NY Times: "Nation's two biggest banks are buckling under massive losses"

WASHINGTON — Last fall, as Federal Reserve and Treasury Department officials rode to the rescue of one financial institution after another, they took great pains to avoid doing anything that smacked of nationalizing banks.

Steve Ruark for The New York Times

A protest Thursday against a foreclosure auction outside a Baltimore courthouse. The auction took place after the protesters left. As banks have struggled, so have customers like homeowners.

They may no longer have that luxury. With two of the nation’s largest banks buckling under yet another round of huge losses, the incoming administration of Barack Obama and the Federal Reserve are suddenly dealing with banks that are “too big to fail” and yet unable to function as the sinking economy erodes their capital.

Particularly in the case of Citigroup, the losses have become so large that they make it almost mathematically impossible for the government to inject enough capital without taking a majority stake or at least squeezing out existing shareholders.

And the new ground rules laid down by Mr. Obama’s top economic advisers for the second half of the $700 billion bailout fund, as explained in a letter submitted to Congress on Thursday, call for the government to play an increasing role in the major activities of the banks, from the dividends they pay to shareholders to the amount they can pay executives.

“We are down a path that this country has not seen since Andrew Jackson shut down the Second National Bank of the United States,” said Gerard Cassidy, a banking analyst at RBC Capital Markets. “We are going to go back to a time when the government controlled the banking system.”

The approximately $120 billion aid package on Thursday for Bank of America — including injections of capital and absorbed losses — as well as a $300 billion package in November for Citigroup both represented displays of financial gymnastics aimed at providing capital without appearing to take commanding equity stakes.

Treasury and Fed officials accomplished that trick by structuring the deals like insurance programs for big bundles of the banks’ most toxic assets.

Instead of investing tens of billions of taxpayer dollars in exchange for preferred shares in the banks, which has been the Treasury Department’s approach so far with its capital infusions, the government essentially liberated the banks from some of their most threatening assets.

The trouble with the new approach, analysts say, is that it is likely to conceal the amount of risk that taxpayers are taking on. If the government-guaranteed securities turn out to be worthless, the cost of the insurance would be much higher than if the Treasury Department had simply bailed out the banks with cash in the first place.

Christopher Whalen, a managing partner at Institutional Risk Analytics, said the approach also covers up the underlying reality that the government is already essentially the majority shareholder in Citigroup.

“There’s nobody else out there to invest in them,” Mr. Whalen said. “We already own them.”

Ben S. Bernanke, chairman of the Federal Reserve Board, outlined the elements of what could become the Obama administration’s new approach to bank rescues in a speech on Monday.

Speaking to the London School of Economics, but addressing American audiences as much as European ones, Mr. Bernanke warned that the federal government had no choice but to put more money into banks and other financial institutions if it had any hope of reviving the paralyzed credit markets.

Known officially as the Troubled Asset Relief Program, or TARP, the rescue program has infuriated lawmakers in both parties, who complain that Treasury Secretary Henry M. Paulson Jr. has doled out money to banks without demanding accountability in return. Mr. Obama and his top economic advisers convinced enough lawmakers that shoring up the banks was essential to preventing a broader financial collapse, and offered written assurances that they would address the lawmakers’ biggest complaints.

But Mr. Bernanke proposed an array of alternative approaches to dealing with the banks in the months ahead, and all of those options reflected a fundamental shift from the original assumptions of the Bush administration.

Mr. Paulson had insisted that the government would be investing only in healthy banks, some of which might take over sicker rivals. The Treasury would invest taxpayer dollars in exchange for preferred shares, which would pay a regular dividend and come with warrants that would allow the government to profit from increases in company stock prices.

By contrast, Mr. Bernanke proposed various ways to fence off the troubled assets, from nonperforming loans to mortgage-backed securities that investors had stopped buying at almost any price.

Mr. Bernanke’s options included guarantees for bank assets, which was at the heart of the rescue packages for Bank of America and Citigroup. Citigroup received its rescue package in November, but it is expected to report additional losses on Friday that could top $10 billion.

In both of those deals, the federal government set up a complicated arrangement that would limit the banks’ losses on hundreds of billions of dollars worth of their worst assets.

Citigroup’s deal in November covered $300 billion in assets. Citigroup agreed to absorb the first $29 billion in losses. The Treasury agreed to take a second round of losses up to $5 billion, and the Federal Deposit Insurance Corporation agreed to take a third round of losses of up to $10 billion. The Federal Reserve then agreed to lend Citigroup money at low interest rates for the value of the remaining assets.

As a second option, Mr. Bernanke and other Fed officials have proposed putting a bank’s impaired assets into a separate new “bad bank.” The effect would be much the same as providing a federal guarantee: the bank would be able to free itself from the need to set aside reserves for extra losses.

Both the idea of a government “wrap” and a government-backed “bad bank” have the virtue of protecting the bank’s common stockholders from being wiped out by the government.

By contrast, the Bush administration’s original approach to recapitalizing banks — injecting capital in exchange for preferred shares with warrants to convert to common stock — had the effect of squeezing out the common shares. That was because any losses would have to first wipe out common stockholders before the bank could stop paying dividends on preferred shares.

“One of the problems with TARP has been a result of the government not wanting to own the banks,” said Fred Cannon, chief equity strategist at Keefe, Bruyette & Woods. “If you get losses, there is less common stock. What we are hopefully moving toward, to the extent that the government guarantees some of the assets, is a structure that protects common shareholders and allows the company to go out and raise common shares through the market.”

But a growing number of analysts warned that the approach may be too clever, because it gives policy makers too many ways to conceal true problems at banks and true risks to taxpayers.

“What we have is a weird, shadow nationalization,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics, a consulting firm in Washington. “The government does not want to and should not want to own banks. But if they get forced into that situation, they should resolve that situation. Here, what you have is a huge diversified financial services industry with recognized losses and looming losses in every aspect of its operations. There’s nothing straightforward about it.”

We have every right to be angry with the bankers

Executives who wrecked rock-solid institutions walked away with millions – leaving us to pay for their folly, says Philip Johnston

By Philip Johnston

Before the internet age, it was a rite of passage, a feeling that you had finally grown up and were considered responsible and trustworthy. As children, many of us might have had savings accounts or a few pounds in a building society deposited by an ageing aunt.

But to get one's first cheque book was something special. Mine had the words National Westminster Bank written on the front, an imprimatur that could hardly have sounded more rock solid, British to the core, a guarantee of probity and quiet competence.

In those days, banks were forbidding places; there were no open plan offices. A visit to the bank manager, especially for an impecunious student trying to explain a £20 overdraft, was a terrifying experience conducted in a sternly avuncular manner from behind a large desk.

We all knew that such a world had disappeared. But it was none the less astonishing to wake on Monday morning to discover that the Royal Bank of Scotland – my bank, or at least the NatWest bit of it – had posted the biggest loss in British corporate history.

Nor did it take long for the shock to give way to fury. Charles Dickens captured the feeling well after the collapse of Merdle's bank in Little Dorrit: "The air was laden with a heavy muttering of the name of Merdle, coupled with every form of execration."

Well, there were a few execrations in my own household and doubtless in many others across the country. Both curses and questions. How could this have happened?

How is it possible to rack up a loss of £28 billion and yet be worth just £8 billion? What happened to the RBS share of the £37 billion shelled out by taxpayers last October to recapitalise the banking system? What possessed the executives of RBS to buy a Dutch financial institution for way over the odds even as the Northern Rock fiasco was unfolding?

Beyond the sheer incredulity, there is anger that the people responsible have cushioned themselves financially against the privations that their recklessness will induce in millions of others. The people at the top may lose their jobs, but they have already paid themselves so much in bonuses and struck such lucrative pension deals that they can retire in luxury while the rest of us face penury.

Extraordinarily, the vast bonuses were paid for what at the time was hailed as success but now turns out to be abject failure. Do they get returned, along with the knighthoods and gongs?

For those of us who did not know what a derivative was until a few months ago and had only a vague idea that Sir Fred Goodwin was "something in the City", these are revelatory times.

It was evident from the steady flow of letters offering to lend money and urging us to take out new credit cards (all of which went into the bin in our house) that the banks were on a credit binge and that many people were being tempted to join in.

But surely, we all thought, they must know what they are doing. Even the near-collapse of Northern Rock after the first run on a bank since the mid-19th century, seemed like an isolated example of a badly run institution that had been led to the edge by incompetent and foolhardy executives and had to be rescued by the Government.

At the time, some cynical observers suggested that if it had been Southern Rock based in Guildford, it would have been allowed to go to the wall. But it was a big employer and an iconic institution in Labour's north-east heartland, so it had to be saved. But at least it was one-off, wasn't it? The other banks could not possibly be in the same leaky boat.

The discovery that they were sinking too has been more than a shock; it has been a betrayal. Their recklessness has bordered on the criminal. One figure from the Bank of England's financial stability report last October exemplifies the enormity of their folly. In 2000, the amount of money held on deposit in British banks and the amount they were lending was roughly comparable.

Last year, they were lending £700 billion more than they were receiving. This was the mother of all bubbles, yet the bank bosses kept inflating it, egged on by the Government, the Bank of England, the so-called regulators and, let's be frank, by those of us who borrowed way beyond our means.

In its report, the Bank said: "The seeds of this boom can be traced back to the development of financial and trade imbalances among the major economies over the past decade. Increased borrowing in a number of developed countries was in part financed with inflows of foreign capital, leading to greater integration in international capital markets. Benign economic conditions helped anchor expectations of continued stability. This, along with rising asset prices and low global real interest rates, boosted the demand for and supply of credit in a number of developed economies.

It added: "Over time, banks took on progressively more credit risk by lending to, for example, households with high loan to income ratios, leveraged buy-out firms and, in the United States, to the sub-prime sector."

There you have it in a nutshell. When Gordon Brown says that it is all the fault of the Americans, nobody forced the British banks to lend to them. And it is not only the bankers we want to see on their way to the guillotine: they should be joined by the regulators who either turned a blind eye to what was happening or were simply incapable of finding out. Were they knaves or fools?

Then there are the non-executive directors of the bank boards, happily trousering their fees without ever asking any difficult questions or calling a halt to the madcap expansion of credit.

And what about the government ministers who are trying to blame everyone but themselves, yet who presided over the economic policies that allowed this profligacy to flourish. They should be joined on the tumbrels by the central bankers whose handling of monetary policy would have been just as effectively conducted using a crystal ball and a Ouija board.

But pride of place must go to the bank bosses: to Adam Applegarth, 46, who took Northern Rock over the edge and still walked away with a severance deal worth £63,000 a month and who has a pension fund worth more than £2 million from which he can start drawing at 55; to Andy Hornby, who was paid £630,000 in 2007 to run HBOS, augmented by an ''incentive'' of £1.7 million, and who drove it into the wall; and to Sir Fred Goodwin, chief executive of RBS, who was paid about
£30 million in his 10 years with the busted company and left with a pension pot worth £8.4 million.

Between 2003 and 2007, the basic pay and cash bonuses (excluding share-based payments) of just five bank chief executives totalled over £52 million.

Even though the banks are virtually nationalised, some executives still have expectations of high salaries and bonus "incentives", as though the pay is not enough. Even those for whom the party is over managed to get out with what was left of the champagne and canapés. They will be all right.

The rest of us who had shares in the banks that are now worthless or whose pensions were tied to their value will not be so lucky.

In addition, the wider economy is suffering, the pound is sliding so fast that one international financier yesterday said sterling was "finished", and we no longer have enough money to underpin the economy.

We are, as a nation, virtually bankrupt; and the potential personal liability in future taxes is, on average, more than most people earn in a year.

The age of excess is over and an uncertain future awaits. Yet those who were responsible will be insulated from its worst impact. No wonder we are angry. Once more, as in Little Dorrit, the air is laden with every form of execration.

Gordon Brown brings Britain to the edge of bankruptcy

Iain Martin says the Prime Minister hasn't 'saved the world' and now faces disgrace in the history books

By Iain Martin

When will the Gordon Brown nightmare end? Photo: Jane Mingay

They don't know what they're doing, do they? With every step taken by the Government as it tries frantically to prop up the British banking system, this central truth becomes ever more obvious.

Yesterday marked a new low for all involved, even by the standards of this crisis. Britons woke to news of the enormity of the fresh horrors in store. Despite all the sophistry and outdated boom-era terminology from experts, I think a far greater number of people than is imagined grasp at root what is happening here.

The country stands on the precipice. We are at risk of utter humiliation, of London becoming a Reykjavik on Thames and Britain going under. Thanks to the arrogance, hubristic strutting and serial incompetence of the Government and a group of bankers, the possibility of national bankruptcy is not unrealistic.

The political impact will be seismic; anger will rage. The haunted looks on the faces of those in supporting roles, such as the Chancellor, suggest they have worked out that a tragedy is unfolding here. Gordon Brown is engaged no longer in a standard battle for re-election; instead he is fighting to avoid going down in history disgraced completely.

This catastrophe happened on his watch, no matter how much he now opportunistically beats up on bankers. He turned on the fountain of cheap money and encouraged the country to swim in it. House prices rose, debt went through the roof and the illusion won elections. Throughout, Brown boasted of the beauty of his regulatory structure, when those in charge of it were failing to ask the most basic questions of financial institutions. The same bankers Brown now claims to be angry with, he once wooed, travelling to the City to give speeches praising their "financial innovation".

Does the Prime Minister realise the likely implications when the country joins the dots? He has never been wild on shouldering blame, so I doubt it. But Brown is a historian. He should know that when a nation has put all its chips on red and the ball lands on black, the person who made the call is responsible. Neville Chamberlain discovered this in May 1940 with the German invasion of France.

We're some way from a similar event. But do not underestimate the gravity of the emergency and potential for disgrace.

The Government's bail-out of the banks in October with £37 billion of taxpayers' money was supposed to have "saved the world", according to the PM, but now it is clear that it has not even saved the banks. Our money kept the show on the road for only three months.

As the Liberal Democrats' Treasury spokesman Vince Cable asks: where has the £37 billion gone? The answer, as Cable knows, is that it has disappeared down the plug hole.

It is finally dawning on the Government that the liabilities of the British banks grew to be so vast in the boom years that they now eclipse the entire economy. Unfortunately, the Treasury is pledged to honour those
liabilities because it has guaranteed not to let a British bank go down. RBS has liabilities of £1.8 trillion, three times annual UK government spending, against assets of £1.9 trillion. But after the events of the past year, I wager most taxpayers will believe the true picture is worse.

Meanwhile, the assets are falling in value. This matters, because post-nationalisation these liabilities are now yours and
mine.

And they come piled on top of the rocketing national debt, charitably put at £630 billion, or 43 per cent of GDP. The true figure is much higher because the Government has used off-balance sheet accounting to hide commitments such as PFI projects.

Add to that record consumer indebtedness and Britain becomes extremely vulnerable. The markets have worked this out ahead of the politicians, as usual, and are wondering what to do next. If they decide our nation is a basket case, they will make it so.

The PM and the Chancellor , both looking a year older every day, tell us that for their next trick they will buy more bank shares, create a giant insurance scheme for bad debt, pledge to honour liabilities without limit, cross their fingers and hope it all works. The phrase "bottomless pit" springs to mind for a reason: that is what they have designed.

In this gloom, the Prime Minister has but one slender hope: that somehow, by force of personality, the new President Obama engineers a rapid American recovery restoring global confidence, energising the markets and making us all forget this bad dream.

Obama is talented but he is not a magician. Instead, Gordon Brown's nightmare, in which we are all trapped, is going to get much worse.

Now it's time US Citizens to emigrate, says investment guru

By Sean O'Grady, Economics Editor
Thursday, 22 January 2009

AP Photo/Vincent Yu

Jim Rogers speaks during the first day of the Asian Financial Forum 'The Changing Face of Asia' in Hong Kong on 19 January 2009

Government prevented from taking Barclays stake by deal with Abu Dhabi

Ian King and Patrick Hosking

A clause inserted during the Abu Dhabi Royal Family’s investment in Barclays last October has made it practically impossible for the Government to take a meaningful stake in the bank, The Times has learnt.

News of the clause is likely to reignite controversy over the way that Barclays raised the money — dubbed at the time by Vince Cable, Liberal Democrat Treasury spokesman, as “a scandal of mammoth proportions”. Barclays shares fell another 9 per cent yesterday, having collapsed by 35 per cent at one point, amid speculation that it is poised to raise more capital — either in the market or from the Government.

But the small print in the deal, in which Barclays raised £7.3 billion from Abu Dhabi and Qatar, means that if the bank raises fresh capital before the end of June, the Middle Eastern investors would receive a greater number of shares for their original investment without paying more. If Barclays were to raise fresh capital at last night’s closing price, for example, it would automatically hand almost 50 per cent of the bank to the Middle Eastern investors. The only way to get around the anti-dilution clause, should Barclays need more money before the end of June, would be if new capital was raised at more than the 153p-a-share at which paper issued to Abu Dhabi and Qatar is due to convert into Barclays stock.

This would mean that if the Government wanted to take a meaningful stake in the bank, it would have to do so by paying more than 153p for Barclays shares — which were trading at just 66.1p yesterday. The Treasury would face accusations of wasting taxpayers’ money were it to do this.

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The clause was inserted at the request of Amanda Staveley, chief executive of PCP Capital, the private equity firm, who advised the Middle Eastern investors on taking the stake. It is understood that she insisted on the clause because she was concerned that instability in the markets in coming months could potentially force Barclays to raise more capital.

The Times has seen a letter from Ms Staveley to Sheikh Mansour bin Zayed Al Nahyan, the owner of Manchester City Football Club and the Abu Dhabi royal who led the deal, explaining the benefits of the clause.

Part of it says: “If Barclays does have to issue new shares at a price which is, for example, half our agreed price, then you will automatically get twice as many ordinary shares for the money you have already invested. If this provision comes into effect you could, subject to the size of any new investment, potentially end up owning significantly more of Barclays Bank at no extra cost.” Ms Staveley last night declined to comment but sources at Barclays confirmed the clause exists.

Meanwhile, Barclays was yesterday pressing on with contingency plans to bring forward its annual results amid growing investor unease over its financial strength. Although it is due to publish its figures on February 17, it is trying to speed up the process to pacify increasingly nervous investors. Traders fear that the bank’s £1.4 trillion balance sheet could contain more hidden problems and that the worsening global economy will add to the red ink.

The lifting of the ban on short-selling — making down bets — on bank shares last Thursday has added to investor fears, though there is little evidence of widespread “shorting” of bank shares. MPs on the Treasury Select Committee yesterday wrote to the Financial Services Authority asking it not to hesitate in re-introducing the ban if it found shortsellers were undermining stability of the banking sector.

Barclays may lose control to Gulf investors

Government dismay as state bail-out plan hamstrung by capital-raising clause that saw Gulf investors pump £5.3bn into bank.

By Louise Armitstead and Philip Aldrick
Last Updated: 9:18AM GMT 22 Jan 2009

The Government is in talks with Barclays after the bank admitted that raising extra capital could trigger a clause that would deliver control to its Middle East investors.

Government insiders were last night reeling at the possibility that helping Barclays could see Britain's fourth biggest lender automatically delivered to the Middle East as the result of a little known clause agreed in the bank's October capital raising.

Sheikh Mansour Bin Zayed Al Nahyan, a member of the Abu Dhabi royal family, and two Qatari investment vehicles invested £5.3bn in the bank in October. In return, they took a series of complicated investment structures, the bulk of which were "mandatory convertible notes".

Under the terms of the deal, the investors have to wait seven months for delivery of the shares, which convert at 153.276p. However, if at any time until June 30 Barclays raises more capital at a lower price, the Middle East investors are able to take their stake at that lower level.

With Barclays' shares now at 66.1p, the bank would have to roughly triple the number of shares issued to Sheikh Mansour and the Qataris. Such a move would hand the Arab investors around 55pc of Barclays, effectively giving them control. With the warrants for an additional £3bn of "reserve capital instruments", their combined stake could rise to 67pc.

One insider said: "This was a clause to protect the Middle East. There seems to have been no thought about protecting the bank at all. If the clause is triggered at this level, the Middle East can lay claim to the whole bank."

The Financial Services Authority is understood to be seeking a full explanation about the clause's implications.

Amanda Staveley, who advised the Middle East investors for a £40m fee, has written to Sheikh Mansour alerting him to the implications of Barclays plunging share price. According to insiders, Ms Staveley had insisted on the inclusion of the clause as a way of protecting the investment against short-sellers in the event on the ban on short-selling of financial stocks being lifted.

The ban was lifted earlier this month and yesterday politicians called for its reintroduction after noting "anecdotal evidence" that hedge funds had been shorting UK banks.

Barclays is reeling from speculation it will have to be nationalised or seek alternative state support. The shares collapsed for a seventh consecutive day yesterday, falling 9pc to 66.1p, despite small recoveries at Royal Bank of Scotland and Lloyds Banking Group. Barclays has now lost nearly two thirds of its value in little over a week, its four largest investors have lost a combined £8.5bn.

One banking expert said: "Barclays has spent the past few days insisting it has enough capital. That would be fine in normal circumstances, but these are not. The Government has made it completely clear that it will not allow the banks to fail and everyone knows that nationalisation is very much on the table."

Government insiders were said to be incredulous that the clause could restrict their options for a rescue. Speculation has mounted that banks might pay for the planned "toxic debt" insurance scheme by issuing new shares, but the Barclays clause would prohibit this. It now seems banks will buy the insurance with preference shares or cash.

Barclays pointed out that the clause expires on June 30, after which it will be able to issue shares with no strings attached. A spokesman dismissed any concerns, arguing it would not need to raise capital under the FSA's revised rules unless it suffers £20bn of losses in the next six months. He said: "The statement on Friday demonstrates the strength of the group's capital position."

China sentences two to death over tainted milk

By Lucy Hornby

SHIJIAZHUANG, China (Reuters) - A Chinese court on Thursday sentenced two men to death for their role in the production and sale of melamine-tainted milk that killed at least six children and made nearly 300,000 ill.

The former head of the dairy firm at the heart of the scandal, the now bankrupt Sanlu Group, got life in prison and a fine, which may anger some affected parents who had hoped she would face the ultimate punishment.

The closely watched trial of middlemen and executives from the Sanlu Group -- accused of peddling poisonous products or turning a blind eye to their sale -- wrapped up just before the most important holiday in China, the Lunar New Year.

Traditionally a time for families to reunite, Beijing may have hoped the sentences would deflect public outrage about the deadly impact of the tainted milk during the festive period.

Claims of official concealment and indifference have turned the milk powder case into a volatile political issue for the ruling Communist Party, which is wary of protest.

Police detained two parents to stop them attending the trial of the dairy executives, one father and fellow activists said on Wednesday.

On Thursday, police guarded the courthouse at Shijiazhuang, a gritty industrial city south of Beijing, nudging people away but avoiding harsh confrontation. The session to announce the verdicts and sentences was closed to the public but a court official gave details to reporters outside.

Sanlu had failed to report cases of Chinese children developing kidney stones and other complications from drinking their milk months before news of the problem broke in September, making former general manager Tian Wenhua a particular target for angry parents.

"I think she should be shot. A death for a death," said Zheng Shuzhen, a 48-year-old grandmother from central Henan province, who said her one-year-old granddaughter, Zhou Mengxian, died in June of kidney failure after drinking Sanlu milk formula but was not included in the list of victims.

Tian had pleaded guilty to charges of producing and selling fake or substandard products, which state media said did not carry a death sentence.

Besides the life sentence, she was fined 24.5 million yuan ($3.6 million).

One of the men sentenced to death was Zhang Yujun. Zhang had made and sold over 600 tonnes of powder which contained melamine between October 2007 and August 2008, worth around 6.8 million yuan ($994,700), the official China Daily quoted prosecutors saying earlier this month.

The powder was bought by middlemen who added it to pooled, watered-down milk from farmers that was then sold on to Sanlu. The powder, used in making plastics, is added to cheat nutrition tests. One of these men was also given the death sentence.

The court had announced it would sentence 21 defendants implicated in the scandal Thursday afternoon. However, it said shortly before the court opened that nine of them would be sentenced at other courts.

(Writing by Chris Buckley and Emma Graham-Harrison; Editing by Nick Macfie and Dean Yates)

Banks ask for crisis funds for E Europe

By Stefan Wagstyl in Vienna

Published: January 21 2009 23:36 | Last updated: January 21 2009 23:36

Leading international banks operating in central and eastern Europe have clubbed together to lobby the European Union and the European Central Bank to extend their anti-crisis policies to ease the credit crunch in the region.

The group of nine, which wants action to ease liquidity shortages and help revive lending, is urging Brussels and the ECB to extend support beyond the EU’s new member states, such as Poland, to prospective members, such as Serbia, and to Ukraine, which has few prospects of joining the bloc soon.

Herbert Stepic, chief executive of Raiffeisen International, the Austrian bank, who brought the group together, said it was important that any action to support banks was not limited to western Europe.

“We fought for 50 years, many of us, to get these countries away from communism and now we have a free market economy in the region, we can’t leave them alone when there is an extremely harsh wind blowing,” he said.

The group has kept a low profile until now, but Mr Stepic told the Financial Times he was speaking out “because of the deteriorating economic circumstances”.

He said the costs of possible support would be “relatively” modest in comparison with the huge sums pledged to assist western European banks. The total gross domestic product of formerly communist central Europe was €740bn and for south-east Europe €270bn. This compared with €290bn for Austria alone.

His remarks come amid a week of fresh turmoil in the financial markets and a darkening economic outlook. The European Commission released a forecast of a 1.8 per cent decline in EU economic output for 2009, its gloomiest prediction in years, while Moody’s, the credit ratings agency, on Wednesday said the outlook for the Ukrainian banking system was negative.

EU institutions have already played a role in the emergency financial packages assembled by the International Monetary Fund in the region. The ECB has extended liquidity support to Hungary and the EU is contributing to Latvia’s bail-out. The ECB has also extended liquidity support to Poland, where the IMF has not been involved.

But the international banks want Brussels and the ECB to make clear that they stand ready to assist vulnerable non-EU members. Mr Stepic declined to specify which countries might need such support but bankers said they could include those with high external financing needs, including Serbia and Bosnia, as well as Ukraine.

As well as Raiffeisen, the banks involved are Italy’s Unicredit and Intesa Sanpaolo, Austria’s Erste Bank, Société Générale from France, Belgium’s KBC, German Bayern Landesbank, Sweden’s Swedbank, and EFG Eurobank from Greece.

Copyright The Financial Times Limited 2009

Obama ushers in an ‘era of openness’

By Andrew Ward in Washington

Published: January 21 2009 19:42 | Last updated: January 21 2009 21:35

Barack Obama marked his first full day as president on Wednesday by imposing a pay freeze on senior White House staff and ordering tough new ethics rules designed to herald “a new era of openness” in government.

At a swearing in ceremony for his top staff, the president thanked them for agreeing to the pay freeze, which he described as a mark of commitment to public service and a symbol of shared sacrifice at a time of economic strife.

“Families are tightening their belts, and so should Washington,” he said.

Top White House salaries range from $400,000 for the president to $172,200 for senior aides such as the chief of staff and press secretary.

Mr Obama also signed an executive order -- his first as president -- setting out a series of tough restrictions on lobbying and new standards of government openness.

He said the rules were more strict than those of any previous administration and marked a “clean break from business as usual”.

“Let me say it as simply as I can: transparency and the rule of law will be the touchstones of this presidency,” he added.

The new rules made good on many of the commitments Mr Obama made during his election campaign to reduce the influence of lobbyists on public policy.

Officials entering the administration will be banned from working on matters they lobbied on during the prior two years and officials leaving the administration will be unable to lobby the federal government for as long as Mr Obama is president.

There will also be a ban on gifts from lobbyists to anyone serving in the administration.

“We need to make the White House the people’s house,” he said. “We need to close the revolving door that lets lobbyists come into government freely and lets them use their time in public service as a way to promote their own interests over the interests of the American people when they leave.”

Melanie Sloan, executive director of Citizens for Responsibility and Ethics in Washington, an ethics watchdog, said she was delighted by the rules, which she described as “very tough”.

In a further move to increase transparency, Mr Obama issued a new directive for how his administration should interpret the Freedom of Information act.

“For a long time now there’s been too much secrecy in this city,” he said. “The old rules said that if there was a defensible argument for not disclosing some thing to the American people, then it should not be disclosed. That era is now over.”

The orders represented Mr Obama’s first concrete step to roll back the expansion in executive power that occurred during the administration of George W. Bush.

“These historic measures mark the beginning of a new era of openness in our country,” he said. “And I will, I hope, do something to make government trustworthy in the eyes of the American people.”

Mr Obama was later scheduled to hold a meeting with his economic advisers as fresh turmoil on Wall Street cast a cloud over his first full day in office.

Larry Summers, Mr Obama’s chief economic adviser, was among those expected to brief the president a day after fresh concerns about the banking system caused a sharp drop in the stock market.

Mr Obama was also due to hold his first meeting in the White House situation room with his national security team to discuss Iraq.

After a late night attending several inaugural balls, the new president arrived in the Oval Office at 8.35am and spent 10 minutes alone reading a letter from his predecessor, George W. Bush.

It is tradition for the outgoing president to leave a note for his successor on the Oval Office desk.

Robert Gibbs, the new White House press secretary, said the envelope was marked: “To: #44, From: #43” (a reference to Mr Obama’s status as the 44th US president).

Mr Obama and his wife, Michelle, later travelled to a prayer service at the National Cathedral.

As the president entered the cathedral, the all-black Children of the Gospel Children’s Choir was warming up the congregation with songs that seemed handpicked for the guest of honour: ‘The Best is Yet to Come’; ‘A Brand New Day’; ‘Great Day’; and ‘He’s Got the Whole World In His Hands’.

Copyright The Financial Times Limited 2009

Apple escapes downturn as iPod sales grow

By Chris Nuttall in San Francisco

Published: January 21 2009 23:24 | Last updated: January 22 2009 01:26

A consumer love affair with Apple products appears to be surviving the recession, with the Silicon Valley company reporting record sales and profits in the final quarter of 2008.

Apple said there were record sales of its iPod media players, while iPhone unit sales were up 88 per cent compared with a year ago and Mac computer sales rose 9 per cent. Its shares rose 9 per cent on the news.

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“Even in these economically challenging times, we are incredibly pleased to report our best quarterly revenue and earnings in Apple history – surpassing $10bn in quarterly revenue for the first time ever,” said Steve Jobs, chief executive.

Mr Jobs is on a six-month medical leave of absence and did not take part in an analyst conference call. The Bloomberg news agency reported on Wednesday that the Securities and Exchange Commission was carrying out a review of Apple’s statements about his health problems to ensure investors were not misled.

Tim Cook, chief operating officer, who is running day-to-day operations in his absence, told analysts he believed that Apple was doing the best work in its history and the company’s values were so deeply embedded that it would do well regardless of who was running the group.

“There is an extraordinary breadth and depth and tenure among the Apple executive team . . . We believe we are on the face of the earth to make great products and that’s not changing,” he said.

Apple said it sold 2.5m Mac computers in its first quarter ending in December, up 9 per cent on the year-ago quarter. iPod sales grew 3 per cent to a record 22.7m and 4.4m iPhones were sold.

Revenues of $10.17bn and profits of $1.61bn, or $1.78 per diluted share, were ahead of Wall Street expectations of $9.74bn in sales and earnings per share of $1.40, according to Reuters Estimates.

Peter Oppenheimer, chief financial officer, said low visibility made forecasting challenging. He predicted second-quarter sales of $7.6bn to $8bn and earnings of 90 cents to a dollar. This was below analyst forecasts of revenues of $8.1bn and earnings of $1.12 per share, but Apple is noted for its conservative forecasts.

In extended trading, its shares rose nearly 9 per cent to $90.02.

Apple said there were record sales of its iPod media players, while iPhone unit sales were up 88 per cent compared with a year ago and Mac computer sales rose 9 per cent. Its shares rose 9 per cent on the news.

“Even in these economically challenging times, we are incredibly pleased to report our best quarterly revenue and earnings in Apple history – surpassing $10bn (£7bn) in quarterly revenue for the first time ever,” said Steve Jobs, chief executive.

Mr Jobs is on a six-month medical leave of absence and did not take part in an analyst conference call. The Bloomberg news agency reported on Wednesday that the Securities and Exchange Commission was carrying out a review of Apple’s statements about his health problems to ensure investors were not misled.

Tim Cook, chief operating officer, who is running day-to-day operations in his absence, told analysts he believed that Apple was doing the best work in its history and the company’s values were so deeply embedded that it would do well regardless of who was running the group.

“There is an extraordinary breadth and depth and tenure among the Apple executive team ... We believe we are on the face of the earth to make great products and that’s not changing,” he said.

Apple said it sold 2.5m Mac computers in its first quarter ending in December, up 9 per cent on the year-ago quarter. IPod sales grew 3 per cent to a record 22.7m and 4.4m iPhones were sold.

Revenues of $10.17bn and profits of $1.61bn, or $1.78 per diluted share, were ahead of Wall Street expectations of $9.74bn in sales and earnings per share of $1.40, according to Reuters Estimates.

Peter Oppenheimer, chief financial officer, said low visibility made forecasting challenging. He predicted second-quarter sales of $7.6bn to $8bn and earnings of 90 cents to a dollar.

This was below analyst forecasts of revenues of $8.1bn and earnings of $1.12 per share, but Apple is noted for its conservative forecasts.

In extended trading, its shares rose nearly 9 per cent to $90.02.

Sales of the 3G iPhone fell in its first quarter, failing to match the impetus achieved when it was launched in the previous quarter. Sales of 4.4m units were below analyst expectations of 5m.

Copyright The Financial Times Limited 2009

AIG starts $20bn auction of Asian unit

By Francesco Guerrera in New York, Lina Saigol and Andrea Felsted in London and Sundeep Tucker in Seoul

Published: January 21 2009 23:30 | Last updated: January 21 2009 23:30

AIG, the stricken insurance giant, on Wednesday kicked off the sale of its Asian life assurance unit – one of its most prized assets – in the hope of raising up to $20bn to help repay the $60bn US government loan that is keeping the group alive.

The US insurer sent the sales memorandum for American International Assurance with limited information to a group of selected potential bidders, according to people close to the situation. First-round bids are due towards the end of next month.

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Prospective bidders include: China Life, the world’s largest life assurer; HSBC, the UK-based bank; Prudential, the UK insurance group; as well as Prudential Financial of the US.

ManuLife Financial, one of North America’s biggest insurance groups, and Allianz of Germany have also requested information.

People close to the situation said AIG had asked interested parties to bid for 49 per cent of AIA, but said it would be willing to look at offers for all of the unit. AIG could also opt for a full listing of the division if it does not achieve a high enough price.

Any interested bidder will have to prove they can finance the acquisition, which has become increasingly difficult as credit markets have contracted. AIG is thought to be prepared to accept shares as acquisition currency.

The size of AIA could also force potential buyers to form consortiums and break up the asset among themselves. This means that the list of the bidders could change as the auction progresses.

“This has to be a flexible auction,” one person familiar with AIG’s thinking said.

The auction of AIA, which follows last week’s opening of the sale process for AIG’s US life assurance unit, is a sign of its desire to speed up the repayment of the five-year $60bn government loan. AIG came close to collapse last year and had to be bailed out twice by the US government, which now owns 80 per cent of the troubled insurer.

Edward Liddy, AIG’s government-appointed chief executive, told the Financial Times recently that the company wanted to ask the authorities to renegotiate the terms of the loan once it had completed some big disposals.

Some AIG executives believe that the insurer should press for a renegotiation of the $60bn loan earlier, especially if, as expected, the US government pours more money into the banking sector in the coming weeks.

AIG and its advisers Blackstone, Goldman Sachs and Citigroup, all declined to comment.

AIA, which was built into a powerhouse by its former chief executive Hank Greenberg, is regarded as a jewel in the company’s crown. Last year, it made an aggregate operating profit of about $2bn.

Copyright The Financial Times Limited 2009

Sony forecasts $2.9bn operating loss

By Robin Harding in Tokyo

Published: January 22 2009 06:42 | Last updated: January 22 2009 06:42

Sony, the Japanese consumer electronics group, said on Thursday that it would plunge to a Y260bn ($2.9bn) operating loss in the year to March 2009 as the global downturn and strong yen wreaked havoc on sales.

The group was expecting an operating profit of Y200bn only last October but Sony made an operating loss during the peak Christmas trading period and slashed its sales forecast by 14 per cent to Y7,700bn.

EDITOR’S CHOICE

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The depth of the expected loss – far worse than even the most pessimistic forecasts – will raise questions about whether Sony has enough cash to get through the downturn without drastic restructuring.

Sony said that Y340bn of the fall in operating profit was due to its electronics division, with Y250bn of that due to price competition and the weak economy. There will be further losses of Y65bn on securities held by the company’s insurance arm.

Every business was hit by the strength of the yen and Sony announced additional restructuring provisions in the electronics, music and movie divisions as it gears up to announce the end of production at one of its most famous Japanese factories later on Thursday.

Sony confirmed that it may move all TV production in Japan to one plant, which would mean the closure of either its Ichinomiya or Inazawa factory, as the company seeks to stem losses in its electronics business by cutting 16,000 jobs

The two neighbouring plants, from which Sony exported Trinitron TVs to the world in the 1970s and 1980s, are icons within the company and a closure would show that Sony is willing to tackle its high costs in Japan.

Sony’s shares closed down 2.6 per cent at Y1,938 in the run-up to the announcement on restructuring by Sir Howard Stringer, chief executive, which is scheduled to take place in Tokyo on Thursday evening.

“It depends on whether this is the package or this is the start of the sacred cows being dismantled,” said Pelham Smithers, an analyst at Pali International in Singapore.

The Ichinomiya factory is considered most at risk because staff there say Sony was already planning to move the manufacture of projectors to another plant.

Sony declined to comment on a report in the Nikkei business newspaper that more than 2,000 full-time jobs will go in Japan through natural attrition and incentives for early retirement.

If that were the full extent of job losses in Japan, however, it would imply deeper cuts abroad.

Sony has said it will cut 8,000 full time jobs in total and shut five or six factories. So far it has announced the closure of one factory in France, with the loss of 312 jobs, and one in the US, with the loss of 560 jobs.

Sacking staff in Japan is sensitive, because many were implicitly promised a ‘job for life’, but sparing them would risk angering Sony’s foreign employees.

Managers in the company have told the Financial Times that the restructuring plans have met resistance from executives in Sony’s traditional manufacturing business.

But the extent of the downturn means that most analysts, and a number of Sony managers, say that there will have to be further cuts even after the current plan is completed.

Copyright The Financial Times Limited 2009

Asian stocks edge higher as banks rebound

HONG KONG, Jan 22 (Reuters) - Asia stocks rose slightly on Thursday, with investors snapping up beaten down bank shares, but with global economic gloom still pervasive, safety trades such as the yen and US Treasuries also climbed.

A slew of reports in the region showed a rapid drop in growth and collapse in export markets in Asia, suggesting it may be a while before a recovery takes hold and provides support for investor willingness to take risks. Chinese economic growth slowed to a seven-year low in 2008 and Japanese exports had a record decline in December.

”Across the region, a collapse in export growth has had direct flow-on effects to industrial production, and we are now seeing this start to impact employment, with household spending the next in line,” emerging market strategists at Royal Bank of Canada said in a note.

Sterling fell after rising overnight on speculation UK policy makers may take more aggressive actions to support their economy and perhaps the British currency, which hit a 23-year low on Wednesday, as well.

The MSCI index of Asia-Pacific stocks outside Japan rose 1.1 per cent though remained within spitting distance of a one-month low touched earlier in the session.

Japan’s Nikkei average was largely unchanged on the day. Shares of large exporters such as Honda Motor and Toyota Motor weighed on the index as the yen rose, but brokerages jumped after Credit Suisse upgraded the sector to overweight from market weight.

Hong Kong’s Hang Seng index climbed 1.3 per cent, powered by a 4.3 per cent rise in HSBC stock. Shares of the largest European bank had plunged for eight consecutive days to the lowest in a decade on concern whether the firm has access to adequate capital.

Although risk taking among investors returned suddenly overnight, knocking down a closely followed market volatility index 18 per cent, uncertainty about medium-term corporate earnings, global consumer demand and the banking industry kept the element of fear high.

At the same time, analysts and fund managers also believe though that massive government spending and tax cuts around the world will eventually trickle down to real economies, maybe even as soon as late 2009.

For that reason, and given how badly corporate credit was sold off last year, some large asset managers have begun to sift through corporate bonds and equities in search of bargains.

The British pound resumed a decline against the dollar back toward 23-year lows, cutting gains made after a source told Reuters that its slide will be discussed at the next meeting of the Group of Seven nations. Sterling was down 0.4 per cent to $1.3826 after dropping to near $1.36 on Wednesday.

”Sterling still looks far from hitting a bottom with mounting expectations for further and bigger interest rate cuts from the Bank of England to combat the quickly deteriorating economy,” said a senior trader at a Japanese trust bank.

The US dollar fell 0.5 per cent to Y88.96, after rebounding from Wednesday’s low of Y87.10, the lowest since July 1995. The euro dropped 0.8 per cent to Y115.84, though remained well above a 7-year low of Y112.08 hit on Wednesday.

US Treasuries, which have been in hot demand as the credit crisis has kept investors in need of liquidity and safety, rebounded after dropping overnight on worries about upcoming debt supply to finance various U.S. rescue packages.

The yield on the benchmark 10-year note, which moves in the opposite direction of the price, slipped to 2.52 per cent from 2.54 per cent late in New York.

US crude futures steadied on Thursday, after rallying more than 6 per cent the previous day, as traders weighed the impact of recent Opec supply cuts and a weaker dollar.

Crude futures for March deliver – which took over as the main front month contract – rose 32 cents to $43.87 a barrel.

© Reuters Limited

S Korean economy shrinks faster than expected

By Christian Oliver in Seoul

Published: January 22 2009 02:01 | Last updated: January 22 2009 02:41

South Korea faces a far deeper recession than previously feared, the Bank of Korea said on Thursday, with a collapse in exports causing gross domestic product to contract by 5.6 per cent in the final quarter of last year compared with the third quarter.

As with all of Korea’s indicators in recent weeks, the central bank’s figures undershot analysts’ forecasts and were the worst since the Asian financial markets crisis of 1997-1998.

“There’s no possibility of growth turning positive in the first quarter,” said Choi Chun-shin, director of statistics at the bank.

Exports from Asia’s fourth-biggest economy slumped 11.9 per cent in the final quarter and the bank stressed a particular weakness in semiconductor shipments, mainstay of Korea’s talismanic Samsung Electronics, the world’s biggest maker of memory chips.

Manufacturing plunged 12 per cent and spending from Korea’s debt-ridden private households sagged 4.8 per cent.

Compared with a year earlier, GDP slumped 3.4 per cent in the last quarter. The BoK a had forecast it would shrink by less than half of that, 1.6 per cent.

“This year’s annual growth rate is very likely to be much lower than the BoK’s previous forecast of 2.0 per cent,” Mr Choi said.

Although parts of the government have been producing bullish projections for this year, even hoping that the economy will avoid a recession, international banks such as UBS have been forecasting a contraction for the last two months.

Morgan Stanley on Thursday slashed its forecast for Korea’s economic growth to a contraction of 2.8 per cent over 2009 from an earlier calculation that GDP would grow 2.7 per cent.

Big companies are already feeling the pain. Hyundai Motor and Kia Motors have reduced shifts at production lines and LG Electronics has laid off workers abroad. These companies are all expected to release annual results later on Thursday.

In November, South Korea posted its steepest ever decline in industrial output.

Copyright The Financial Times Limited 2009

China GDP growth at 6.8% as crisis bites

By Geoff Dyer in Beijing

Published: January 22 2009 02:25 | Last updated: January 22 2009 05:49

China’s economic slowdown deepened in the last quarter of 2008, with economic growth falling to an annual rate of 6.8 per cent in the face of slumping exports and a weak housing market.

The news came as the Bank of Korea undershot market estimates by reporting that gross domestic product contracted by 5.6 per cent in the final quarter of last year compared with the third quarter, pushing the country closer to its first recession since the Asian financial crisis. Exports from Asia’s fourth-biggest economy slumped 11.9 per cent in the final quarter.

The Bank of Japan on Thursday cut its growth forecast for the economy, saying GDP was likely to shrink 1.8 per cent in the year to March 31 and contract 2 per cent the following year. The BoJ had previously forecasts growth of 0.1 per cent and 0.6 per cent, respectively. The central bank, however, kept interest rates unchanged at 0.1 per cent and said it would consider buying corporate bonds to help ease credit strains for companies.

China’s National Bureau of Statistics said that the economy expanded by 6.8 per cent in the last quarter of the year compared to the same period in 2007, the weakest pace of growth in seven years. For the year as a whole, the economy grew 9 per cent, down from the revised 13 per cent growth rate in 2007.

The steep slowdown is likely to have a significant impact on much of the rest of Asia, which relies heavily on demand from China, and has also raised the prospect of widespread unrest as a result of job losses.

“This confirms that the economy has decelerated rapidly from its 2007 peak,” said Ben Simpfendorfer, economist at RBS in Hong Kong. He added that the headline figure probably exaggerated the actual growth rate, partly because of problems with the national accounts data. He is forecasting growth of only 5 per cent this year.

Peng Wensheng, economist at Barclays Capital, estimated that after taking into account seasonal adjustments, the economy had barely grown at all in the fourth quarter compared with the third quarter, although he expects some pick-up in the first three months of this year.

Industrial output increased by 5.7 per cent in December, the lowest figure in nearly a decade, while electricity generation fell by 7.9 per cent, an indication of the sharp slump in heavy industry.

Ma Jiantang, head of the NBS, said the economy had been hit hard by the global financial crisis but said he was confident China could still achieve the target of 8 per cent growth this year. He said that in recent weeks there had been a rebound in the sales of certain goods including cars and clothes, while bank lending had also increased rapidly.

“We still need to wait and see” if these indicators represented a recovery, he said, “but they are like sunshine in a cold winter, light at the break of a dark dawn”.

Additional reporting by Christian Oliver in Seoul

Copyright The Financial Times Limited 2009

BT warns again on Global Services

By Maggie Urry

Published: January 22 2009 08:11 | Last updated: January 22 2009 08:21

BT Group, the former British Telecommunications, warned on Thursday that profits from its Global Services division had tumbled and its efforts to get to grips with the problems would lead to a £340m write-off.

The charges could be even higher, it said, and another “substantial” write-off could result from talks over two large contracts. An operational review of the division, which provides telecom and IT services for multinational companies and government departments, could led to yet more “substantial” charges for reorganisation and rationalisation to cut the cost base.

Ian Livingston, BT chief executive, warned that as a result, group profits for the third quarter to December 31 would be lower, although BT’s other divisions would edge profits higher by 5 per cent.

BT shares plunged 15 per cent in early London trading to 104.2p, making them the biggest fallers on the FTSE 100 index of blue-chip stocks. The company was privatised in November 1984 at 130p a share.

Since the write-offs in Global Services were non-cash items, BT said they would not affect the decision on the final dividend, which will be made at the year-end. Analysts have been fearful of a cut in the payment, which has been a prop to the shares.

BT first warned in November that profits at Global Services were falling sharply and instituted the review. Previously the division had been seen as the engine of growth for the group, but while revenues rose quickly, a plan to lift profit margins stalled.

In the second quarter the division achieved earnings before interest, tax, depreciation and amortisation (ebitda) of £119m. But BT said that would fall to around £17m, before the charges, in its third quarter to December 31. That compares with £215m in the same quarter of the previous year.

Morten Singleton, an analyst at Oriel Securities, said: “Far from the second-quarter clear-out at Global Services being the kitchen-sinked affair we had believed, BT has today come come out with a further profit warning and one-off charges galore.”

He said the writedowns would “merely add to the market concerns over the cash requirements of the pension deficit and the size of the likely decline in the dividend.”

After the problems were discovered last autumn, BT replaced the head of the division with Hanif Lalani, who had been the group’s finance director. Mr Livingston said Mr Lalani’s first job, alongside Tony Chanmugam, the new finance director, was to review the financial position of the division and its major contracts.

The division has always been proud of its work for leading organisations, which include the UK’s National Health Service and the Department for Work and Pensions, and companies including Thomson Reuters, Procter & Gamble, Fiat, and Nestlé.

However, it has now reviewed the assumptions used when it valued the contracts and as a result reduced their worth.

“Ongoing commercial discussions in respect of two of our largest contracts are likely to be completed during the fourth quarter. These may result in further substantial one-off non-cash charges in the current year,” it said.

BT declined to name the contracts and said the size of the write-offs would depend on the outcome of the discussions.

The group is known to have had severe problems in delivering a £2.5bn contract which is part of a £12.7bn programme to shift NHS patient records to an electronic database. The contract is years behind schedule and BT gets paid only when systems are shown to be working.

The problems at Global Services are aside from a plan announced in November to cut 10,000 jobs aimed at reducing BT’s cost base by £1.25bn.

BT said the group’s net cash outflow in the third quarter would be £32m, a £189m improvement, and net debt would be around £11.1bn.

Copyright The Financial Times Limited 2009

nvestors Dump Shares As Banking Fears Mount

NEW YORK, Jan. 20 -- At the dawn of the Obama presidency, the stock market could not shake its dejection over the rapidly deteriorating state of the banking industry.

Financial stocks led the decline Tuesday, and the Dow Jones industrial average fell 332.13, or 4.01 percent, to 7949.09, its lowest close since Nov. 20.

Broader stock indicators also fell sharply Tuesday. The Standard & Poor's 500-stock index dropped 44.90, or 5.28 percent, to 805.22, and the Nasdaq composite index plunged 88.47, or 5.78 percent, to 1440.86.

During much of President Obama's address, the Dow Jones industrials were down about 150 points. Traders hadn't appeared so focused on TV screens since Sept. 29, when the House initially voted against the banking bailout package and the Dow tumbled 777 points.

The market's most recent bout of angst, which began with multibillion-dollar losses reported last week by Bank of America and Citigroup, intensified after Royal Bank of Scotland's forecast that its losses for 2008 could top $41.3 billion.

A collapse in bank stocks followed: State Street plunged 59 percent Tuesday, Citigroup fell 20 percent, and Bank of America lost 29 percent. Royal Bank of Scotland fell 69 percent in New York trading.

"The reason we're having a panic drop is the fact that Europe is catching our cold, and we could have deeper and deeper problems that could require more and more money. And eventually the government is going to have to stop spending," said Keith Springer, president of Capital Financial Advisory Services. "It's a pretty dangerous situation to be in."

In his address, Obama suggested that Wall Street will see greater oversight: "Without a watchful eye, the market can spin out of control."

The shrinking value of bank stocks means the financial industry accounts for less than 10 percent of the Standard & Poor's 500 for the first time since 1992. At the end of 2006, banks made up 22 percent of the index.

Movers

Regions Financial plunged $1.47, to $4.60, a 24-year low. The firm posted a fourth-quarter loss of $6.24 billion.

Advanta lost 89 cents, to $1.06. An analyst said the credit card issuer is "unlikely to survive."

Royal Bank of Scotland wants to sell electricity in Pa.

By Elwin Green, Pittsburgh Post-Gazette

The troubled corporate parent of Citizens Bank is seeking permission from the state Public Utility Commission to sell electricity in Pennsylvania.

The Royal Bank of Scotland, which announced Monday that its losses for last year could reach 28 billion pounds ($41.3 billion), has filed an application with the PUC "to sell electricity and related services throughout all of Pennyslvania."

"Having a bank or a financial institution become an electric generation supplier or an electric marketer is something that we've not seen before in Pennsylvania," said PUC spokeswoman Jennifer Kocher.

"We have seen more and more financial institutions becoming involved in utilities in the state," she said, citing the purchase of Duquesne Light by a consortium led by Australia's Macquarrie Bank.

"You don't have to be a generator of electricity in Pennsylvania to be an electricity generation supplier," she said. "You can be more of a marketer. You just have to have the resources to be able to acquire that generation."

The bank is not new to the electricity business. Ms. Kocher said that when RBS filed its application in November, it was already a supplier in Michigan, Maine, Massachusetts, Connecticut, Texas, Ohio, California and Oregon. As well, it had applications in progress to supply electricity in Maryland, New Jersey, New York and Rhode Island.

The agency has extended the 45-day review period for the application.

However - U.K. Says It Has No Plans to Nationalize More Banks

LONDON -- U.K. Prime Minister Gordon Brown rejected suggestions Wednesday that his government is aiming to privatize more U.K. banks.

Meanwhile, banking shares had another turbulent day, underscoring investors' concerns about their stability two days after the government announced a second bank-rescue plan. Sterling also continued its slide, hitting a 13-year low.

Rather than reassure markets, the giant new bailout plan announced Monday by the prime minister has underscored the depth of the crisis faced in one of the world's largest financial centers. Some investors, and politicians, say Britain could end up fully nationalizing more of its banks.

Politician urges government to nationalise RBS and Lloyds

By Adrian Croft

LONDON (Reuters) - The chairman of the parliament's Treasury Committee urged the government on Wednesday to nationalise Royal Bank of Scotland and Lloyds Banking Group as the global financial crisis deepens.

John McFall, a prominent legislator in Prime Minister Gordon Brown's Labour Party, made the call in a column in the Financial Times written jointly with Jon Moulton, the head of private equity firm Alchemy Partners.

McFall and Moulton said there seemed to be considerable expectation that Britain would nationalise at least RBS and Lloyds Banking Group.

"If it is to happen, the sooner the better. Let us get it over with -- nationalise the pair of them," they wrote.

Both banks are now part-owned by the government but they, and the government, oppose full nationalisation.

Shares in Lloyds, already 43 percent owned by the government, and Barclays fell heavily on Tuesday as concern resurfaced they may need state help to repair their balance sheets.

Shares in Royal Bank of Scotland, which lost two thirds of its value on Monday after a record loss prompted Britain to raise its stake in the bank to 70 percent, fell another 11 percent. Analysts highlighted the risk of nationalisation.

The government threw Britain's troubled banks their second multi-billion-pound lifeline in three months on Monday but the package failed to reassure investors spooked by deepening recession.

Nationalising the banks would pose serious risks, including raising the question of whether it would hurt Britain's credit rating to own such large balance sheets, and to some extent these risks would probably all happen, McFall and Moulton wrote.

LEAST WORSE COURSE

"But things are so bad that the least worse course is to accept nationalisation of these banks," McFall and Moulton said.

Nationalisation would allow the authorities to use the banks to restart the flow of credit, tempering the recession.

It would also allow the banks to sort out their toxic assets "in an unrushed and orderly process," they wrote.

"Over a few years, it would be possible to clean up and simplify these banks and return them to private ownership in a good state," they said.

Lloyds Banking Group Chairman Victor Blank said on Monday the bank did not want the government to raise its stake. RBS said on Monday that full nationalisation had only been discussed with the government "as something that we all want to avoid."

The Independent newspaper reported on Wednesday that Barclays was under intense pressure from shareholders to bring forward its full-year results. A rushed trading update from the bank late on Friday said 2008 profits would be ahead of expectations, but the move failed to reassure investors.

The Financial Times quoted City Minister Paul Myers as saying on Tuesday the government's insurance scheme for toxic bank assets would probably last between five and nine years.

The newspaper also quoted Nick Clegg, leader of Britain's second-biggest opposition party, the Liberal Democrats, as saying Britain must prepare to ditch the pound and join the euro to salvage the public finances and prevent the "permanent decline" of London's financial district.

The U.S. dollar hit a 7-1/2-year peak against the pound on Tuesday as losses at British banks raised worries over the country's economy.