something comes up that would drastically change our view, we don't need to change our stance," Naoto Kan of the Democratic Party of Japan told national broadcaster NHK.

Muto is a former Finance Ministry bureaucrat and has been groomed by Fukui to be his successor.

Ruling Liberal Democratic Party officials said Muto would provide a smooth transition during times of economic uncertainty.

But the opposition party claims Muto is too politically connected as an ex-official in the Finance Ministry, saying the central bank should be clearly separate from the government.

The Bank of Japan has only asserted its independence in the last decade or so, although Japanese politicians often go further than their counterparts in the United States, for instance, in voicing their opinions about what the central bank should do.

Democratic Party of Japan Secretary General Yukio Hatoyama said Saturday that Prime Minister Yasuo Fukuda should nominate someone else.

He said Fukuda should then negotiate a settlement with the DPJ's president, Ichiro Ozawa.

The nomination has to pass the two houses of Japan's parliament to take effect.

The Liberal Democratic Party controls the powerful lower house.

The DPJ's Kan, however, said the final party decision on whether to oppose Muto would be made only after the parliamentary hearings Tuesday on the nominee and candidates for the two Bank of Japan deputy chief positions.

A parliamentary delay in Muto's confirmation would be an embarrassment for Japan on the international stage, reducing investor confidence at a time when global markets are in turmoil.

The Bank of Japan will be changing leadership at a critical time for the global and Japanese economies amid fears about soaring oil prices, volatile global stock markets, a strengthening yen and declining corporate capital investment.

Analysts say they do not expect the political scuffling to directly hurt Bank of Japan policies or to derail its decision-making in the near future.

"GAO asked to audit Iraqi oil revenue"

Associated Press

Last updated: 5:02 a.m., Sunday, March 9, 2008

WASHINGTON -- The Democratic chairman and Republican former chairman of the Senate Armed Services Committee have asked government auditors to determine what Iraq is doing with the billions of dollars in oil revenue it generates.

"We believe that it has been overwhelmingly U.S. taxpayer money that has funded Iraq reconstruction over the last five years, despite Iraq earnings billions of dollars in oil revenue over that time period that have ended up in non-Iraqi banks," Sens. Carl Levin, D-Mich., and John Warner, R-Va., said Friday in a letter to the head of the Government Accountability Office.

"At the same time, our conversations with both Iraqis and Americans during our frequent visits to Iraq, as well as official government and unofficial media reports, have convinced us that the Iraqi government is not doing nearly enough to provide essential services and improve the quality of life of its citizens," they said.

The senators estimated that Iraq will realize "at least $100 billion in oil revenues in 2007 and 2008."

They asked specifically that the GAO determine:

-- Estimated oil revenues from 2003-2007.

-- How much the U.S. and Iraq each have spent annually during that period on training, equipping and supporting Iraqi security forces as well as reconstruction, governance and economic development.

-- Projected oil revenue and spending for 2008.

-- The amount of unspent revenue from 2003 to 2007 and the expected estimate at the end of 2008.

-- How much money the Iraqi government has deposited and in which banks.

-- Why the Iraq government has not spent more of its oil revenue on its own country.

The GAO concluded in a January report that the Bush administration used questionable financial data to assert that the Baghdad government was making progress in managing its budget.

The study focused specifically on whether Iraqis were spending money for infrastructure needed to boost the country's lagging economic growth and to improve poor public services.

The administration reported in September that Iraq's central government ministries had spent 24 percent of their 2007 capital projects budget as of July 15, 2007.

"This report is not consistent with Iraq's official expenditure reports," which show that the central ministries had spent only 4.4 percent of their investment budget as of August, the GAO said.

It said capital projects are 90 percent of Iraq's investment budget.

The benchmark report submitted by the administration was ordered by Congress to measure Baghdad's progress in 18 areas including political and economic activities.

It was aimed at judging whether Iraqis were working hard enough at reconciliation and other issues to warrant continued American support.

Iraqis have been slow to execute their capital budgets partly because violence and sectarian strife have reduced the number of contractors willing to bid on projects, the GAO said in January.

Also, their procurement and accounting systems are weak and many professionals and skilled workers have fled the country, the GAO report noted.

The January report recommended that the Treasury Department work to improve its "ability to report accurate and reliable expenditure data from the ministries and provinces" in Iraq.

"Official: NY gov's prostitution involvement caught on wiretap"

By AMY WESTFELDT, Associated Press

Last updated: 4:07 p.m., Monday, March 10, 2008

NEW YORK -- A law enforcement official has told The Associated Press that New York Gov. Eliot Spitzer's involvement in a prostitution ring was caught on a federal wiretap.

The official says Spitzer is identified in court papers as "Client 9," and the wiretap was part of an investigation that opened in the last few months.

The official says the New York governor met last month with at least one woman in a Washington hotel.

The law enforcement official spoke on condition of anonymity because of the ongoing investigation.

"US: recent Iraq attacks not a trend"

By BRADLEY BROOKS, Associated Press Writer

9 March 2008

BAGHDAD - The U.S. military said Sunday it does not believe a recent wave of deadly attacks in Baghdad reflects a trend toward an overall increase in violence.

Navy Rear Adm. Gregory Smith, the military spokesman, said a wave of horrific violence, including a single attack on Thursday that killed 68 people in Baghdad, must be placed in perspective.

You have to "look historically at what happened in the last year to put in perspective what has happened in one week or two weeks in Baghdad," Smith said.

Violence around Iraq has dropped by about 60 percent in the past nine months, due mostly to an influx of thousands of U.S. troops, a cease-fire called by Shiite cleric Muqtada al-Sadr and a decision by tens of thousands of Sunnis to join forces with the U.S.

"On any given day, al-Qaida in Iraq and other extremist groups are still very much disposed to handing out violence indiscriminately," Smith said, adding that "I wouldn't look at the last two weeks as an increase or trend" toward rising violence.

Thursday's attack occurred in Baghdad's predominantly Shiite Karradah neighborhood, one of the capital's most vibrant commercial districts and a stronghold for the country's most powerful Shiite political party, the Supreme Islamic Iraqi Council.

Despite the attack targeting Shiites, Smith noted that al-Sadr and the majority of his Mahdi army continue to abide by their cease-fire, choosing "path of political and nonviolent ways."

He also said Iran continues to play a destabilizing role in Iraq, despite promises by its government to help Iraq reach peace.

"It would appear that inside Iran there are still groups and elements" who are training, financing and supplying weapons to "criminal elements" inside Iraq," he said.

Iranian President Mahmoud Ahmadinejad, who made a landmark visit to Iraq last week, has denied the U.S. allegations and insisted that the U.S. presence is what fuels violence in Iraq and the Mideast region as a whole.

"Oil prices down after last week's record"

By PABLO GORONDI, Associated Press

Last updated: 8:03 a.m., Monday, March 10, 2008

Oil prices pulled back Monday as traders booked profits after last week's record highs and amid easing tension between oil producers Venezuela and Colombia over the weekend.

Cold weather in the United States and the continuing weakness of the U.S. dollar were seen as bullish factors supporting prices.

Light, sweet crude for April delivery on the New York Mercantile Exchange fell 61 cents to $104.54 a barrel in electronic trading by midday in Europe.

The contract set a new trading record of $106.54 a barrel on Friday before retreating to settle at $105.15 a barrel, down 32 cents.

In London, Brent crude futures dropped 60 cents on Monday to $101.78 a barrel on the ICE Futures exchange.

Crude contracts had initially risen on Friday after a weak U.S. jobs report that fueled hopes the Federal Reserve would continue cutting interest rates.

Worries about a crisis in the Andes subsided after Venezuela said Sunday it was restoring full diplomatic ties with Colombia after they were broken off following a cross-border Colombian attack on a leftist rebel camp in Ecuador.

Last week, rebels attacked and shut down a Colombian pipeline that transports 60,000 barrels of oil a day in retaliation for the Colombian raid into Ecuador.

Venezuela threatened to slash trade and nationalize Colombian-owned businesses, and Venezuela and Ecuador briefly sent troops to their borders with Colombia.

The surge to a new record was driven by a U.S. Labor Department report that said employers cut 63,000 jobs in February -- the biggest drop in five years.

Investors can react to such news in one of two ways: by selling on the prospect that the economy -- and demand for oil -- is cooling, or by buying on a conviction that bad economic data makes it more likely the Fed will cut rates.

On Friday investors engaged in a little of both, sending oil prices down more than a dollar at one moment and propelling them to new records the next.

Lower interest rates tend to weaken the dollar.

Many analysts believe a weak dollar is the reason oil set new inflation-adjusted records four times last week and has risen 23 percent in less than a month.

"The 'investors' flocking into oil have been buying energy futures the way sharks eat fish," said U.S. oil analyst Peter Beutel of Cameron Hanover.

"By gobbling up everything in sight, they are pushing food and fuel prices to ruinously high levels."

Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is falling.

Most investors believe that despite occasional rebounds, the dollar is likely to keep falling as the Fed continues to cut rates.

But while analysts expect oil's underlying supply and demand fundamentals to eventually pull down its price, few are willing to predict when that will happen.

Meanwhile, oil could continue rising to as high as US$120 a barrel in the short term, according to some forecasts.

Heating oil futures lost 1.25 cents to $2.9345 a gallon while gasoline prices fell 1.57 cent to $2.6786 a gallon.

Natural gas futures shed 9.5 cents to $9.674 per 1,000 cubic feet.

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Associated Press writer Gillian Wong in Singapore contributed to this report.

"China's trade surplus plunges 63 percent"

By JOE McDONALD, Associated Press

Last updated: 7:12 a.m., Monday, March 10, 2008

BEIJING -- China's trade surplus plunged in February as sales of goods to the United States and Europe weakened and snowstorms disrupted the economy, the government reported Monday, but analysts said it appeared to be a onetime drop and exports should rebound.

The 63 percent drop in the trade gap from a year ago was due partly to a global slowdown but also to storms that hampered shipping and forced some factories to close, economists said.

They said exports also looked unusually small because they were compared with a strong month last February.

"We think the sharp slowdown in China's export growth in February is temporary," Lehman Brothers economist Mingchun Sun said in a report to clients.

China is under pressure from the United States and the European Union to ease import barriers and currency controls that they say are adding to its multibillion-dollar surplus.

Some American lawmakers are calling for trade sanctions.

China's trade surplus in February totaled $8.6 billion, down from a $23.7 billion in February 2007, according to customs agency data.

It was the smallest monthly surplus since March 2007, but that month's $6.9 billion gap was considered abnormally low in a fluke caused by changes in export-tax policy.

It has been two years since China regularly posted monthly trade surpluses under $15 billion.

"We would pay more attention to the combined January-February surplus, which remained significant at $28 billion," said Goldman Sachs economists Yu Song and Hong Liang said in a report to clients.

China's imports in February surged 35 percent to $78.8 billion from the year-earlier period, according to the customs agency.

Exports grew by 6.5 percent to $87.4 billion -- a much slower rate than January's 26 percent.

That could spur worries that slowing U.S. demand will hurt Chinese exporters and could wipe out thousands of jobs.

Chinese leaders say they are not actively pursuing a large trade surplus.

The communist government is prodding China's consumers to spend more in hopes of reducing reliance on exports and industrial investment to drive growth.

February's monthly trade gap with the United States, China's No. 2 trading partner, shrank 23 percent to $9.4 billion compared with the same month in 2007, the customs agency said.

China's exports to the United States fell 5 percent in February to $16.4 billion, while imports of American goods jumped 33 percent to $6.1 billion.

The surplus with the 27-nation European Union, China's biggest trading partner, narrowed by 15 percent to $10 billion, data showed.

Chinese and EU officials are due to meet in April in Beijing to launch a regular high-level dialogue aimed at defusing trade tensions.

China holds similar twice-year meetings with the United States.

The U.S., EU and other trading partners are pressing Beijing to ease controls that they say keep its currency, the yuan, undervalued and give Chinese exporters an unfair price advantage.

Premier Wen Jiabao said last week that Beijing would pursue a more flexible exchange rate.

The yuan has been allowed to rise by about 16 percent against the U.S. dollar since mid-2005, and a faster increase would help to narrow the trade gap by making China's goods more expensive abroad and making foreign imports more attractive to Chinese consumers.

But concern over possible job losses has prompted trade officials to argue against letting the yuan strengthen faster.

The flood of import revenues also is straining the central bank's ability to rein in pressure for prices to rise.

Consumer inflation rose to 7.1 percent in January, its highest level in 11 years, and is expected to surpass that when figures for February are reported this week.

Also Monday, the government said producer prices, a key inflation indicator, rose 6.6 percent in February over the year-earlier period.

The spike in inflation has been driven by food costs, but the data Monday showed prices of oil, iron and other raw materials rising sharply, suggesting that pressure was increasing for across-the-board price hikes was increasing.

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On the 'Net:

Chinese customs agency (in Chinese): http://www.customs.gov.cn

"January machinery orders jump 19.6 pct"

Associated Press

Last updated: 7:12 a.m., Monday, March 10, 2008

TOKYO -- Japanese core machinery orders -- a key indicator of capital spending -- posted their biggest gain in seven years in January, but analysts were wary about their outlook because the gain was due to one-off factors.

Machinery orders, which are often used to gauge the outlook for business investment, jumped 19.6 percent in January from the previous month, Japan's Cabinet Office said Monday.

While that was much higher than the 3.1 percent rise projected by economists and the first increase in three months, analysts cautioned that January's rise was due to several one-time large deals.

"The result is too strong and shouldn't be taken too optimistically," said Shiko Research Institute economist Norio Miyagawa.

"Orders growth may continue, but its speed will likely decrease ahead with larger downside risks" due to a slowdown in the U.S. economy.

The jump in machinery orders was the sharpest since August 2000, when they rose 20.8 percent, the Cabinet Office said.

Demand from overseas also increased for the first time in three months, jumping 43.1 percent from a month earlier.

This was mainly due to a single large order for boilers and turbines, the survey showed.

Meanwhile, core orders slipped 3.2 percent on month, following a 2.8 percent decline in November.

Core orders exclude those from electric power companies and those for ships, which are often a source of volatility in the overall data due to their large sizes.

Unadjusted core orders in January climbed 11.4 percent from a year earlier.

Machinery orders are widely regarded as a leading indicator of corporate capital investment, which accounts for about 15 percent of Japan's gross domestic product.

"A hard, fast fall for The Sheriff of Wall Street"

By MICHAEL HILL, Associated Press

Last updated: 5:02 p.m., Monday, March 10, 2008

ALBANY -- From Mr. Clean to Client 9, allegations that Gov. Eliot Spitzer was involved in a prostitution ring mark a mortifying fall for a politician whose career was built on ethics.

"Crusader of the Year" proclaimed Time magazine in 2002, when Spitzer was New York's wildly popular attorney general.

Spitzer made his name taking on Wall Street barons and analysts who failed to play fair with everyday investors.

Profiles of Spitzer then were rife with reverential references to his square jaw and his crime-busting predecessor, Eliot Ness.

None of that squares with explosive reports Monday that Spitzer's involvement in a prostitution ring was caught on a federal wiretap.

Law enforcement officials said Spitzer is identified in court papers as Client 9.

"Here's a guy whose entire career has been based on being 'The Sheriff of Wall Street,' 'Mr. Morality,' the guy who is standing firm for ethics in government," said Maurice Carroll, director of Quinnipiac University's Polling Institute.

"For Eliot Spitzer, it's a double surprise because it's his whole public persona."

Spitzer promised to tackle the notorious dysfunction of Albany with the same gusto he took on Wall Street.

He won the New York governor's race in 2006 with a record-setting share of the vote and rumbled into office with his signature mix of aggression and cockiness.

He signed five reform-related executive orders before he was officially sworn in on New Year's Day and was soon making trips to the home districts of lawmakers to denounce them if he felt were in the way of his reform agenda.

Spitzer allegedly described himself as a "steamroller" in a profanity-laced phone call to a Republican legislative leader.

The nickname stuck.

Some saw it as indication of a more arrogant side to Spitzer.

In December 2005, John Whitehead, a former top Wall Street executive, wrote in the Wall Street Journal that Spitzer threatened him in a telephone conversation earlier that year, saying, "I will be coming after you."

"You will pay the price," for publicly criticizing Spitzer's investigation of an ally, AIG insurance magnate Maurice Greenberg.

Spitzer denied threatening Whitehead.

Though Spitzer came into office like gangbusters, he lost steam last summer amid a scandal involving efforts by top aides to governor to embarrass Republican state Senate Majority Leader Joseph Bruno, a chief political rival, over use of state aircraft.

Bruno, who was back on his heels for months in the face of Spitzer's whirlwind, snatched back the offensive.

Spitzer's popularity plummeted even further last year when he proposed making it easier for illegal immigrants to get driver's licenses.

Republicans opposing the unpopular plan were soon joined by Democrats and Spitzer eventually surrendered as polls showed most New Yorkers would be unwilling to re-elect him.

Only recently did Spitzer's poll numbers begin nudging back up.

And this month, the Senate Democrats won a special election in a deep-red Republican district in northern New York with the help of Spitzer's political machine.

It got them within one seat of capturing control of the Senate for the first time in 40 years, one of Spitzer's long-stated goals.

It looked like Spitzer was mounting a modest comeback.

"Stocks slide on mixed news, surging oil"

By MADLEN READ, Associated Press

Last updated: 5:52 p.m., Monday, March 10, 2008

NEW YORK -- Wall Street sank Monday as oil's surge above $108 a barrel and more worrisome signs for the financial sector led investors to extend last week's losses.

The Dow Jones industrial average fell more than 150 points, bringing its three-day loss to nearly 515, while broader indexes showed steeper percentage losses.

Wall Street had no bleak economic data to contend with Monday, but instead faced a steady drumbeat of negative news on companies exposed to mortgages.

Mortgage lenders dropped after Thornburg Mortgage Inc. was downgraded by a Jefferies & Co. analyst and Countrywide Financial Corp. was reported to be under investigation by the government for securities fraud.

Then, Bear Stearns Cos. dropped as Moody's Investors Service downgraded a batch of Bear securities backed by Alt-A mortgages, which are home loans given to people lacking proof of income or with minor credit problems.

The slew of downbeat financial news overshadowed a strong February sales report from McDonald's Corp., and led restless investors to proceed cautiously ahead of big economic reports later in the week: Thursday's report on retail sales and Friday's report on consumer prices.

Those two readings will give Wall Street a better idea of how much the average American is struggling with falling home values and rising costs, and how aggressively the Federal Reserve will need to act when it meets next week.

"The next three days, there aren't any set, big, market-moving reports," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research.

"The economic data Thursday and Friday is going to be the last bit of news, the last showing, before seeing what the Fed will do on the 18th."

The Dow Jones industrial average fell 153.54, or 1.29 percent, to finish near the lows of the session at 11,740.15.

It was the lowest close for the Dow since October 2006.

Broader stock indicators also retreated.

The Standard & Poor's 500 index fell 20.00, or 1.55 percent, to 1,273.37, while the Nasdaq composite index fell 43.15, or 1.95 percent, to 2,169.34.

Government bond prices jumped as stocks weakened.

The yield on the 10-year Treasury note, which moves opposite its price, fell to 3.46 percent from 3.54 percent late Friday.

Investors appeared to shrug off an upbeat report from the Commerce Department that said U.S. wholesale inventories rose in January by 0.8 percent, more than expected, and that sales at U.S. wholesalers rose 2.7 percent, their widest jump since March 2004.

Last week, increasing worries about the economy and the continuing fallout from the credit crisis pounded the stock market.

The Dow ended down 3.04 percent, the S&P 500 index was off 2.80 percent, and the Nasdaq composite index closed with a loss of 2.60 percent.

Recent record-breaking surges in commodities prices have worried many investors about whether the Federal Reserve might hesitate to lower key rates by as much as they want -- at least a half percentage point.

Over the past few months, policy makers have cited the staggering economy as a greater risk than inflation.

On Monday, crude oil soared to finish at a record, rising $2.75 to $107.90 a barrel on the New York Mercantile Exchange after setting a trading record of $108.21 during the session.

It was the fifth record set in the last six sessions.

Gold fell, while the dollar traded mixed.

Even if rising commodities costs do not restrain the Fed from lowering rates further, the market remains unsure that rate cuts will be enough to keep the sagging economy out of recession.

Of particular concern is the job market -- the Labor Department last Friday said the economy lost 63,000 jobs last month.

Early Monday, JPMorgan analysts slashed their year-end target for the S&P 500 index and earnings for S&P 500 companies, after the bank's chief economist said he believes a recession began in January.

The Russell 2000 index of smaller companies fell 16.14, or 2.45 percent, to 643.97.

Declining issues outnumbered advancers by about 5 to 1 on the New York Stock Exchange, where consolidated volume came to 4.15 billion shares compared with 4.44 billion shares traded Friday.

McDonald's, a Dow component, rose $1.53, or 2.9 percent, to $53.80.

Thornburg Mortgage sank $1.08, or 60 percent, to 71 cents, while Countrywide fell 71 cents, or 14 percent, to $4.36.

Bear Stearns fell $7.78, or 11.1 percent, to $62.30 on the Moody's move and also amid market rumors about a liquidity squeeze at the company.

Bear Stearns said in a statement there was "absolutely no truth" to the rumors.

Most Asian markets sank Monday, some in response to Wall Street's losses last week, with Tokyo's market falling to a 2 1/2-year low.

In Tokyo, the Nikkei 225 stock average tumbled 1.96 percent to its lowest point since September 2005.

Hong Kong's market bucked the trend, with a recovery in afternoon trading driven by bargain-hunting and gains at the bank HSBC.

The Hang Seng Index rose 0.9 percent.

Stocks slipped on European exchanges.

Britain's FTSE 100 fell 1.24 percent, Germany's DAX index fell 1.01 percent, and France's CAC-40 fell 1.13 percent.

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On the Net:

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

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

"Gas prices near records, following oil"

By JOHN WILEN, Associated Press

Last updated: 4:07 p.m., Monday, March 10, 2008

NEW YORK -- Gasoline prices were poised Monday to set a new record at the pump, having surged to within half a cent of their record high of $3.227 a gallon.

Oil prices, meanwhile, surged above $108 to a new inflation-adjusted record and their fifth new high in the last six sessions on an upbeat report on wholesale inventories.

The national average price of a gallon of gas rose 0.7 cent overnight to $3.222 a gallon, 69 cents higher than one year ago, according to AAA and the Oil Price Information Service.

Last May, prices peaked at $3.227 as surging demand and a string of refinery outages raised concerns about supplies.

That record will likely be left in the dust soon as gas prices accelerate toward levels that could approach $4 a gallon, though most analysts believe prices will peak below that psychologically significant mark.

In its last forecast, released last month, the Energy Department said prices will likely peak around $3.40 a gallon this spring; a new forecast is due Tuesday.

Retail gas prices are following crude oil, which has jumped 25 percent in a month.

On Monday, crude prices surged to yet another record after the Commerce Department said wholesale sales jumped by 2.7 percent in January, their biggest increase in four years, according to Dow Jones Newswires.

The strong sales report suggested to oil traders that the struggling economy may be doing better than thought.

Light, sweet crude for April delivery rose $2.75 to settle at a record $107.90 on the New York Mercantile Exchange after earlier setting a new trading record of $108.21.

Energy investors shrugged off a relative stabilization of the dollar and a cooling in tensions between Venezuela and its neighbors Colombia and Ecuador.

Many analysts believe speculative investing attracted by the weak dollar is the primary reason oil has risen so far so fast in recent months.

Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is falling.

"We've got a Fed(eral Reserve) meeting on the 18th that could see a sizeable rate cut," said Brad Samples, an analyst with Summit Energy Services Inc., in Louisville, Ky.

"So, it's not over."

Indeed, while the dollar rose against the euro on Monday, many investors believe the greenback is likely to keep falling as the Fed continues to cut rates.

Many analysts believe the rise in crude prices is not supported by the market's underlying fundamentals, noting that supplies are generally rising while demand is falling.

"By gobbling up everything in sight, (investors) are pushing food and fuel prices to ruinously high levels," said Peter Beutel, president of the energy risk management firm Cameron Hanover, in a research note.

Investors shrugged off a weekend cooling of tensions in South America, where Venezuela said Sunday it was restoring full diplomatic ties with Colombia after they were broken off following a cross-border Colombian attack on a leftist rebel camp in Ecuador.

Last week, rebels shut down a Colombian oil pipeline in retaliation for the Colombian raid into Ecuador.

Venezuela threatened to slash trade and nationalize Colombian-owned businesses, and Venezuela and Ecuador briefly sent troops to their borders with Colombia.

The potential for conflict involving Venezuela, an OPEC member and major U.S. oil supplier, helped push oil higher last week.

"The Venezuelan production was at risk there," Samples said.

Other energy futures also rose Monday.

April heating oil futures rose 2.64 cents to settle at $2.9734 a gallon while April gasoline futures rose 2.06 cents to settle at $2.7149 a gallon.

April natural gas futures jumped 25.5 cents to $10.024 per 1,000 cubic feet, the first time a natural gas contract has closed above $10 since January 2006.

Natural gas was following oil higher, but also rising in anticipation of cooler temperatures across the Midwest and Northeast, analysts said.

In London, Brent crude futures rose $1.78 to $104.16 a barrel on the ICE Futures exchange.

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Associated Press writers Pablo Gorondi in Budapest and Gillian Wong in Singapore contributed to this report.

"Carlyle tries to hold off lenders"

By JANE WARDELL, Associated Press

Last updated: 9:22 a.m., Monday, March 10, 2008

LONDON -- Carlyle Capital Corp. Ltd is in talks with creditors to prevent the liquidation of some $16 billion in securities, the listed mortgage-bond fund said Monday.

Carlyle Capital shook financial markets last week after missing margin calls from banks on its $21.7 billion portfolio of residential mortgage-backed bonds.

It said some $5 billion in securities held as collateral may have already been sold.

The fund, an affiliate of the U.S.-based private equity firm Carlyle Group, warned that if it fails to reach an agreement with remaining lenders, all of its securities may be liquidated.

"While these talks continue, the company has discussed and requested a standstill agreement whereby its lenders would refrain from foreclosing and liquidating their collateral, and we are awaiting responses," the fund said in a statement.

The trouble at Carlyle Capital has raised fears that their assets will flood the market, further depressing prices on fixed-income securities.

The securities have dropped sharply in recent weeks as banks pull back on lending to funds and investment vehicles, leading to forced asset sales.

Shares in the fund, which trade on Euronext Amsterdam, were suspended Friday.

The stock fell nearly 60 percent to $5 Thursday when Carlyle Capital revealed it had failed to meet margin calls with four banks the day before.

Shares will not be reactivated until Dutch stock markets watchdog AFM receives more information from Carlyle Capital, said Paul van Dijk, a spokesman for the regulator.

On Monday, Carlyle Capital said it had received more than $400 million in margin calls.

The company leveraged its $670 million equity 32 times to finance a $21.7 billion portfolio of AAA-rated residential mortgage-backed securities issued by U.S. housing agencies Freddie Mac and Fannie Mae.

To do this, it enters into repurchase agreements with banks, in which it posts the mortgage securities as collateral in exchange for cash.

If the value of the security held as collateral falls, the lender has the right to ask for more collateral -- a "margin call" -- to secure the loan.

If the borrower does not meet the margin call, the lender may sell the security.

"Due to recent turmoil in the market for mortgage-backed securities, the company's lenders have significantly reduced the amount they are willing to lend against the company's portfolio," Carlyle Capital on Monday.

The fund is managed by a unit of Washington, D.C.-based Carlyle Group, which is one of the world's largest private-equity firms with $76 billion in assets under management.

Initially launched as a private fund in 2006, it was floated on Euronext Amsterdam last July, selling shares at $19 each.

Within weeks of the listing, it was forced to tap Carlyle Group for $200 million in emergency funding and sold a $900 million loan portfolio at a loss to help meet margin calls.

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AP Business Writer Toby Sterling in Amsterdam contributed to this report.

"Blackstone posts 4Q loss of $170 million"

By STEPHEN BERNARD, Associated Press

Last updated: 5:12 p.m., Monday, March 10, 2008

NEW YORK -- Private equity firm Blackstone Group LP said Monday it swung to a loss during the fourth quarter due to a write-down on its investment in bond insurer Financial Guaranty Insurance Co. and deterioration in the credit markets.

Shares in Blackstone, which went public last June, hit an all-time low on the news.

The company did little to bolster the market's confidence, warning on a conference call that things may yet get worse.

"I don't think we'd load the boat and get aggressive until we knew things had bottomed out," said Tony James, Blackstone's president and chief operating officer.

"And you know, there's no evidence right now that it's bottomed out yet."

"We don't like to guess, we're not just shooting from the hip here."

Blackstone lost $170 million during the fourth quarter, compared with earnings of $1.18 billion during the final quarter in 2006.

Adjusted net income, which was adjusted for special revenues and expenses tied to the company's public offering, fell to $88 million, or 8 cents per share, from $808.1 million, or 72 cents per share, during the year-ago period.

Analysts polled by Thomson Financial, on average, expected Blackstone to turn a profit of 19 cents per unit for the quarter.

Analysts do not always include special charges in their estimates.

Quarterly revenue fell 73 percent to $345 million from $1.28 billion during the final quarter in 2006.

Revenue plummeted because Blackstone posted $141.8 million in negative revenue during the fourth quarter from performance allocation fees, compared with revenue of $776.3 million during the year-ago period.

Blackstone reduced the value of its portfolio investment in bond insurer FGIC because of recent weakness in the credit markets and worries about bond insurers' abilities to repay claims.

Blackstone wrote down the value of its investment in FGIC to "a few cents on the dollar," James said.

Blackstone invested in FGIC in 2003.

FGIC recently had its financial strength rating cut by both Moody's Investors Service and Standard & Poor's, which could force the company out of business.

Ratings agencies have worried in recent months that bond insurers might not have enough spare cash to maintain their top-notch "AAA" financial strength ratings.

The write-down of FGIC's value reduced Blackstone's fourth-quarter revenue by about $120 million, James said on the call, cutting earnings by 9 cents per unit.

Blackstone Chief Executive Stephen Schwarzman said on the call deterioration in the credit and fixed income markets during the second half of 2007 reduced the level of new investments, transaction fees and appreciation on Blackstone's portfolio of investments.

Schwarzman said those problems have continued into 2008 and it is unclear when conditions will improve.

For the full year, Blackstone earned $1.62 billion on total revenue of $3.05 billion.

It posted earnings of $2.27 billion on $2.62 billion in revenue in 2006.

Blackstone shares fell 42 cents, or 2.9 percent, to close at $15 Monday.

The stock, which debuted last June at $31, touched an all-time low of $13.82 at one point in the session.

"Retail retrenchment hurts malls"

By ANNE D'INNOCENZIO, Associated Press

Last updated: 11:22 a.m., Monday, March 10, 2008

The signs that smaller retailers are struggling are unavoidable at malls across America: "Going out of business" sales at many Wilsons Leather stores.

"Up to 70 percent off" at KB Toys.

At the once-sizzling Paradise Valley Mall in Phoenix, the space once occupied by Bombay Co., the furniture chain that went bankrupt last year, is empty.

Wilsons just finished liquidating its inventory.

KB Toys, AnnTaylor and American Eagle feature bold posters advertising steep discounts.

"I don't think it brings much business when all these stores are closed," said Michelle Green, a sales clerk at Fred Meyer Jewelers.

Around the country, mall centers are starting to feel the recoil from a rapid expansion in recent years that allowed retailers to aim stores at almost every niche, from shoppers who wanted Talbots clothes for their children to those who craved Bombay's little wood tables.

Now, consumers who are closing their wallets amid rising gasoline prices and a housing slump are forcing specialty retailers to pare back their brands.

While still healthy overall, mall centers in areas hardest hit by the housing downturn -- like Paradise Valley -- are suffering the most store shutdowns.

Retailers including AnnTaylor Stores Corp., Talbots Inc. and Pacific Sunwear of California Inc. have closed hundreds of stores so far this year.

Gadget seller Sharper Image Corp. filed for bankruptcy protection last month and plans to shutter nearly half of its 184 stores.

That retrenchment, along with the Chapter 11 bankruptcy of catalog retailer Lillian Vernon Corp., marks the beginning of a wave of retail bankruptcies that's expected to go well beyond the home furnishings stores hurt by the housing malaise.

"This is economic Darwinism," said Dan Ansell, a partner at Greenberg Traurig LLP and chairman of its real estate operations division.

"Those retailers and businesses that have a product that is desired by consumers will survive, and those who do not will not."

Unless the economy dramatically improves, Ansell believes retail bankruptcies this year could reach the highest level since the 1991 recession.

More closings could leave gaping holes in the nation's retail centers, which have already seen average vacancy rates creep up to between 7 percent and 8 percent from 5 percent over the last six months, according to data from NAI Global, a commercial real estate services firm.

David Solomon, president and CEO of ReStore, NAI Global's retail division, expects the vacancy rate could hit 10 percent by the end of the year.

Suzanne Mulvee, senior economist at Property & Portfolio Research, figures that vacancies could rise as high as 12.5 percent this year.

Her figure includes retail spaces where tenants have defaulted on their rents.

Part of the problem, according to Mulvee, is that more retail space is coming to the market just as consumer demand is falling.

Another 130 million square feet of retail space will become available this year, she predicts, on top of last year's 143 million.

That is well above the average 100 million square feet added per year earlier in the decade.

As a result, markets like Phoenix, which had a retail boom, are expected to see the most dramatic increases in vacancies.

Phoenix's rate is expected to more than double to 10 percent by the end of 2009 from 4.4 percent late last year, according to Property & Portfolio.

In Kansas City, Mo., rates could rise to almost 17 percent by the end of 2009 from last year's 13.5 percent.

In San Antonio, experts say the figure may hit 20.5 percent next year from last year's 17.4 percent.

Still, Solomon doesn't think the situation will be as dire as in 1991, when the savings and loan crisis hurt the entire country.

Experts also say merchants are weathering downturns better because of new systems to control inventory and costs.

Nevertheless, consumers are seeing fewer stores that focus on specific niches, like apparel for women baby boomers or clothing for surf fans.

That would differ from 17 years ago, when it was the department stores that felt the major shakeup as leveraged buyouts and fierce competition led to the demise of names like Carter Hawley Hale Stores and Woodward & Lothrop.

But there's one common theme: the power of national discounters like Wal-Mart Stores Inc., which helped seal the eventual demise of regional discount chains last time around.

Now, the discounters' clout is hurting consumer electronics stores like CompUSA, which is closing most of its stores, and Circuit City Stores Inc., which posted dismal holiday sales.

Christina Avila, shopping at the Oak Park Mall in Kansas City, Mo. -- which had more than half a dozen store vacancies -- said she's cutting back because of the economy and spending more at places like Wal-Mart and Target.

"I'm more interested if they have clearance items," she said.

Michele Lipovitch of Phoenix said she only goes to the Paradise Valley mall twice a month.

"We have two kids."

"I have credit card debt I'm trying to pay off," said Lipovitch.

"It's kind of scary because we keep hearing that it looks like we're going into a recession."

The industry pullback follows several years of rapid expansion and experimentation with a range of new store formats as retailers enjoyed robust consumer spending fueled by rising home values.

But the sharp spending drop has made stores rethink how to expand their businesses.

Jewelry retailer Zale Corp. announced more closings last month, meaning it now plans to shutter almost 5 percent of its stores by the end of July.

In January, Pacific Sunwear said it will close all 154 remaining Demo stores, which sell urban fashions.

AnnTaylor is shutting down 13 percent of its stores and delaying a new store concept aimed at women boomers, while Talbots is closing its 78 children's and men's apparel stores to focus on its core middle-aged female customer.

Macy's also has said it will close nine stores.

And Wilsons The Leather Expert is closing a majority of its 260 mall locations.

Analysts say they're watching to see if Circuit City closes any stores after posting a third-quarter loss and cutting its full-year profit outlook.

Analysts also expect more store cutbacks at Sears Holdings Corp., which operates Kmart and Sears stores.

Some shoppers are not going to miss the casualties.

"They have nice clothes, nice urban wear, but their prices (are) a little high," said Tasha Burts, 35, of Demo at the Dolphin Mall west of downtown Miami.

She walked out empty-handed.

Mall operators Taubman Centers Inc. and Simon Property Group say their top tenants -- the department stores and other big chains that anchor most shopping centers -- are in good financial shape.

Bill Taubman, chief operating officer of Taubman Centers, predicts more store closings and bankruptcies than last year, but doesn't think they will reach historic highs.

That will still mean a more limited selection for consumers, who until a few months ago had a plethora of choices, particularly when it came to furniture.

Recent home furnishings casualties included Bombay and Levitz Furniture, which filed for bankruptcy in November and has been liquidating its inventory.

Clothing stores, in a malaise since consumers see fashion spending as discretionary, could see widespread closures this year.

While the industry overall is experimenting less with new formats, Janet Hoffman, managing partner of the North American retail division of Accenture, expects the mood to be temporary.

"There is this undying belief in the retail industry that they have an idea that will work," Hoffman said, citing Abercrombie & Fitch Co.'s new lingerie chain Gilly Hicks.

"A year or 18 months from now you will see new ones at play."

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Associated Press Writers David Twiddy in Kansas City, Mo., Terry Tang in Phoenix and Laura Wides-Munoz in Miami contributed to this report.

"Treasurys rise; stocks fall on earnings"

By LESLIE WINES, Associated Press

Last updated: 5:42 p.m., Monday, March 10, 2008

NEW YORK -- Long-term Treasury prices rallied Monday as stocks came under pressure from yet another record-smashing new oil price high and continued nervousness in the credit markets.

Treasurys, which are backed by the federal government, tend to benefit whenever investors are worried about risks in other markets.

There was some disappointment in the markets that rumors that the Federal Reserve would put in place an emergency rate cut to soothe frazzled markets did not pan out.

Data that showed that the nation's economy gave up jobs in both January and February contributed to speculation late last week that the Fed's Open Market Committee might put in place an emergency rate cut as early as Monday morning.

"Stocks stumbled and Treasuries reaped windfall gains once again on a slow news day, following the latest rumors of an emergency Fed cut, following Friday's weak payrolls, and the next scare in the financial sector," said Action Economics.

The benchmark 10-year Treasury note rose 25/32 to 100 18/32 with a yield of 3.43 percent, down from 3.54 percent late last week, according to BGCantor Market data.

Prices and yields move in opposite directions.

The 30-year long bond gained 1 11/32 to 98 27/32 with a yield of 4.45 percent, down from 4.56 percent .

The 2-year note advanced 5/32 to 101 2/32 with a yield of 1.45 percent, down from 1.53 percent.

After hours trade sent yields higher.

At 5:30 p.m. Eastern time, the 10-year yield rose to 3.46 percent, the 30-year yield rose to 4.47 percent and the 2-year yield rose to 1.49 percent.

The yield on the 3-month note fell to 1.32 percent from 1.42 percent late Friday as the discount rate dropped to 1.30 percent from 1.39 percent.

Crude futures continued on a record-setting advance, surging above $108 a barrel to their fifth new high in the last six sessions.

The bond market has become very worried that a vigorous commodities rally has sent inflation higher at the same time that the economy is slowing.

This means the Fed will have to choose between cutting rates to stimulate the economy and holding rates in check or raising them to curb inflation.

The Fed is scheduled to hold another monetary policy meeting next week.

Investors in the bond market continue to expect a rate cut of at least 0.50 percentage point by then.

Investor wariness about risks in other markets also was stoked by unconfirmed rumors that Bear Stearns Cos. is having funding problems.

The rumors were dismissed by Bear Stearns, but nonetheless undermined market sentiment.

Worries about liquidity at banks and brokerages sparked record high prices this week and last in the credit default swap market that allows investors to buy protection against possible default on bonds.

The IG9 index, which measures default protection costs for 125 U.S. and Canadian investment grade companies, Monday reached 194, its highest level ever, and up sharply from 177 on Friday, according to Phoenix Partners Group.

There also were new concerns about mortgage finance companies Fannie Mae and Freddie Mac that sent the stocks of both companies to 52-week lows Monday.

An article by financial weekly Barron's suggested that Fannie Mae could soon need a government bailout.

A research note from Bear Stearns concluded the article did not provide a balanced assessment of the situation, but that the story also contributed to the jittery mood in the markets.

The Commerce Department reported that sales by wholesalers rose at the fastest pace in almost four years in January.

Sales increased 2.7 percent in the month, the biggest rise since March 2004, while inventories rose 0.8 percent.

The inventory-to-sales ratio was a record low 1.07.

This means that inventories entered February in lean condition, giving wholesalers the ability to adjust to possible lower demand without reducing their manufacturing orders.

The report generally does not have a major impact on market activity, although it is a component of gross domestic product, which is closely followed by investors.

"Gold, silver falls on fund-selling"

By STEVENSON JACOBS, Associated Press

Last updated: 5:32 p.m., Monday, March 10, 2008

NEW YORK -- Gold and silver prices fell Monday, ignoring another record-setting oil rally as worries of U.S. recession sparked a round of selling by funds.

Other commodities traded mixed, with platinum falling for a third straight session and wheat futures rising.

Gold futures have been hovering near the $1,000 mark for the last several days but have failed to breach the psychologically important milestone despite the dollar's continued slide versus the euro and crude oil's push above $100 a barrel.

Gold fell more than $10 earlier Monday amid a sell-off by hedge funds but recovered slightly in the early afternoon on bargain buying, analysts said.

"If there is a recession, let's face it, everything is going to be moving a little bit south because the hedge funds are selling liquid assets like gold to make up for margin calls on non-liquid assets," said George Gero, vice president at RBC Capital Markets Global Futures in New York.

Gold for April delivery fell $2.40 to settle at $971.80 an ounce on the New York Mercantile Exchange, after earlier trading as low as $961.90 and as high as $982.80.

The metal has gained 15 percent this year and 31 percent in 2007, driven by a tumbling dollar, record-high crude prices and uneasiness about the U.S. economy.

Gold is traditionally viewed as a safe-haven investment in times of economic uncertainty and rising inflation, since the metal is known for holding its value.

Other precious metals also traded lower Monday.

Silver for March delivery lost 46 cents to settle at $19.968 an ounce on the Nymex, while March copper shed 12.35 cents to settle at $3.8085 a pound.

Platinum for April delivery declined $2.60 to settle at $2,039.10 an ounce on the Nymex on easing supply concerns following a move by South Africa to give the country's mines 95 percent of their power supply, up from a 90 percent ration that was imposed after an energy crisis struck the country last month.

In energy markets, crude oil prices surged above $108 for the first time and hit a new inflation-adjusted record on a positive report on wholesale inventories.

Light, sweet crude for April delivery rose $2.75 to settle at a record $107.90 on the New York Mercantile Exchange after earlier setting a new trading record of $108.21.

It was oil's fifth new high in the last six sessions.

Other energy futures also rose.

April heating oil futures rose 2.64 cents to settle at $2.9734 a gallon while April gasoline futures rose 2.06 cents to settle at $2.7149 a gallon.

In agriculture markets, May wheat futures surged 58 cents to settle at $11.63 a bushel on the Chicago Board of Trade on expectations of rising demand and dwindling world stockpiles.

Other agriculture products traded mixed.

Soybeans for May delivery fell 2.25 cents to settle at $14.065 a bushel on the CBOT, while March corn futures added 22.5 cents to settle at $5.56 a bushel.

"Hovnanian reports 1Q loss doubled"

By JEFFREY GOLD, Associated Press

Last updated: 6:16 p.m., Monday, March 10, 2008

NEWARK, N.J. -- Homebuilder Hovnanian Enterprises Inc. on Monday reported it lost more than twice as much money in its fiscal first quarter compared to a year ago and blamed the continuing struggles of the housing market.

It was the sixth consecutive quarterly loss for Red Bank-based Hovnanian, which operates in 19 states.

After paying preferred stock dividends, the company reported a net loss of $130.9 million, or $2.07 per share, for the quarter that ended Jan. 31.

This compared with a loss of $57.4 million, or 91 cents per share, for the same period a year ago.

Quarterly revenue fell 6.2 percent to $1.09 billion from $1.17 billion in the same period last year.

Analysts surveyed by Thomson Financial expected Hovnanian to lose $1.96 per share in the quarter on revenue of $911.4 million.

"Market conditions remain challenging across many of our markets," President and Chief Executive Ara K. Hovnanian said in a statement.

The company will continue to reduce inventories, maximize cash flow and shrink overhead, he said.

"Despite the persistence of negative factors impacting the homebuilding industry, we are diligently working to position the company to take advantage of the stronger demand for new homes that will inevitably return once the current housing correction ends," Hovnanian said.

He did not suggest when that might occur.

The housing and credit crises are the key factors blamed for an economic slowdown that has led to the nation's deepest job cuts in five years and suggestions that the country is in a recession or heading toward one.

The company said its net contracts for the first quarter, excluding joint ventures, declined 41.2 percent to 1,511.

The dollar value of net contracts dropped nearly 50 percent to $457.8 million, with the average home price down nearly 15 percent to $302,971.

Hovnanian's contract cancellation rate, excluding the joint ventures, dropped to 38 percent from 40 percent last quarter, but was higher than the 36 percent in last year's first quarter.

Hovnanian has operations in Arizona, California, Delaware, Florida, Georgia, Illinois, Kentucky, Maryland, Michigan, Minnesota, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Texas, Virginia and West Virginia.

Hovnanian issued its report after the market closed.

Shares rose 7 cents to $8.66 in after-hours trading, having risen in regular trading 9 cents to $8.59.

The stock has declined from a high of $31.24 to a low of $4.25 over the past year.

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On the Net:

Hovnanian Enterprises Inc.: http://www.khov.com

"CNBC - Billionaire Investor Sees Bank Failures Ahead"

Monday March 10, 10:52 am ET

Billionaire investor Wilbur Ross says the current market downturn differs from previous slumps in that no American banks have yet failed this time, but he suggests that's about to change.

"I think that's going to be the next wave, and coupled with problems in the commercial real estate market; I think they'll be the next bubbles that burst," the chairman and CEO of W. L. Ross and Company told CNBC's "Squawk Box" in an exclusive interview.

He was asked about the risks to big banks.

"I think that the big banks won't fail in the sense that they will go to zero and depositors would lose money," Ross replied.

"I think the Fed and other regulators will make things happen."

"I think it's the medium-sized banks, and particularly some of those that got overextended with the subprime and other kind of mortgage debt."

"I think those are the ones that had the serious mismatch, making 20- and 30-year loans based on 90-day deposits."

Ross's comments echo those made by Federal Reserve Chairman Ben Bernanke, who told a Senate committee on Feb. 28 that some smaller regional banks that heavily invested in real estate could go under.

Ross and other high-profile investors have made recent moves in the credit markets, explaining that they have done so to snap up bargains.

Last week it was reported that Ross had invested $1 billion into municipal bonds.

In the meantime, Ross said he didn't think the U.S. economy would recover any time soon.

"I think at best we're in for stagflation," Ross said, referring to the combination of higher inflation and weak economic growth.

"I think the consumer has been tapped out for quite a while and is frightened by the poverty effect of seeing the house go down."

Straightening out the problems in the bond industry, particularly the situation of the insurers who backstop bond offerings, would go a long way toward fixing the current paralysis in the credit markets, Ross intimated.

That process is underway, he suggested, with the current reassessment by ratings agencies of the bond insurers.

"Making real triple-As will solve a lot of the problem," he said.

"The problem is we've had a lot fake triple-As before."

That effort is far from over, indicated New York State Insurance Commissioner Eric Dinallo, who has been at the center of efforts to stabilize the sector.

Troubled bond insurers MBIA (NYSE:MBI) and Ambac (NYSE:ABK) successfully raised fresh capital last week, he noted.

Now attention now turns to FGIC, he said, also during an appearance on "Squawk Box."

"Barrage of Iraqi attacks kills 16, including 5 U.S. troops"

By Hannah Allam, McClatchy Newspapers

10 March 2008

BAGHDAD, Iraq — Bombers struck four times in Baghdad and at three locations north of the capital Monday with explosions aimed at an array of targets: a U.S. military foot patrol, a hotel in the typically safe Kurdish region, a police station, and civilians near a hospital and a mosque, authorities and witnesses said.

With a combined death toll of at least 16— including five American service members— none of the seven blasts was as powerful as the twin bombings that killed 68 people last Thursday in a Baghdad shopping district.

It wasn't clear whether any of Monday's bombers acted in coordination.

Still, Iraqi officials interpreted the wave of attacks as Sunni Muslim insurgents reasserting their presence at a time when violence had dipped to record lows and families were tentatively venturing out of their walled-off neighborhoods.

Two of the explosions occurred in militia-controlled Shiite Muslim districts, signaling that bombers still can strike in the heart of Mahdi Army territory.

Another blast ripped through a hotel in the cultural hub of Sulaimaniyah in the autonomous northern Kurdish region, which is typically among the safest places in Iraq.

In central Baghdad, five U.S. troops died after an apparent suicide bomber wearing an explosives vest approached an American patrol in the once-upscale neighborhood of Mansour, according to the U.S. command in Baghdad.

Four of the soldiers were killed at the scene and another died later from his wounds, the military said in a statement.

Another three U.S. soldiers and an Iraqi interpreter were wounded.

Iraqi police say that an Iraqi civilian also was killed.

"AP water probe prompts Senate hearings"

By MARTHA MENDOZA, Associated Press

Last updated: 5:52 a.m., Tuesday, March 11, 2008

Two veteran U.S. senators said they plan to hold hearings in response to an Associated Press investigation into the presence of trace amounts of pharmaceuticals in the drinking water supplies of at least 41 million Americans.

Also, U.S. Rep. Allyson Schwartz, D-Pa., has asked the EPA to establish a national task force to investigate the issue and make recommendations to Congress on any legislative actions needed.

Sen. Barbara Boxer, who heads the Senate Environment and Public Works Committee, and Sen. Frank Lautenberg, chairman of the Transportation, Safety, Infrastructure Security and Water Quality Subcommittee, said Monday the oversight hearings would likely be held in April.

Boxer, D-Calif., said she was "alarmed at the news" that pharmaceuticals are turning up in the nation's drinking water, while Lautenberg, a New Jersey Democrat who said he was "deeply concerned" by the AP findings.

Both represent states where pharmaceuticals had been detected in drinking water supplies, but not disclosed to the public.

"I call on the EPA to take whatever steps are necessary to keep our communities safe," said Boxer in a statement.

Added Lautenberg, whose subcommittee has jurisdiction over drinking water issues:

"Our families deserve water that is clean and safe."

"Our hearing will examine these problems and help ensure the EPA and Congress take the steps necessary to protect our residents and clean up our water supply."

EPA spokesman Timothy Lyons said the agency is "committed to keeping the nation's water supply clean, safe and the best in the world."

"We encourage all Americans to be responsible when disposing of prescription drugs."

The Lautenberg-Boxer announcement came just 24 hours after the AP's release of the first installment of its three-part series, titled PharmaWater.

The five-month-long inquiry by the AP National Investigative Team found that while water is screened for drugs by some suppliers, they usually don't tell their customers that they have found medication in it, including antibiotics, anti-convulsants, mood stabilizers and sex hormones.

The series shows how drugs -- mostly the residue of medications taken by people, excreted and flushed down the toilet -- have gotten into the water supplies of at least 24 major metropolitan areas, from Southern California to northern New Jersey.

The stories also detail the growing concerns among scientists that this pollution has adversely affected wildlife, and may threaten human health.

In a letter to EPA administrator Stephen Johnson, Schwartz said, "Like many Pennsylvanians, I was especially taken aback by the finding of 56 different pharmaceuticals discovered in the drinking water for the City of Philadelphia.."

". . The Associated Press report raises serious questions about the safety and security of America's water system."

"Stocks head for higher open"

By JOE BEL BRUNO, Associated Press

Last updated: 8:02 a.m., Tuesday, March 11, 2008

NEW YORK -- Wall Street appeared poised to rebound Tuesday amid investor hopes that the Federal Reserve will increase the pace of interest rate cuts and also pump more liquidity into the financial system.

At the same time the market was eyeing crude oil's unrelenting march higher as the price briefly topped $109 a barrel.

Economists from Goldman Sachs and JPMorgan Chase speculated the central bank might act to cut rates before its March 18 meeting.

The market is also hopeful the Fed would create new measures to boost the ailing economy, such as increase the amount of money it directly lends to banks and other financial institutions.

More aggressive Fed action would be welcomed by Wall Street after a grim jobs report and more news about the fallout from the credit crisis sent the Dow Jones industrial average down 515 points over a three-day period.

While Wall Street seems to want the Fed to act, there are also concerns that this won't be enough to help the economy.

Inflation is another concern.

On Monday, stocks sank as oil surpassed $108 a barrel in intraday trading before settling just below that benchmark on the New York Mercantile Exchange.

In electronic trading Tuesday, light, sweet crude for April delivery briefly climbed to $109.20 a barrel by midday in Europe.

Speculation that rising prices for oil and other commodities will offset the falling dollar has driven oil's rally from $87 a barrel in January.

Any move higher on Wall Street on Tuesday would come amid caution.

Many investors are taking positions ahead of big economic reports later in the week, including Thursday's report on retail sales and Friday's data on consumer prices.

Tuesday's economic calendar focuses on a trade report from the Commerce Department, which will be released at 8:30 a.m. EDT.

Economists expect the report to indicate the trade balance worsened slightly in January, moving to a deficit of $69.75 billion from $58.8 billion in December.

Ahead of Tuesday's opening, Dow futures rose 80, or 0.67 percent, to 11,859.

The index is down more than 2,400 points from its October 2007 record high.

Standard & Poor's 500 futures were up 9.10, or 0.71 percent, at 1,284.70, while the Nasdaq 100 futures added 5.00, or 0.30 percent, to 1,681.75.

In corporate news, WellPoint Inc. is expected to tumble after Goldman Sachs trimmed its ratings in the managed care sector to neutral from attractive.

The investment bank singled out WellPoint's performance amid pricing pressures.

Texas Instruments Inc., which makes chips used in about half the world's cell phones, lowered its profit projections late Monday due to a key customer's decision to cut orders.

The company did not identify the customer other than to say it is a maker of wireless phones.

Stocks overseas rebounded Tuesday.

Japan's Nikkei 225 stock average rose 1.01 percent, while Hong Kong's market closed up 1.28 percent higher.

In afternoon trading, Britain's FTSE-100 rose 1.11 percent, Germany was up 0.44 percent, and France added 0.90 percent.

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"NY Gov. Spitzer under pressure to quit over sex case"

By Claudia Parsons Tue Mar 11, 12:49 AM ET

NEW YORK (Reuters) - New York Gov. Eliot Spitzer faces pressure to resign on Tuesday as well as questions about whether he will be prosecuted for any crime after a report linked him to a high-class prostitution ring.

A New York Times report said the man who made his name fighting corruption hired a $1,000-an-hour prostitute and was caught on a federal wiretap at least six times on February 12 and 13 arranging to meet with her at a Washington hotel.

Spitzer, a married 48-year-old Democrat who investigated prostitution as New York's attorney general, apologized for what he described as a "private matter" but said nothing about resigning.

He neither confirmed nor denied the report.

State Republicans called for him to step down.

New York State Assembly Republican Minority Leader James Tedisco said on Monday night he had received a phone call from Lieutenant Governor David A. Paterson to discuss a possible transition of power if Spitzer resigns.

The New York Times said in an editorial Spitzer's insistence it was a "private matter" displayed arrogance.

"He did not just betray his family in a private matter."

"He betrayed the public, and it is hard to see how he will recover from this mess and go on to lead the reformist agenda on which he was elected to office," the paper said.

News of the scandal rocked Wall Street, where power brokers resented Spitzer's high-profile inquiries into financial cases when he was New York state's chief prosecutor.

Spitzer was elected governor with nearly 70 percent of the vote in late 2006 following a stint as state attorney general noted for high-profile investigations into Wall Street.

The Wall Street Journal said Spitzer had shown his lack of restraint in overly aggressive tactics as attorney general, making "extraordinary threats" to entire firms and to those who criticized his pursuit of high-profile Wall Street figures.

"The stupendously deluded belief that the sitting Governor of New York could purchase the services of prostitutes was merely the last act of a man unable to admit either the existence of, or need for, limits," the Journal wrote in an editorial about what it said was almost a Shakespearean fall.

"Governor Spitzer, who made his career by specializing in not just the prosecution, but the ruin, of other men, is himself almost certainly ruined," the paper said.

IF, OR WHEN, HE'LL QUIT

The state capital, Albany, was rife with speculation about if, or more likely when, Spitzer would resign and whether he would be charged with any crime.

Prosecutors rarely bring charges against clients of prostitutes in such cases.

In an online poll on The Daily News web site, 83 percent of respondents said Spitzer should resign.

At the heart of the scandal is a criminal complaint unveiled last week charging four people with running a multi-million dollar prostitution ring dubbed "The Emperors Club."

The New York Times said Spitzer was an individual identified as Client 9 in the court papers filed last week.

Client 9 arranged to meet with "Kristen," a prostitute who charged $1,000 an hour, on February 13 in a Washington hotel and paid $4,300 for services rendered and as a down payment for future engagements, according to the court documents.

Among the charges brought against the four defendants last week was transporting women across state lines for prostitution purposes.

It was not clear if a similar charge might be brought against Spitzer if it were proven he arranged for "Kristen" to travel from New York to Washington to have sex with him.

ABC News reported on its Web site that the probe of the prostitution ring was triggered when a bank told the Internal Revenue Service about suspicious money transfers by Spitzer.

ABC quoted an unidentified Justice Department official as saying Spitzer could be prosecuted under an obscure financial statute, in what would be an irony for a man who used wiretaps to nail major names in finance.

In a interview two years ago, Spitzer, then-attorney general, told ABC News he had some advice for people who break the law.

"Never talk when you can nod, and never nod when you can wink, and never write an e-mail because it's death."

"You're giving prosecutors all the evidence we need," he said.

(Additional reporting by Daniel Trotta, Robert Campbell; editing by Stuart Grudgings)

"Probe into call girl ring started at IRS"

By LARRY NEUMEISTER, Associated Press

Last updated: 1:42 a.m., Tuesday, March 11, 2008

NEW YORK -- The federal investigation into a high-end prostitution ring linked to Gov. Eliot Spitzer apparently began last year as a financial probe by the Internal Revenue Service.

The investigation into the Emperors Club VIP gathered more than 5,000 telephone calls and text messages, and more than 6,000 e-mails, along with bank records, travel and hotel records and surveillance.

But it was unclear whether Spitzer was a target from the start or whether agents came across his name by accident while amassing evidence.

Conversations were recorded about someone identified as "Client 9," including that a prostitute identified as "Kristen" should take a train from New York to Washington for a tryst on the night of Feb. 13, according to an affidavit.

A law enforcement source in Washington who spoke on condition of anonymity told The Associated Press that "Client 9" was Spitzer and that he met with "Kristen" in a Washington hotel room just two hours before Valentine's Day.

Wiretaps enabled government agents to listen as the woman later told a booking agent for the ring that she had secured $4,300 in cash from her client and that she liked him.

Authorities also had statements from a confidential source and an undercover officer.

The prostitution ring first came to light last week when four people with charged with running it.

It was not immediately clear whether Spitzer could face charges.

Federal prosecutors have brought charges against several prostitution rings over the past two decades, but have generally not prosecuted customers.

The public-corruption unit of the U.S. attorney's office got involved after the IRS looked into a complaint of a potential violation of the Bank Secrecy Act, the government's main tool against money laundering.

Financial institutions are required to have anti-money laundering programs, which help the government catch terrorist financiers, drug lords and other criminals.

Financial companies also must report suspicious financial transactions to the government.

Investigators say the Emperors Club, which is based in Brooklyn, made more than $1 million for its operators by selling the services of women whose bodies were displayed, their faces concealed, on a Web site.

The prostitutes were advertised as costing from $1,000 to $5,500 an hour.

Last Thursday, four people were arrested in the probe and charged with conspiracy to violate federal prostitution laws: Mark Brener, 62, and Cecil Suwal, 23, who live together in Cliffside Park, N.J.; Temeka Rachelle Lewis, 32, of Brooklyn; and Tanya Hollander, 36, of Rhinebeck, N.Y.

Brener and Suwal also were charged with conspiracy to launder more than $1 million in illicit proceeds.

Lewis and Hollander were accused of arranging meetings between prostitutes and clients.

Assistant U.S. Attorney Dan Stein said he believed the arrests shut down the ring.

The business promised clients they could pay with a wire transfer that would show up on records as QAT Consulting to make it appear to be a business transaction.

"Client 9" insisted on paying in cash.

"Analysts ask: What was Spitzer thinking?"

By JOCELYN NOVECK, Associated Press

Last updated: 7:52 p.m., Monday, March 10, 2008

NEW YORK -- It's the simplest question in the world, but it was the one repeated over and over Monday after the staggering news broke about Gov. Eliot Spitzer: What in heaven's name was the man thinking?

Yet if the New York governor is proved to have been involved in a prostitution ring, it would hardly be the first time a powerful, brilliant person in public life has done something dizzyingly self-destructive.

Why do otherwise smart, successful people do such risky things?

For psychologists and political analysts who found themselves dissecting the Spitzer story, it was a question of the chicken or the egg: In such situations, does the risky behavior precede the powerful job?

Or does something about being in power cause the behavior?

Many speculated that it was a combination of the two.

"We're all human," said Leon Hoffman, a psychoanalyst in New York.

"These urges are so, so common."

"Whether it's a prostitute or a mistress that one chooses, that's another question."

And yet, Hoffman said, there may be something about the aura of power surrounding a prominent politician that makes him feel potentially immune from consequences.

"There's the psychology of the exception," said Hoffman, former chairman of the American Psychoanalytic Association's public information committee.

"People in power sometimes feel they can do things that us, mere mortals, are forbidden to do."

"There's a sense, as with adolescents, that 'I won't get caught.'"

Political analyst Steven Cohen was wary of trying to draw any conclusions about the corrupting influence of power.

"The problem is we don't know when this behavior started for this person," said Cohen, a professor of public administration at Columbia University.

"Politicians are like the rest of us."

"The fact that they're flawed and do stupid things shouldn't surprise us."

The real question, Cohen said, is whether Spitzer should be held to a different ethical standard.

And his answer is yes.

"This isn't Britney Spears we're talking about."

"This is the governor," Cohen said.

"The bottom line is, he controls the National Guard and the state police."

"He could have people come to arrest you and me tomorrow."

"So his private behavior does become a public issue."

One psychologist who has studied and worked with politicians and their families thinks there is indeed something different about people who reach positions of such prominence.

"In order to be in such a high-profile position, you have to believe that what you are doing is innately right," said Renana Brooks, of Washington, D.C.

"Anything that isn't right, you may blot out."

"You can't be tortured by guilt or indifference."

"It's just virtually impossible to function at this high a level without limiting the amount of introspection you can do."

Spitzer, who has not been charged and has not resigned, was caught on a federal wiretap arranging to meet with a prostitute, according to a law enforcement official who spoke to The Associated Press on condition of anonymity because the investigation is still going on.

The governor, identified in court papers only as "Client 9," met with the woman the day before Valentine's Day, the official said.

According to the complaint he paid $4,300 in cash for that and future trysts, and when discussing payments told an agent:

"Yup, same as in the past, no question about it."

One longtime analyst of New York politics finds it hard to look at Spitzer's predicament without thinking of politicians such as President Clinton in the Monica Lewinsky scandal and New Jersey Gov. James E. McGreevey, who resigned after announcing he had an affair with a male staffer.

"These are really smart guys doing really stupid things -- and doing really stupid things repeatedly," said Doug Muzzio, professor of public affairs at Baruch College.

But the allegations about Spitzer, he said, were the most shocking, if only because there was no public hint of such behavior from the governor, who campaigned as a model of moral rectitude.

"Nobody I've spoken to ... had any inkling of this," Muzzio said.

He said he was torn between believing Spitzer's situation could be a case of a deep-seated compulsion or one of simple hubris.

"It could be both -- they're not mutually exclusive," Muzzio said.

"Now that would be a really fatal cocktail."

"In any case, there's an element of recklessness and risk-taking that is just breathtaking."

Would Spitzer, who knows better than most anyone how law enforcement works, consider the consequences of getting caught?

Analysts say people often don't consciously think about such risks, even highly intelligent people.

Chicago psychoanalyst Mark Smaller believes one can find useful parallels in the case of certain patients, from all walks of life, who exhibit a striking capacity to compartmentalize risky, unethical or even illegal behavior, a process known as the "splitting" of part of the personality.

"They can be otherwise completely law-abiding, sensible, reliable people," Smaller says.

"Often the behavior in question is caused by intense anxiety, stress in the workplace or home, or feeling overwhelmed."

And often, he says, the behavior can involve sex, drugs, or something like shoplifting.

"They compartmentalize to the extent that they don't feel any sense of shame or guilt," Smaller said.

"Until," he adds, "they get caught."

"Another tri-state governor in scandal"

By JOHN CHRISTOFFERSEN, Associated Press

Last updated: 11:23 p.m., Monday, March 10, 2008

NEW HAVEN, Conn. -- A dynamic young governor near the New York media spotlight is suddenly derailed by scandal.

In 2004, it was Connecticut's John Rowland, followed quickly by New Jersey's Jim McGreevey.

On Monday, prostitution allegations against New York Gov. Eliot Spitzer threatened to make him the third governor in the tri-state area to lose his job in shocking, humiliating fashion in less than four years.

"It's troubling," said Gary Rose, politics professor at Sacred Heart University in Fairfield.

"They were all rising stars -- all three of them."

"I think it could cause some voters to really look below the surface."

"You wonder what lies beneath a lot of the imagery."

JOHN ROWLAND

Rowland was the boy wonder of Connecticut politics: At 27 a congressman and at 37 the youngest governor in Connecticut history when he took office in 1995.

Though a Republican in a heavily Democratic state, the charismatic Rowland enjoyed high approval ratings.

But in his third term, a federal investigation against members of his administration brought new and damaging information each week.

He was forced to admit that contractors paid for home improvements at his lakeside cottage and that state employees bought him a hot tub.

Memos revealed that he had accepted Cuban cigars from a state contractor.

Amid impeachment hearings and the federal probe, Rowland finally resigned.

He later served 10 months in prison.

Now 50, Rowland recently landed a job as the economic development coordinator for his hometown of Waterbury.

JAMES McGREEVEY

McGreevey's sudden and spectacular downfall came after an alleged affair with a male aide who McGreevey said tried to blackmail him.

In a nationally televised speech, McGreevey, now 50, acknowledged being "a gay American."

He said he would resign because of his sexual indiscretions, which included putting his lover on the government payroll in a job -- homeland security adviser -- for which he had no qualifications.

The aide, Golan Cipel, denied being gay and said the governor sexually harassed him.

McGreevey and his estranged wife, Dina Matos, are embroiled in a bitter divorce and even have competing tell-all books.

They share custody of their only child, 6-year-old Jacqueline.

McGreevey is enrolled in an Episcopal seminary in New York City and lives in Plainfield, N.J., with a male partner.

ELIOT SPITZER

Spitzer, 48, built his career on fighting corruption.

Formerly an assistant district attorney in Manhattan, Spitzer was New York's attorney general for two terms before overwhelmingly being elected governor in 2006.

Spitzer's hard-charging ways quickly put him at odds with the powerful Republican leader of the state Senate, Joseph Bruno, and his agenda stalled amid political scandal and polls that showed most New Yorkers would not vote for him again as governor.

Two aides were disciplined for using the state police to track the movements of Bruno, Spitzer's chief political rival.

Spitzer's involvement in a prostitution ring was caught on a federal wiretap as part of an investigation opened in recent months, according to a law enforcement official who spoke to The Associated Press on condition of anonymity because of the ongoing inquiry.

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Associated Press writer Angela Delli Santi in Trenton, N.J., contributed to this report.

"Official: Cash triggered Spitzer probe"

By AMY WESTFELDT, Associated Press

Last updated: 8:33 a.m., Tuesday, March 11, 2008

NEW YORK -- A law enforcement official says New York Gov. Eliot Spitzer's role in a prostitution scandal grew out of a public corruption inquiry triggered by his movement of cash to bank accounts operated by the call-girl ring.

The law enforcement source spoke to The Associated Press on condition of anonymity Tuesday because of the sensitivity of the investigation.

The official says Spitzer was the initial target of the investigation and was tracked using court-ordered wiretaps, but possible charges against Spitzer have not been decided.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

NEW YORK (AP) -- Gov. Eliot Spitzer, who took office with the vow "Day One, Everything Changes," started day one of his life after allegations of a prostitution scandal with his outlook so changed that many wondered if he could remain in power.

The first-term Democrat was caught on a federal wiretap arranging to meet a prostitute from a call-girl business, according to a law enforcement official who spoke to The Associated Press on condition of anonymity because the investigation is still going on.

Spitzer allegedly paid for the call girl to take a train from New York to Washington -- a move that opened the transaction up to federal prosecution because she crossed state lines.

The governor has not been charged, and prosecutors would not comment on the case Monday.

A spokesman for Spitzer said the governor has retained a large Manhattan law firm.

There was no word on Spitzer's plans, but Assembly Republican leader James Tedisco said Tuesday he received a call Monday from Lt. Governor David Paterson, who would assume the governor's office if Spitzer resigned.

Tedisco said Paterson raised the possibility of such a scenario by asking if Tedisco, who has been at odds with Spitzer, would be willing to start fresh with him.

"He called me to ask if we would give him the benefit of the doubt, and go forward," Tedisco said.

"I told him we would."

Spitzer was to be in New York City Tuesday, but had no public events scheduled.

At a Manhattan news conference, a glassy-eyed Spitzer, his shellshocked wife Silda at his side, apologized to his family and the people of New York.

"I have acted in a way that violates my obligations to my family and violates my -- or any -- sense of right and wrong," he said.

"I apologize to the public, whom I promised better."

He did not say what he was apologizing for and ignored reporters' shouted questions about whether he would resign -- 14 months after he boldly proclaimed at the start of his term, "Day One, Everything Changes."

Spitzer, the 48-year-old father of three teenage girls, retreated from his Manhattan offices to his Upper East Side home.

Republicans immediately called for him to quit.

"He has to step down."

"No one will stand with him," said Rep. Peter King, a Republican from Long Island.

"I never try to take advantage or gloat over a personal tragedy."

"However, this is different."

"This is a guy who is so self-righteous, and so unforgiving."

Attention turned to the state's lieutenant governor, David Paterson, who automatically becomes governor if Spitzer quits.

There was no immediate comment from Paterson, who would become New York's first black governor.

Spitzer was elected with a historic margin of victory, and took office Jan. 1, 2007, vowing to stamp out corruption in New York government in the same way that he took on Wall Street executives while state attorney general.

In his previous position, Spitzer uncovered crooked practices and self-dealing in the stock brokerage and insurance industries and in corporate board rooms; he went after former New York Stock Exchange chairman Richard Grasso over his $187.5 million compensation package.

Spitzer become known as the "Sheriff of Wall Street."

Time magazine named him "Crusader of the Year," and the tabloids proclaimed him "Eliot Ness."

The square-jawed graduate of Princeton University and Harvard Law was sometimes mentioned as a potential candidate for president.

But he apparently became embroiled last year in a financial probe by the Internal Revenue Service into a high-end prostitution ring.

The investigation into the Emperors Club VIP gathered more than 5,000 telephone calls and text messages, and more than 6,000 e-mails, along with bank records, travel and hotel records and surveillance.

It was unclear whether Spitzer was a target from the start or whether agents came across his name by accident while amassing evidence.

In an affidavit filed in Manhattan federal court last week, Spitzer appeared as "Client 9," according to the law enforcement official.

Client 9 personally made several cell phone calls to Emperors Club VIP to arrange a Feb. 13 tryst at a Washington hotel, the official said.

Client 9 wanted a high-priced prostitute named Kristen to come to Washington on a 5:39 p.m. train from Manhattan.

The door to the hotel room would be left ajar.

Train tickets, cab fare, room service, and the minibar were all on him.

"Yup, same as in the past."

"No question about it," the caller told Kristen's boss, when asked if he would make his payment to the same business as usual, a federal affidavit said.

The client paid $4,300 to Kristen, touted by the escort service as a "petite, pretty brunette," according to court papers.

Carl Tobias, a law professor at the University of Richmond, noted that prostitution customers are often not charged, and said charges against Spitzer might be unlikely.

"Especially if he resigns, he may just be left alone."

"It may be that the public is satisfied by his resignation as governor," Tobias said.

Spitzer's term as governor has been fraught with problems, including an unpopular plan to grant driver's licenses to illegal immigrants and a plot by his aides to smear his main Republican nemesis.

It would not be the first time that a high-profile politician became ensnared in a prostitution scandal.

Sen. David Vitter of Louisiana acknowledged in July that his Washington phone number was among those called several years ago by an escort service.

Scandals also recently derailed neighboring Connecticut Gov. John Rowland and New Jersey's Jim McGreevey.

And Sen. Larry Craig of Idaho pleaded guilty to disorderly conduct after being arrested last June in a Minneapolis airport restroom.

Spitzer's cases as attorney general included a few criminal prosecutions of prostitution rings and tourism involving prostitutes.

In 2004, he took part in an investigation of an escort service in New York City that resulted in the arrest of 18 people on charges of promoting prostitution and related charges.

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Associated Press Writers Larry Neumeister in New York, Michael Gormley in Albany and Devlin Barrett in Washington contributed to this report.