Paulson and Bernanke push bailout as Lehman assets sold

By Jason Szep

NEW YORK (Reuters) - The architects of a $700 billion bailout for the U.S. financial system tried to head off opposition to the plan in the U.S. Congress, while Japan's largest brokerage agreed to buy Lehman Brothers' European arm as the next step in the industry's dramatic transformation.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson stressed the dire consequences of failing to move quickly on the plan for the government to buy up hundreds of billions of dollars of tainted mortgage-related securities.

U.S. stocks opened slightly higher, with the Dow Jones industrial average .DJI up 0.22 percent, following losses in European and Asian markets on uncertainty over what price the government will pay for the securities, when the buying would begin, and how confidence in the U.S. financial system can be restored.

"Action by Congress is urgently required to stabilize the situation and avert what could otherwise be very serious consequences for our financial markets and our economy," Bernanke said in remarks prepared for delivery on Tuesday to the Senate Banking Committee.

He said global financial markets "remain under extraordinary stress.

Paulson said market turmoil was already spilling into the broader U.S. economy. "We must now take further, decisive action to fundamentally and comprehensively address the root cause of this turmoil," he said.

Democrats are pushing back. Senate Banking Committee Chairman Christopher Dodd said lawmakers must limit executive pay for companies participating in the bailout or risk the wrath of voters. The bailout plan, he said, was "stunning and unprecedented in its scope and lack of detail".

U.S. lawmakers and the Bush administration are trying to resolve differences over the legislation that would authorize the Treasury to buy $700 billion in bad assets and hold them until they could be sold at a later date.

On the Democrats' wish list: assistance to homeowners struggling to pay their mortgages, curbs on executive pay at companies that use the program to unload toxic assets, and the government taking equity stakes in banks that use the program. Markets suspect the debate could drag into next week.

"I just don't think the American public is sold," said David Dietze, chief investment officer of Point View Financial Services in New Jersey. "I think they are skeptical of the need and they are fearful of the cost."

JAPANESE RUSH ON U.S. ASSETS

Japanese firms are leading the rush to acquire U.S. investment banking assets. Nomura Holdings (8604.T: Quote, Profile, Research, Stock Buzz) agreed to buy bankrupt Lehman Brothers' equities and investment banking business in Europe and the Middle East, and said it expects to retain "a significant proportion" of the 2,500 staff employed in the businesses.

Previously, Japan's top bank, Mitsubishi UFJ Financial Group Inc (8306.T: Quote, Profile, Research, Stock Buzz), said it would buy up to 20 percent of Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) for as much as $8.5 billion, and Nomura bought Lehman's franchise in Japan and Australia, with some 3,000 employees.

Speculation is growing that Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz), which like Morgan Stanley is transforming itself into a commercial bank, might turn to Sumitomo Mitsui Financial Group (SMFG) (8316.T: Quote, Profile, Research, Stock Buzz), Japan's No. 3 bank, with which it has a long relationship.

"SMFG has always had very close ties with Goldman Sachs, so you can't rule out some sort of a more comprehensive tie-up there," said Jason Rogers, credit analyst at Barclays Capital.

Insurance giant American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz) should have a list of assets it wants to sell by next week, new Chief Executive Edward Liddy said. Canada's Toronto-Dominion Bank (TD.TO: Quote, Profile, Research, Stock Buzz) was among those weighing a bid for Washington Mutual Inc (WM.N: Quote, Profile, Research, Stock Buzz), a source familiar with the situation said.

Singapore sovereign fund GIC said it still has plenty of cash after investing nearly $18 billion in UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz) and Citigroup (C.N: Quote, Profile, Research, Stock Buzz) and would consider opportunities to invest in U.S. distressed assets.

BAILOUT JITTERS

Some analysts and investors harbor deepening doubts over whether Paulson and Bernanke can steer the world's largest economy out of its worst crisis of confidence since the Great Depression of the 1930s.

"You two gentlemen have been wrong about the housing crisis, missed the leverage problem, and understated the derivative issue," said Barry Ritholtz, director of research at Fusion IQ, an investment firm in New York. "Indeed, you two have been wrong about nearly everything since this crisis began years ago. Why should we trust your judgment on the largest bailout in American history?"

Banks remained wary of lending to each other. Overnight dollar borrowing rates remained almost one percentage point above the Federal Reserve's 2 percent target.

Britain's biggest home lender, HBOS (HBOS.L: Quote, Profile, Research, Stock Buzz), which sealed a takeover by UK bank Lloyds TSB (LLOY.L: Quote, Profile, Research, Stock Buzz) last week, was down more than 10 percent after weak housing data sparked worries that its woes could linger despite the takeover.

"The risk has been transferred, it hasn't gone away," said Mike Trippitt, analyst at Oriel Securities.

(Writing by Jason Szep; additional reporting by Jason Neely in London, Glenn Somerville, John Poirier and Donna Smith in Washington; editing by John Wallace)

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NYMEX-Crude eases amid rescue plan uncertainty

* Oil markets tentative on rescue plan uncertainty

* Industry recovery from Hurricane Ike continues

NEW YORK, Sept 23 (Reuters) - U.S. crude oil futures eased on Tuesday in choppy trading amid concerns about the economy and oil demand as Washington attempted to fashion a financial rescue plan acceptable to Congress.

"You have uncertainty about the dollar and the stock market taking hold ahead of today's testimony in Congress," said Phil Flynn, analyst at Alaron Trading in Chicago.

On the New York Mercantile Exchange, front-month November crude CLX8 fell 90 cents, or 0.82 percent, to $108.47 a barrel, trading from $106.07 to $109.58.

The expiring October crude contract surged to its biggest one-day gain on record in volatile trading on Monday, rocketing to $130 per barrel intraday, a jump of $25.45, or 24.3 percent, before slipping back to close nearly 16 percent higher.

NYMEX October crude CLV8 on Monday settled $16.37, or 15.65 percent higher, going off the board at $120.92 per barrel.

In London on Tuesday, November Brent LCOX8 fell $1.78, or 1.78 percent, to $104.15 a barrel, trading from $102.64 to $106.09.

The dollar attempted to consolidate on Tuesday, after the previous session's hefty fall against the euro, despite ongoing jitters over the U.S. government's bailout plan.

U.S. equities edged higher at the open on Tuesday, but global stocks fell, weighed down by investor worries about political resistance to Washington's bailout plan and whether the deal will work.

Concern persisted about delays as the Bush administration and Congress negotiated details of the package and markets awaited U.S. Treasury Secretary Henry Paulson's questioning by the Senate Banking Committee. [ID:nN23363416]

A preliminary Reuters poll of analysts ahead of U.S. government inventory data due out on Wednesday forecast that crude stocks fell last week, with gasoline supplies expected to be down sharply. [EIA/S]

Energy companies continued to work on restarting production, refineries and pipelines after Hurricane Ike. For Factbox, click on [ID:nN22261089].

Reported output curbs by Saudi Arabia, Nigeria's recent supply disruptions, Iran's dispute with the West over nuclear issues, and data showing China's thirst for crude remains strong all supported crude on Monday.

NYMEX October heating oil HOV8 fell 1.43 cents, or 0.47 percent, to $3.0287 a gallon, trading from $2.9734 to $3.0580.

October RBOB gasoline RBV8 fell 5.94 cents, or 2.2 percent, to $2.6444 per gallon, trading from $2.6212 to $2.7050. (Reporting by Robert Gibbons; editing by Jim Marshall)

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Canada dollar inches higher vs weakened greenback

* Canadian dollar inches up 0.1 percent vs greenback

* Core inflation rises in August

* Bond prices little changed, focus on U.S. bailout

By John McCrank

TORONTO, Sept 23 (Reuters) - The Canadian dollar was slightly stronger against the U.S. dollar on Tuesday, as uncertainty about the U.S. government's $700 billion rescue plan for its troubled financial sector weighed on the greenback.

Canadian bond prices were little changed, lagging the moves of the bigger U.S. market, as investors waited to see what would develop with the proposed U.S. bailout package.

At 9:40 a.m. (1340 GMT), the Canadian dollar was at C$1.0320 to the U.S. dollar, or 96.90 U.S. cents, up from C$1.0334 to the U.S. dollar, or 96.77 U.S. cents, at Monday's close.

The currency rose 0.1 percent after gaining 1.6 percent against the greenback on Monday.

"The (U.S.) dollar obviously had a disastrous day yesterday... so I'm not surprised to see things settle a little bit this morning," said Steve Butler, senior currency strategist at Scotia Capital.

All eyes were on the U.S. Congress, where U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke were scheduled to answer questions from the Senate Banking committee at 1330 GMT.

In a prepared text, they warned of dire consequences for financial markets if their $700 billion bailout package were delayed. See [ID:nN23313135]

"Everybody sounds very concerned and nervous on whether or not they can get a quick resolution from this rescue package, because the longer it drags on, the more uncertainty there is and the more heartache it's going to cause the markets," said Butler.

The focus on the U.S. bailout plan took attention away from the release of Canadian inflation data for August.

Inflation sped to 3.5 percent on the year from 3.4 percent in July, its highest since March 2003 as energy prices remained sharply above 2007 levels.

Core inflation, which excludes several volatile items like gasoline and is the Bank of Canada's preferred gage of underlying price trends, rose more than expected at 0.3 percent in the month and 1.7 percent year-over-year.

Analysts had expected a monthly rise of 0.1 percent and an annual rate of 1.6 percent, according to median forecasts in a Reuters poll.

Expectations for future Bank of Canada interest rate moves were little changed after the data, with a 51 percent probability of a 25-basis point cut in October, down from a reading of 52 percent on Monday. BOCWATCH

BONDS LITTLE CHANGED

Canadian bond prices were mixed but little changed, lagging the moves of the larger U.S. Treasury market.

"In Canada we have lagged, because beyond just the fact that it's not our problem to the same degree, there is also the issue that core inflation was stronger than expected, preventing us from matching the decline in yields in the U.S.," said Mark Chandler, fixed income strategist at RBC Capital Markets.

The two-year bond was unchanged at C$99.79 to yield 2.849 percent, while the 10-year bond added 2 Canadian cents to C$104.70 to yield 3.662 percent.

The yield spread between the two-year and 10-year bond was 83.9 basis points, up from 84.2 basis points at the previous close.

The 30-year bond fell 5 Canadian cents to C$114.90 for a yield of 4.110 percent. In the United States, the 30-year treasury yielded 4.406 percent.

The three-month when-issued T-bill yielded 2.23 percent, down from 2.27 percent at the previous close. (Reporting by John McCrank; Editing by Scott Anderson)

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US SEC's Cox urges regulation of CDS market

(Adds details from Cox testimony)

WASHINGTON, Sept 23 (Reuters) - The top U.S. securities regulator urged Congress on Tuesday to pass laws to regulate the $58 trillion credit default swap market and said lack of oversight was a cause for great concern.

Securities and Exchange Commission Chairman Christopher Cox said there is a regulatory hole in supervision of the credit default swap (CDS) market and said there was potential for unfettered naked short-selling.

Credit default swaps are used to hedge against a borrower defaulting on its debt or to speculate on the borrower's credit quality.

"I urge you to provide in statute the authority to regulate these products to enhance investor protection and ensure the operation of fair and orderly markets," Cox said in prepared testimony to be delivered to the Senate Banking Committee.

"Neither the SEC nor any regulator has authority over the CDS market, even to require minimal disclosure to the market," he said.

Cox also said the SEC was probing broker-dealers and institutional investors with significant trading activity in financial companies and with positions in credit default swaps.

Cox said the SEC had more than 50 subprime investigations open. (Reporting by Karey Wutkowski, Rachelle Younglai, editing by Dave Zimmerman)

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Lennar loss narrower than expected

NEW YORK (Reuters) - Lennar Corp (LEN.N: Quote, Profile, Research, Stock Buzz) posted a narrower-than-expected quarterly loss on Tuesday as the home builder reduced construction and administrative costs.

The No. 2 U.S. builder reported a loss of $89 million, or 56 cents per share, compared with a loss of $513.9 million, or $3.25 per share, a year ago.

Analysts had predicted a loss of 63 cents, according to Reuters Estimates.

Lennar's revenue declined 53 percent to $1.11 billion in the quarter, just topping analyst estimates of $1.07 billion.

The U.S. housing market, mired in its worst slump since the Great Depression, continues to flail as subprime borrowers, who had been extended credit despite their high-risk profile, increasingly default on mortgages, pushing foreclosures and inventory up and prices down.

"While we expected the housing market to remain constrained throughout the third quarter, the weakness in the market actually accelerated as a result of increased foreclosures, weakened consumer confidence and tightened mortgage lending standards," Stuart Miller, Lennar's chief executive officer, said in a statement.

The Miami-based company's average sales price decreased to $270,000 in the quarter from $296,000 last year.

As prices fall, builders must acknowledge the lower value of their holdings by taking charges. Lennar's losses on land sales totaled $28.8 million, including $21.4 million in valuation adjustments and $10.9 million in write-offs related to sites the company does not intend to purchase.

U.S. builders have shifted into survival mode, trying to live through the downturn by selling their land, much of it bought at peak prices during the boom years, instead of building houses on it. Builders have scaled back so sharply that construction starts on new U.S. homes plummeted to a 17-1/2-year low during August, according to Commerce Department data.

Cash generation is king in this climate. Lennar ended the third quarter with about $857 million in cash and no outstanding borrowings under its credit facility.

(Reporting by Helen Chernikoff and Euan Rocha, editing by Maureen Bavdek)

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Britain's Brown at Labour Party conference

MANCHESTER, England, Sept 23 (Reuters) - Below are highlights from British Prime Minister Gordon Brown's speech to the ruling Labour Party's annual conference.

OPPOSITION CONSERVATIVES

"What has become clear is that Britain cannot trust the Conservatives to run the economy. Everyone knows that I'm all in favour of apprenticeships, but let me tell you this is no time for a novice.

"The Conservatives may want to represent the future, but whether it's Europe or energy, planning or tax credits, university places of 42 days, whenever they are tested on substance they have nothing to offer to meet the big challenges of tomorrow, because they are prisoners of their past."

UNPOPULARITY

"I know what I want to do in this job. And I know that the way to deal with tough times is to face them down. Stay true to your beliefs. Understand that all the attacks, all the polls, all the headlines, all the criticism, it's all worth it, if in doing this job I make life better for one child, one family, one community. Because this job is not about me, it's about you."

HEALTHCARE

"Labour is the party of the National Health Service (NHS) -- we created it, we saved it, we value it and we will always support it.

"I've always found it unfair that we cannot offer on the NHS the comprehensive services that private patients can afford to buy. And so in April a Labour Britian will become the first country in the whole world to offer free universal check ups for everyone over 40.

"I can announce today for those in our nation battling cancer, from next year you will not pay prescription charges."

INTERNET

"We want to enable all families to use the Internet to link back to their children's school.

"We will fund over a million extra families to get online, on the way to our ambition of Britain leading the world with more of our people than any other major economy able to access the Internet and broadband."

CHILD POVERTY

"So today I announce my intention to introduce ground-breaking legislation to enshrine in law Labour's pledge to end child poverty."

BUSINESS

"We are and will always be a pro-enterprise, pro-business and pro-competition government. And we believe the dynamism of our five million businesses large and small is vital to the success of our country.

"But the continuing market turbulence shows why we now need a new settlement for these times -- a settlement that we as a pro-market party must pursue."

MISTAKES

"Where I've made mistakes I'll put my hand up and try to put them right.

"I want to give the people of this country an unconditional assurance -- no ifs, no buts, no small print -- my unwavering focus is taking the country through the challenging economic circumstances we face and building the fair society of the future."

BROWN

"I didn't come into politics to be a celebrity or thinking I'd always be popular. Perhaps, that's just as well.

"And I didn't come to London because I wanted to join the establishment, but because I wanted and want to change it. So I'm not going to try to be something I'm not. And if people say I'm too serious, quite honestly there's a lot to be serious about -- I'm serious about doing a serious job for all the people of this country.

"What angers me and inspires me to act is when people are treated unfairly."

CLIMATE CHANGE

"I am asking the climate change committee to report by October on the case for, by 2050, not a 60 percent reduction in our carbon emissions, but an 80 percent cut -- and I want British companies and British workers to seize the opportunity and lead the world in the transformation to a low carbon economy."

PUBLIC SPENDING

"But you know, when it comes to public spending you can't just wave a magic wand to conjure up the money - not even with help from Harry Potter."

FINANCIAL MARKETS

"I and then (finance minister) Alistair Darling will meet financial and government leaders in New York to make these proposals:

"First transparency, all transactions need to be transparent and not hidden. Second, sound banking, a requirement to demonstrate that risk can be managed and priced for bad times as well as good. Third, responsibility, no member of a bank's board should be able to say they did not understand the risks they were running and walk away from them. Fourth, integrity, removing conflicts of interest so that bonuses should not be based on short-term speculative deals but on hard work effort and enterprise. And fifth, global standards and supervision because the flows of capital are global, then supervision can no longer just be national but has to be global."

"And if we make these changes I believe London will retain its rightful place as the financial centre of the world."

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Oil falls $2 after surge, bailout worries weigh

By Alex Lawler

LONDON (Reuters) - Oil fell more than $2 a barrel on Tuesday, after a record one-day rise in the previous session, depressed by doubts over a U.S. plan to rescue the financial sector.

U.S. crude for November was $2.17 down at $107.20 a barrel by 1241 GMT, after rising nearly $7 on Monday. November Brent crude traded down $2.63 to $103.41.

The October U.S. crude contract on Monday settled 15.7 percent higher at $120.92 before its expiry -- the biggest one-day gain on record.

The U.S. regulator of futures markets, the Commodity Futures Trading Commission, said on Monday it was reviewing the price jump to ensure that the trading was valid.

Monday's price surge was supported by a weak U.S. dollar plus hopes the $700 billion U.S. bailout plan would ease the U.S. financial crisis and support demand in the world's top energy consumer.

But concerns that political resistance to the rescue package could delay its implementation weighed on global markets.

"It started off with a wave of optimism and now perhaps a bit of realism has kicked in," said Christopher Bellew, a broker at Bache Commodities.

"The dollar's weak, but the stock market is weak as well. The implications of that for demand are probably why we're coming back down again."

The weak dollar can boost the appeal of commodities to investors seeking to hedge against inflation. The dollar steadied on Tuesday against a basket of other major currencies.

U.S. Treasury Secretary Henry Paulson urged Congress not to weigh down the proposed financial system bailout with unrelated provisions that would delay its implementation.

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Testimony likely to set market's tone

By Ellis Mnyandu

NEW YORK (Reuters) - The S&P 500 was poised to open little changed on Tuesday before key congressional testimony on the financial bailout, but tech stocks could start higher, boosted by a decline in oil prices.

In testimony to be delivered to a Senate committee, a copy of which was obtained by Reuters, Federal Reserve Chairman Ben Bernanke said, "Action by Congress is urgently required to stabilize the situation and avert what could otherwise be very serious consequences for our financial markets and our economy."

Investors worry that political wrangling over the $700 billion package proposed by the Bush administration might snag the passage of what is likely to be one of the costliest U.S. bailouts since the Great Depression.

Financial shares were poised to weigh on the market as they did heavily on Monday, when the benchmark S&P 500 .SPX fell nearly 4 percent. Shares of JPMorgan Chase (JPM.N: Quote, Profile, Research, Stock Buzz), Wells Fargo (WFC.N: Quote, Profile, Research, Stock Buzz) and Washington Mutual (WM.N: Quote, Profile, Research, Stock Buzz) all drifted lower before the bell.

A drop in oil prices might offer some market support, with U.S. front-month crude down $1.91 at $107.43 a barrel.

"From what I'm seeing and hearing, Bernanke is basically putting pressure on Congress to do something right now," Matt McCall, president of Penn Financial Group in Ridgewood, New Jersey.

"I think it's probably just more of a ploy to put some pressure on Congress, but I don't think he should be speaking like that unless he felt that way because that's obviously going to put pressure on the stock market."

S&P 500 futures fell 2.20 points but were above fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures slipped 7 points and Nasdaq 100 futures climbed 14.75 points.

Influential Oppenheimer & Co bank analyst Meredith Whitney cut her outlook on U.S. banks, saying the government bailout plan has little hope of improving core fundamentals over the near and medium term. She forecast more dividend cuts by banks.

Congressmen and analysts are concerned about what would be the ultimate cost of the measure and its impact on the budget deficit, the outlook for the dollar and inflation.

Led by Treasury Secretary Henry Paulson, officials are working on a solution to mop up hundreds of billions of dollars worth of bad mortgage debt on the books of financial institutions.

Paulson, Bernanke, Securities and Exchange Commission Chairman Christopher Cox and James Lockhart, director of the Federal Housing Finance Agency, are due to testify before the Senate Banking Committee starting at 9:30 a.m. EDT.

(Editing by Kenneth Barry)

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S.Africa's Manuel: ANC asked me to stay as finmin

WASHINGTON, Sept 23 (Reuters) - South Africa's Finance Minister Trevor Manuel said on Tuesday the leaders of the ruling African National Congess had asked him to stay in his job and he was happy to serve a new president after Thabo Mbeki's ouster.

"I am happy to serve a new head of state," Manuel told a hastily-convened press conference in Washington.

Manuel said he had spoken to ANC President Jacob Zuma and his deputy Kgalema Motlanthe and they had asked him to remain as finance minister.

Motlanthe is expected to replace Mbeki as president until elections next year. (Reporting by Gordon Bell)

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US STOCKS-Techs lift market on bailout hopes

(Updates with market extending gains)

NEW YORK, Sept 23 (Reuters) - U.S. stocks rose on Tuesday as shares of technology bellwethers, including Microsoft Corp (MSFT.O: Quote, Profile, Research, Stock Buzz) , jumped on hopes that the proposed $700 billion financial sector bailout would help loosen up lending and boost business and consumer spending.

Even so, investors were cautious and trading was choppy as the debate over the measure to mop up bad mortgage debts from the banks' balance sheets intensified before Congress in Washington.

The Dow Jones industrial average .DJI rose 59.26 points, or 0.54 percent, to 11,074.95. The Standard & Poor's 500 Index .SPX rose 7.41 points, or 0.61 percent, to 1,214.50. The Nasdaq Composite Index .IXIC climbed 15.36 points, or 0.70 percent, to 2,194.34.

In testimony to be delivered to a Senate committee, a copy of which was obtained by Reuters, Federal Reserve Chairman Ben Bernanke said, "Action by Congress is urgently required to stabilize the situation and avert what could otherwise be very serious consequences for our financial markets and our economy."

Shares of Microsoft, a Dow component, jumped nearly 2 percent to $25.83 on Nasdaq. The software maker on Monday announced plans of a $40 billion shares repurchase and raised its quarterly dividend.

Led by Treasury Secretary Henry Paulson, officials are working on a solution to mop up hundreds of billions of dollars worth of bad mortgage debt on the books of financial institutions.

Paulson, will be joined by Bernanke, Securities and Exchange Commission Chairman Christopher Cox and James Lockhart, director of the Federal Housing Finance Agency, in testifying before the Senate Banking Committee. (Editing by Kenneth Barry)

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Europe shares pare losses as Wall St stocks rise

LONDON, Sept 23 (Reuters) - European shares pared losses on Tuesday after U.S. stock markets rose strongly in early trade as investors eyed key congressional testimony about a financial sector bailout.

At 1353 GMT, the FTSEurofirst 300 index of top European shares traded 1.2 percent lower at 1,113.68 points after having been at 1,109.79 points before Wall Street opened.

Banks pared losses but were still took most points off the European benchmark, followed by miners.

Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz) fell 5.3 percent, ING (ING.AS: Quote, Profile, Research, Stock Buzz) fell 4.7 percent and UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz) lost 4.4 percent.

Among miners, Anglo American (AAL.L: Quote, Profile, Research, Stock Buzz) lost 6.5 percent and Rio Tinto (RIO.L: Quote, Profile, Research, Stock Buzz) 3.8 percent as metal prices fell.

U.S. stocks .DJI .IXIC .SPX gained 0.6-0.8 percent.

(Reporting by Sitaraman Shankar)

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Investment-Bank Demise May Speed Regulatory Overhaul

By Scott Lanman and Jesse Westbrook

Sept. 23 (Bloomberg) -- The financial crisis that obliterated the lines between banks and securities firms may be about to do the same to divisions between federal regulators.

The demise this week of independent securities firms may accelerate a change Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson have called for: a single supervisor to ensure market stability. It may also avert a battle over which regulator might gain or lose power because the Securities and Exchange Commission's role is already diminished.

``We have no more investment banks, so we don't have to regulate them,'' House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, told reporters yesterday. ``But we do have other entities that need regulation. There's clearly far too much risk taking going on, far too much leveraging.''

Still to be decided is whether the Fed, another existing regulator, or a new agency will be required. Bernanke proposed a ``macroprudential supervisor'' to oversee risk in the financial system in an Aug. 22 speech. He didn't identify which body should do the job.

Frank plans to consider regulatory changes next year and has said he favors new powers for the Fed. He holds a hearing with Paulson and Bernanke on the financial crisis tomorrow.

`Crisis at Hand'

Bernanke said in testimony to a hearing at the Senate Banking Committee today that while regulatory flaws ``must be addressed,'' the priority for now is to end the financial crisis, and a broader plan would be ``difficult to compress into a short legislative time frame.'' Paulson and SEC Chairman Christopher Cox are also scheduled to appear before the panel today.

Bernanke is accruing authority after the conversion of Goldman Sachs Group Inc. and Morgan Stanley, the last large independent securities companies, into commercial banks this week. This comes at the expense of the SEC, which at the start of the year oversaw five investment banks that are now bankrupt, sold or transformed.

The Fed started accumulating more power when it intervened to rescue Bear Stearns Cos. in March. Fed and SEC officials then signed an agreement in July giving the central bank shared oversight of securities firms' leverage and capital.

Even as his role expands, Bernanke has indicated no desire for the Fed to become the financial industry's universal regulator.

``The adoption of a regulatory and supervisory approach with a heavier macroprudential focus has a strong rationale, but we should be careful about over-promising,'' Bernanke said at a gathering of central bankers from 40 countries last month in Jackson Hole, Wyoming.

Political Threat

Making the Fed a broader financial regulator may threaten its political independence, risking attempted influence on interest-rate decisions, according to some central bankers and politicians.

At the Jackson Hole gathering, European Central Bank governing council member Mario Draghi, who chairs an international group of regulators and finance officials, said that giving central banks responsibility for ensuring stable markets would risk impeding their ability to control inflation.

During times of extraordinary market turmoil, ``maintaining price stability could be the best contribution that monetary policy could give to the return of financial stability,'' Draghi said at the forum.

At the very least, heightened scrutiny by lawmakers would follow.

``If we grant additional powers'' to the Fed, ``I certainly hope that that will provide more reliable information to the Congress,'' Representative Brad Miller, a North Carolina Democrat, said ahead of Bernanke's semiannual economic testimony to Congress in July.

Default Regulator

The Fed is becoming a bigger regulator now because ``it's the entity that's there,'' said Representative John Campbell, a California Republican who is a member of the Financial Services Committee. ``We'll have considerable discussion next year about whether that's the appropriate way to build it when we actually have time to think about it.''

Setting up an authority other than the Fed to oversee financial regulation may take longer than lawmakers care to wait.

``The Fed should be at the heart of this,'' said James Leach, a Republican former chairman of the panel now headed by Frank. He cited the agency's deep pockets, pool of economic talent and ability to move quickly under existing statutes. Leach is now at Harvard University's Kennedy School of Government.

The SEC's authority has declined, making it less likely to win new powers. The Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency oversee commercial banks and have little experience with complex markets such as for derivatives, where the Fed has imparted regulatory scrutiny.

SEC's Focus

At the SEC, the staff composition ``has been too skewed toward lawyers for too long,'' said Chester Spatt, a former SEC chief economist who is now a finance professor at Carnegie Mellon University in Pittsburgh. That's ``arguably hobbled its ability to deal with important market issues.''

Big banks may already be comfortable with the Fed in charge.

``Bank holding companies have been holding up, weathering a pretty fierce storm'' as other parts of the financial system failed, said Wayne Abernathy, the American Bankers Association's executive vice president for regulatory policy and a former staff director at the Senate Banking Committee.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net

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Bank of England Drains Overnight Pounds as Long-Term Rates Rise

By Brian Swint

Sept. 23 (Bloomberg) -- The Bank of England drained funds from overnight sterling lending markets as financial institutions hoarded money and pushed the cost of borrowing for longer periods to the highest level this year.

The U.K. central bank held a fine-tuning auction to remove 10 billion pounds ($19 billion) from money markets. The overnight lending rate for pounds fell to 4.5 percent today, lower than the 5 percent benchmark rate. At the same time, one-month, two-month and three-month lending rates rose.

``Overnight rates have gone down an awful lot,'' said Jason Simpson, an analyst at Royal Bank of Scotland Group Plc in London. ``Going further out, it's clear that banks are still quite reluctant to lend. The central bank has tried to get those money rates down, but there are powers beyond their control.''

The Bank of England's action underscores the challenge faced by central banks worldwide to restore confidence to money markets after the bankruptcy of U.S. investment bank Lehman Brothers Holdings Inc. last week. The tension threatens to further undercut U.K. mortgage lending after loan approvals fell to a record low last month, data released today show.

The Federal Reserve opened up swap lines with the Bank of England, the European Central Bank and the Swiss National Bank last week and will start another one with the Bank of Japan tomorrow. The auctions put an additional $80.1 billion into overnight dollar money markets today. The London interbank offered rate, or Libor, was still 2.95 percent for dollars today, almost a point higher than the Fed's benchmark rate at 2 percent.

BOE Auction

The Bank of England, which offered $40 billion in its overnight dollar auction, allocated $30.1 billion, the most since the emergency sales began last week.

At the same time, financial institutions deposited 9.5 billion pounds at the bank yesterday, the most since it started the current standing deposit facility in May 2006. The move is a sign they couldn't lend pounds in the overnight market at a better rate than the 4 percent penalty rate offered by the central bank.

While the Bank of England has succeeded in bringing down the overnight rate for pounds, the three-month lending rate was 6.07 percent today, the highest since Dec. 21.

The government nationalized mortgage lender Northern Rock Plc earlier this year after the surge in three-month interest rates dried up its funding. HBOS Plc, the country's biggest home-loan provider, agreed to a rescue takeover by Lloyds TSB Group Plc last week after Prime Minister Gordon Brown pledged to waive merger scrutiny on the deal.

Government Action

With house prices falling at the fastest pace in a quarter century, according to HBOS, the government should weigh whether to do more to shore up the mortgage market, Goldman Sachs Group Inc. Chief Economist Jim O'Neill told Bloomberg Television today.

Brown should consider ``doing something to take over the activities of all those institutions that are just not in a position to lend here any more, because it's going to end up causing significant economic weakness in the U.K.,'' O'Neill said.

The U.K. central bank last week extended its Special Liquidity Scheme that allows bank to swap mortgage-backed debt created up to last year for government securities.

``I don't know what else they can do,'' RBS's Simpson said. ``There's still funding for banks using mortgages as collateral, but even that hasn't quelled the uncertainty. Things could remain like this for quite some time.''

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.



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Belgian September Business Confidence Declines to Five-Year Low

By Jurjen van de Pol

Sept. 23 (Bloomberg) -- Belgian business confidence dropped to a five-year low in September, led by weakening orders in the manufacturing industry.

The confidence index for Belgium, the sixth-largest economy among the 15 nations that use the euro, fell to minus 14.4 this month from minus 5.9 in August, the Brussels-based National Bank of Belgium said today in an e-mailed statement. The September reading is the lowest since July 2003 and below the minus 6.9 expected by economists, according to the median of 21 forecasts in a Bloomberg News survey.

The euro-area economy is showing few signs of recovery after contracting in the second quarter for the first time since the introduction of the single currency almost a decade ago, as exports, investment and consumer spending declined. Belgium's Federal Planning Bureau on Sept. 12 projected Belgian economic growth would stagnate in the current quarter, citing a slowdown in exports and domestic demand.

``Export growth has fallen substantially in recent months and inventories are expanding, weighing on industry sentiment,'' said Peter Vanden Houte, chief economist at ING Belgium in Brussels. ``Seventy percent of Belgian exports go to other European Union countries, whose economies are cooling rapidly.''

The European Commission this month cut its growth forecasts for the region and projects a recession in Germany, Europe's largest economy and one of Belgium's biggest trading partners. Expansion in Belgium is expected to slow to 1.2 percent next year from 1.6 percent this year, according to the Brussels-based planning bureau.

`Deteriorated Considerably'

`` The decline was strongest in the manufacturing industry,'' the Belgian central bank said, adding that ``domestic and export demand deteriorated considerably.'' The manufacturing-sentiment sub-index fell to minus 15.8 from minus 5.6 in August; the September reading is the lowest since 2005.

The fallout from the U.S. financial-market crisis will damp economic growth in Europe into next year, European Central Bank Governing Council member Ewald Nowotny said last week. While monetary union brought a ``huge'' increase in stability for its members in times of market turmoil, ``of course we can't isolate ourselves'' from developments in the U.S., he said.

Business sentiment in Germany probably declined for a fourth month in September as the credit-market squeeze intensified, according to the median estimate of 41 economists in a Bloomberg News survey. The Munich-based Ifo institute's business climate index, which is based on a survey of 7,000 executives, will be released tomorrow.

Kuurne, Belgium-based Barco NV, the world's second-largest maker of digital cinema projectors, on Sept. 12 said it plans to sell some unprofitable businesses as customers cut back on orders for light-emitting-diode walls and projectors. Belgian supermarket operator Delhaize Group last month said its second- quarter revenue fell 7.5 percent and reiterated its July prediction that operating profit may not rise at all this year.

To contact the reporter on this story: Jurjen van de Pol in Amsterdam jvandepol@bloomberg.net


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Bernanke's Testimony to Senate Banking Committee: Full Text

Sept. 23 (Bloomberg) -- The following is a reformatted version of the text of Federal Reserve Chairman Ben S. Bernanke's statement to the Senate Banking Committee.

Chairman Dodd, Senator Shelby, and members of the Committee, I appreciate this opportunity to discuss recent developments in financial markets and the economy. As you know, the U.S. economy continues to confront substantial challenges, including a weakening labor market and elevated inflation. Notably, stresses in financial markets have been high and have recently intensified significantly. If financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse.

The downturn in the housing market has been a key factor underlying both the strained condition of financial markets and the slowdown of the broader economy. In the financial sphere, falling home prices and rising mortgage delinquencies have led to major losses at many financial institutions, losses only partially replaced by the raising of new capital. Investor concerns about financial institutions increased over the summer, as mortgage-related assets deteriorated further and economic activity weakened. Among the firms under the greatest pressure were Fannie Mae and Freddie Mac, Lehman Brothers, and, more recently, American International Group (AIG). As investors lost confidence in them, these companies saw their access to liquidity and capital markets increasingly impaired and their stock prices drop sharply.

The Federal Reserve believes that, whenever possible, such difficulties should be addressed through private-sector arrangements--for example, by raising new equity capital, by negotiations leading to a merger or acquisition, or by an orderly wind-down. Government assistance should be given with the greatest of reluctance and only when the stability of the financial system, and, consequently, the health of the broader economy, is at risk. In the cases of Fannie Mae and Freddie Mac, however, capital raises of sufficient size appeared infeasible and the size and government-sponsored status of the two companies precluded a merger with or acquisition by another company. To avoid unacceptably large dislocations in the financial sector, the housing market, and the economy as a whole, the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship, and the Treasury used its authority, granted by the Congress in July, to make available financial support to the two firms. The Federal Reserve, with which FHFA consulted on the conservatorship decision as specified in the July legislation, supported these steps as necessary and appropriate. We have seen benefits of this action in the form of lower mortgage rates, which should help the housing market. The Federal Reserve and the Treasury attempted to identify private-sector approaches to avoid the imminent failures of AIG and Lehman Brothers, but none was forthcoming. In the case of AIG, the Federal Reserve, with the support of the Treasury, provided an emergency credit line to facilitate an orderly resolution. The Federal Reserve took this action because it judged that, in light of the prevailing market conditions and the size and composition of AIG's obligations, a disorderly failure of AIG would have severely threatened global financial stability and, consequently, the performance of the U.S. economy. To mitigate concerns that this action would exacerbate moral hazard and encourage inappropriate risk-taking in the future, the Federal Reserve ensured that the terms of the credit extended to AIG imposed significant costs and constraints on the firm's owners, managers, and creditors. The chief executive officer has been replaced. The collateral for the loan is the company itself, together with its subsidiaries. (Insurance policyholders and holders of AIG investment products are, however, fully protected.) Interest will accrue on the outstanding balance of the loan at a rate of three-month Libor plus 850 basis points, implying a current interest rate over 11 percent. In addition, the U.S. government will receive equity participation rights corresponding to a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders, among other things.

In the case of Lehman Brothers, a major investment bank, the Federal Reserve and the Treasury declined to commit public funds to support the institution. The failure of Lehman posed risks. But the troubles at Lehman had been well known for some time, and investors clearly recognized--as evidenced, for example, by the high cost of insuring Lehman's debt in the market for credit default swaps--that the failure of the firm was a significant possibility. Thus, we judged that investors and counterparties had had time to take precautionary measures. While perhaps manageable in itself, Lehman's default was combined with the unexpectedly rapid collapse of AIG, which together contributed to the development last week of extraordinarily turbulent conditions in global financial markets. These conditions caused equity prices to fall sharply, the cost of short-term credit--where available--to spike upward, and liquidity to dry up in many markets. Losses at a large money market mutual fund sparked extensive withdrawals from a number of such funds. A marked increase in the demand for safe assets--a flight to quality--sent the yield on Treasury bills down to a few hundredths of a percent. By further reducing asset values and potentially restricting the flow of credit to households and businesses, these developments pose a direct threat to economic growth.

The Federal Reserve took a number of actions to increase liquidity and stabilize markets. Notably, to address dollar funding pressures worldwide, we announced a significant expansion of reciprocal currency arrangements with foreign central banks, including an approximate doubling of the existing swap lines with the European Central Bank and the Swiss National Bank and the authorization of new swap facilities with the Bank of Japan, the Bank of England, and the Bank of Canada. We will continue to work closely with colleagues at other central banks to address ongoing liquidity pressures. The Federal Reserve also announced initiatives to assist money market mutual funds facing heavy redemptions and to increase liquidity in short-term credit markets.

Despite the efforts of the Federal Reserve, the Treasury, and other agencies, global financial markets remain under extraordinary stress. Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy. In this regard, the Federal Reserve supports the Treasury's proposal to buy illiquid assets from financial institutions. Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions. More generally, removing these assets from institutions' balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth.

At this juncture, in light of the fast-moving developments in financial markets, it is essential to deal with the crisis at hand. Certainly, the shortcomings and weaknesses of our financial markets and regulatory system must be addressed if we are to avoid a repetition of what has transpired in our financial markets over the past year. However, the development of a comprehensive proposal for reform would require careful and extensive analysis that would be difficult to compress into a short legislative timeframe now available. Looking forward, the Federal Reserve is committed to working closely with the Congress, the Administration, other federal regulators, and other stakeholders in developing a stronger, more resilient, and better regulated financial system.



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Bernanke Says Failure to Pass Plan Threatens Economy

By Scott Lanman and Simon Kennedy

Sept. 23 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke warned lawmakers that failure to pass a rescue plan to take over troubled assets from financial firms would pose a threat to markets and the economy.

``Action by the Congress is urgently required to stabilize the situation and avert what could otherwise be very serious consequences for our financial markets and for our economy,'' Bernanke said in testimony prepared for delivery today to the Senate Banking Committee. ``Global financial markets remain under extraordinary stress.''

Bernanke and Treasury Secretary Henry Paulson are pushing Congress to quickly approve a $700 billion plan to remove illiquid assets from the banking system. Lawmakers have balked at rubber-stamping the proposal, with Democrats demanding it include support for homeowners and limits on executive pay and Republicans questioning the plan's reach and size.

Paulson, who is also testifying today, said in prepared remarks that ``we must now take further, decisive action to fundamentally and comprehensively address the root cause of this turmoil.''

Securities and Exchange Commission Chairman Christopher Cox and James Lockhart, director of the Federal Housing Finance Agency, are also appearing before the committee.

``In light of the fast-moving developments in financial markets, it is essential to deal with the crisis at hand,'' Bernanke said. ``The Federal Reserve supports the Treasury's proposal to buy illiquid assets from financial institutions.''

Federal Intrusion

Bernanke pushed for the biggest federal intrusion into markets since the Great Depression after failing to stem the credit crisis by cutting the benchmark interest rate at the most aggressive pace in two decades. The Fed has also pumped billions of dollars into banks to try and restore liquidity, and invoked extraordinary powers to loan to securities firms.

``Bernanke is telling Congress they need to take action quickly,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, and a former senior economist for the banking committee. ``He is concerned that if this stays in limbo for a long period, the markets will say Congress is not serious and is not addressing the problem.''

The decision by the Treasury this month to put Fannie Mae and Freddie Mac into federal conservatorship was ``necessary and appropriate,'' Bernanke said in a review of government interventions in financial markets this month.

Avoid Collapse

Central bankers looked for private-sector solutions to avoid the collapse of Lehman Brothers Holdings Inc. and a potential failure of American International Group Inc., he said. The Fed chairman said a collapse of AIG would have ``severely threatened global financial stability'' and U.S. growth.

The Fed Board authorized the New York Fed this month to lend up to $85 billion to help AIG pay its creditors. The Fed ensured the loan involved ``significant costs'' to the firm to avoid the perception the central bank would continue bailouts.

Lehman Brothers also ``posed risks,'' Bernanke said. ``But the troubles at Lehman had been well known for some time'' and Fed officials judged that investors and counterparties ``had time to take precautionary measures.''

Still, Lehman's bankruptcy and AIG's troubles contributed to the ``extraordinarily turbulent conditions in financial markets,'' Bernanke said.

Along with the government bailout, Bernanke supports a regulatory overhaul for a U.S. financial industry upended by $523 billion in losses from the collapse of mortgage credit.

`Comprehensive Proposal'

``The development of a comprehensive proposal for reform would require careful and extensive analysis,'' Bernanke said.

The Fed approved this week bids by Goldman Sachs Group Inc. and Morgan Stanley to become commercial banks, ending an investment banking era. Merrill Lynch & Co. agreed to a merger with Bank of America Corp. earlier this month.

Investor concern that the Paulson rescue would inflate the U.S. budget deficit pushed the dollar down 2.3 percent yesterday in the biggest decline since creation of the euro in 1999. U.S. stocks and bonds also fell.

The dollar strengthened 0.2 percent to $1.4748 per euro at 8:46 a.m. in New York.

U.S. economic growth may slow to 1.7 percent this year and 1.5 percent next year, the slowest since the last recession in 2001 and its aftermath in 2002, according to the median of 80 economist forecasts compiled by Bloomberg.

The flagging economy and tumbling commodity prices, including a 28 percent decline in the price of crude oil since July 11, have eased pressure on Bernanke and other policy makers to raise the benchmark interest rate from 2 percent.

Government figures showed last week that consumer prices fell 0.1 percent in August, after jumping 0.8 percent the prior month, as fuel prices declined from record levels. Prices were up 5.4 percent from a year before.

``If financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse,'' Bernanke said.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Simon Kennedy in Paris at Skennedy4@bloomberg.net.



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Yushchenko Calls for Gazprom Deal to Secure Gas Flows

By Halia Pavliva and Daryna Krasnolutska
Enlarge Image/Details

Sept. 23 (Bloomberg) -- Ukraine's President Viktor Yushchenko urged the country's government to sign a contract for natural-gas shipments from Russia's OAO Gazprom for domestic use in 2009, a move that would ensure stability of flows to Europe.

``These talks should be finished as soon as possible,'' Yushchenko said in an interview in New York yesterday. ``We should not wait until December, because December is when the political component dominates.''

The European Union gets a quarter of its gas from Russia, 80 percent of which is shipped across Ukraine. Since 2006, Russia's gas-export monopoly Gazprom has reduced flows to Ukraine twice during pricing disputes, raising EU concerns that Russia is unreliable as an energy supplier.

Ukraine's state-run energy company NAK Naftogaz Ukrainy said Sept. 16 it may delay signing the agreement on 2009 gas supplies with Gazprom until the end of the year because falling oil and gas costs may result in a better price. Ukraine may be forced to tap supplies destined for Europe if a deal isn't signed.

``Banking on the idea that oil prices will drop makes little sense,'' Nick Piazza, an analyst at Galt & Taggart Securities Ukraine, said in an interview from Kiev. ``We are likely to see an incredible amount of volatility in commodity prices over the next three months. Beginning work on a long-term agreement now would certainly be welcomed by investors; the last thing anyone wants to see this Christmas is another gas standoff.''

Russia Halts Gas

Russia, the world's largest gas and second-largest oil exporter, cut off gas supplies to Ukraine at the beginning of 2006 and reduced deliveries by 50 percent this March. It also halted shipments of crude oil to Belarus last year.

Government officials in Ukraine and Belarus have repeatedly said Russia is using its energy resources to wield influence over its former Soviet satellites, accusations Russia has denied.

Yushchenko said he told Gazprom Chief Executive Officer Alexei Miller in July that Ukraine wants to sign the agreement sooner rather than later, in part because affordable gas is ``crucial'' for Ukrainian industries such as metallurgy and chemical production.

``I am convinced that the agreement must be signed before the winter months,'' Yushchenko said. ``The major issue is to agree on a formula for the price,'' which should include the tariffs that Russia pays for shipping its gas via Ukraine to Europe.

Transit Fees

Naftogaz CEO Oleh Dubina said in a Sept. 16 interview that Ukraine doesn't plan to increase 2009 transit charges for Russian gas in a bid to limit the price it pays for supplies from Gazprom.

Still, transit charges remain under discussion, Yushchenko said. Ukraine relies on Russia for 71 percent of its gas needs.

Russia doubled Ukraine's gas price in 2006, and raised it 37 percent in 2007 and 38 percent this year. Russian Foreign Minister Sergey Lavrov said in June that his country may double the price again for 2009 deliveries.

Ukraine increased its transit fee to $1.70 per 1,000 cubic meters of gas over 1,000 kilometers this year, from $1.60 in 2007 and 2006.

To contact the reporters on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net; Halia Pavliva in New York at hpavliva@bloomberg.net.



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EDF Board May Meet Today on $23 Billion Bid for British Energy

By Tara Patel and Sandrine Rastello

Sept. 23 (Bloomberg) -- Electricite de France SA's board of directors plans to meet as early as today to ratify its improved 12.4 billion-pound ($23 billion) offer for British Energy Group Plc, according to two people familiar with the matter.

The bid values the biggest U.K. power producer at 774 pence a share, or 9 pence more than a previous cash bid from EDF, Europe's largest electricity generator, according to two people, who didn't want to be identified because the terms of the transaction have yet to be completed. EDF plans to proceed with a formal offer because British Energy has indicated it would accept, they said.

The takeover, after more than four months of talks, would give EDF control of eight British nuclear plant sites with potential for building new reactors. The French utility already supplies gas and electricity to about 5 million customers in the U.K. The purchase by EDF, whose 58 nuclear plants produced 77 percent of France's electricity last year, comes as the U.K. government seeks investment in atomic energy.

The move is part of a global trend toward nuclear energy after oil prices soared to records this year, and amid pressure from environmentalists to cut pollution stemming from burning fossil fuels. The French government owns 85 percent of EDF.

East Kilbride, Scotland-based British Energy, of which the U.K. government owns 36 percent, rejected an offer on July 31 from EDF at 765 pence a share. British Energy's biggest private shareholders said the bid undervalued its nuclear stations and adjacent land where more reactors may be built.

Centrica Role

The offer to British Energy shareholders includes an alternative to an all cash offer in the form of Contingent Value Rights, or CVRs, which give shareholders a slice of future profits, one of the people said.

EDF spokesman Francois Molho declined to comment and Andrew Dowler, a spokesman for British Energy did not immediately respond to a message left on his cell phone.

Centrica Plc, the U.K.'s biggest energy supplier, said on Aug. 4 it was in talks to take a ``minority ownership position'' in British Energy if the company was sold. Centrica's Chief Executive Officer Sam Laidlaw is seeking assets to reduce the company's exposure to energy market fluctuations and customers from price swings.

An announcement of a deal between EDF and British Energy will likely include a reference to Centrica's planned role, which won't be defined in detail until the takeover receives regulatory approval, two people familiar with the talks said. Andrew Turpin, a spokesman for Centrica, declined to comment.

Electricite de France is not only seeking an acquisition in the U.K. Yesterday it said it made a proposal on Sept. 19 to buy Baltimore-based Constellation Energy Group Inc. with U.S. buyout firms KKR & Co. LP and TPG Capital.

The proposal included a takeover approach at $35 a share for the utility.

Warren Buffett's MidAmerican Energy Holdings Co. on Sept. 18 agreed to buy Constellation for about $4.7 billion. The cash deal was worth $26.50 a share. Buffett's Berkshire Hathaway Inc. is the world's sixth-biggest company by market capitalization, worth $223.4 billion, according to Bloomberg data. Until Buffett's approach, EDF was the biggest shareholder in Constellation, with 9.5 percent.

To contact the reporter on this story: Tara Patel in Paris at tpatel2@bloomberg.net



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Yuan Advances Most in Two Months on Dollar's Slump; Bonds Rise

By Judy Chen and Belinda Cao

Sept. 23 (Bloomberg) -- The yuan advanced by the most in more than two months as the dollar slumped on concern the U.S. government's $700 billion bailout plan for the nation's banks will strain public finances and fail to avert a recession.

The Chinese currency rose for a second day after the dollar fell the most in a decade against the currencies of its major trading partners. China has managed the yuan's exchange rate against a basket of currencies, including the euro and the yen, since a peg against the dollar was scrapped in 2005. It has risen 21.5 percent against the dollar since then.

``The dollar's slump increased the yuan's attractiveness,'' said Li Tao, a foreign-exchange trader at Shenzhen Development Bank Co. in Shenzhen. ``But the central bank may still want to keep the exchange rate stable to support growth.''

The yuan strengthened 0.24 percent to 6.8135 a dollar as of 5:30 p.m. in Shanghai, from 6.8300 yesterday, according to the China Foreign Exchange Trade System. It gained as much as 0.29 percent to 6.8099 earlier today, the highest since the end of the dollar peg.

The U.S. Dollar Index traded on ICE futures in New York, which tracks the greenback against the currencies of six major trading partners, slumped 1.97 percent yesterday, the biggest drop since October 1998. It closed at a six-week low of 76.151.

The yuan is allowed to trade by up to 0.5 percent against the dollar either side of the so-called central parity rate, which was set at 6.8009 today.

Unexpected Rate Cut

Premier Wen Jiabao pledged on Sept. 20 that China will strengthen economic controls to maintain steady growth as global financial volatility threatens the nation's economic stability. The central bank cut borrowing costs on Sept. 15 for the first time in six years after the country's economy expanded at the slowest pace since 2005 in the second quarter.

``The unexpected rate cut last week showed the economic slowdown might be worse than we had forecast,'' said Lu Zhengwei, an economist at Industrial Bank Co. in Shanghai. ``The government won't support a quick appreciation of the yuan for the rest of this year.''

China's export orders this quarter were the lowest since July 2005, according to a central bank survey of businesses published yesterday. Policy makers have slowed yuan appreciation versus the dollar to 0.5 percent since the end of June to help exporters weather a decline in global demand. The yuan gained 6.6 percent in the first half.

Bonds Gain

Government bonds due in 10 years rose after the central bank sold one-year bills at lower yields for a second week.

China's central bank sold 100 billion yuan ($14.7 billion) of one-year bills at a yield of 4.0042 percent, compared with 4.0258 percent a week ago, according to a statement on its Web site. The yield on similar-dated bills in open-market auctions had remained at 4.0583 percent this year up to Sept. 6.

``The yields will continue to decline, but very slowly,'' said Nie Shuguang, a fixed-income analyst at Industrial Bank Co. in Shanghai.

The yield on the 4.41 percent treasury bond due in June 2018 dropped 6 basis points to 3.76 percent in Shanghai, according to Bloomberg calculations based on the rate compiled by the nation's debt clearing house yesterday. The price of the security was 105.76 per 100 yuan face amount. A basis point is 0.01 percentage point.

To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net; Belinda Cao in Beijing at lcao4@bloomberg.net.



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Ruble Rises for Fifth Day Versus Basket as Borrowing Costs Fall

By Emma O'Brien

Sept. 23 (Bloomberg) -- Russia's ruble rose for a fifth day against the dollar, its longest streak of gains in almost 11 months, as declining local interest rates made it easier for companies to borrow money to invest.

The rate of interest Russian banks charge to lend money to each other dropped 24 percent today after lenders borrowed $13 billion in emergency funding yesterday and the government pledged more than $100 billion to help stabilize interest rates and the slumping stock market last week. Investors have withdrawn about $24 billion from Russia since the beginning of September, according to BNP Paribas SA.

``With local rates declining quite rapidly there's less tension in the money markets and that means less outflows,'' said Shahin Vallee, an emerging-markets currency strategist in London for BNP, France's largest bank. ``The ruble is rallying as the situation normalizes and people get more comfortable.''

The ruble rose to as high as 24.9421 to the dollar, its strongest level since Sept. 3, and was at 24.0093 by 4:22 p.m. in Moscow, from 25.0281 late yesterday. It also strengthened to 36.8720 per euro, from 36.9793 yesterday.

Those movements pushed Russia's currency 0.2 percent higher against the dollar-euro basket used by the central bank to limit the currency's fluctuations. The ruble was at 30.3475 to the basket, from 30.4062 yesterday, the level regarded as the weakest end of the ruble's trading band, Vallee said.

Bank Rossii contains the ruble within the trading corridor so as to protect the competitiveness of Russian exporters. The basket rate is calculated by multiplying the ruble's rate to the dollar by 0.55, the euro rate by 0.45, then adding them together.

Rescue Package

Interbank rates in Russia slid to 5.67 percent today, from 7.42 yesterday. They rose to 11.1 percent on Sept. 17, the highest since August 2004, as Russia's Micex and RTS stock markets halted trading amid a collapse in prices. The ruble has lost 3.5 percent to the basket since the beginning of August as Russia's war with neighboring Georgia and turmoil in global credit markets spurred investors to exit holdings.

The government rescue package is soothing investors and sparking a return to the ruble, Vallee said.

Worries about the U.S. economy and the fate of the dollar are also prompting Russian investors to convert funds from U.S. currency into rubles, said Mikhail Galkin, director of fixed- income and credit research at MDM Bank in Moscow.

``People are trying to get rid of dollars because of the weakness,'' he said. ``That's supporting ruble strength at the moment.''

Bonds Mixed

The U.S. Treasury is proposing a $700 billion rescue plan to stabilize the financial system after Lehman Brothers Holdings Inc. filed for bankruptcy and Bank of America Corp. bought Merrill Lynch & Co.

Russian government bonds were mixed, with the yield on the benchmark 30-year note rising 23 basis points to 6.99 percent, the highest since Sept. 18. The two-year note yielded 6.23 percent, down 11 points. The difference in yield between Russian and U.S. two-year debt narrowed to 415 basis points, after widening to 469 points on Sept. 16.

To contact the reporter on this story: Emma O'Brien in Moscow at eobrien6@bloomberg.net



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S. Africa Banks, Rand Pare Falls After Manuel Quits

By Vernon Wessels and Janice Kew

Sept. 23 (Bloomberg) -- South Africa's rand, bonds and stocks pared losses after Finance Minister Trevor Manuel unexpectedly quit along with nine other Cabinet ministers following President Thabo Mbeki's ouster by the ruling African National Congress.

``This is not great news for foreign investor sentiment, this wasn't expected,'' said Ferdi Heyneke, a trader at Afrifocus Securities Ltd. in Johannesburg. ``The finance minister did a great job and was highly respected. The banks are taking the hit after this. The market is going to be very volatile.''

Standard Bank Group Ltd., Africa's biggest lender, fell as much as 9 percent, its biggest decline in a decade, and was trading 2.7 percent down as of 3:10 p.m. in Johannesburg. FirstRand Ltd., the second largest South African bank, fell 3.1 percent. The rand had its worst fall in a month before paring losses as government bonds slumped.

Manuel, 52, had been finance minister since 1996, overseeing the economy's longest expansion on record and the first budget surplus. Three deputy ministers have also submitted their resignations, the presidency said in an e-mailed statement today. South African Deputy President Phumzile Mlambo-Ngcuka also quit.

Manuel was ``duty bound'' to resign because he was appointed by Mbeki and would be willing to serve the new government ``in whatever capacity,'' National Treasury spokeswoman Thoraya Pandy said in a telephone interview.

`Continuity'

``If the ANC is serious about continuity it's important Manuel serves out his term and then sits in to advise for another year or two after that,'' said Graeme Korner, a fund manager at Nedbank Ltd.'s BoE Private Clients, which oversees more than $10 billion. ``This just adds to existing uncertainty in international markets.''

The currency of Africa's largest economy last traded at 8.1510 per dollar from 7.9875 yesterday, after sliding as low as 8.2176. The yield on South Africa's benchmark 13.5 percent security due September 2015 climbed to 9.02 percent from 8.93 percent yesterday.

The FTSE/JSE Africa All Share Index fell 2 percent to 25,381.23, after earlier falling as much as 4.4 percent, as five stocks fell for every one that gained. Old Mutual Plc, the continent's biggest insurer, fell 3 percent to 12.61 rand.

Investor Concerns

``It's like the carpet has been pulled out from under our feet as Mbeki heads out the door,'' Rudi van der Merwe, a fund manager at Standard Bank's private client unit in Johannesburg, said. `` It's going to be tough until we have proper certainty.''

Manuel's exit adds to investor concerns about the future of economic policy in the country as ANC leader Jacob Zuma and his allies strengthen their influence in the party. The leadership of the ANC ordered Mbeki to quit eight days after a High Court judge suggested he pressured prosecutors to pursue corruption charges against Zuma, whom Mbeki fired in 2005.

``Manuel's resignation is the first sign that South Africa's sound economic policies may change and that is a big worry to international investors,'' said Shahin Vallee, an emerging-market currency strategist in London at BNP Paribas SA, France's largest bank. ``It no longer looks like South Africa will have a seamless political transition.''

To contact the reporter on this story: Vernon Wessels in Johannesburg at vwessels@bloomberg.netJanice Kew in Johannesburg at jkew1@bloomberg.net



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Brazil's Real Falls on Concern U.S. Bailout Plan May Stall

By Adriana Brasileiro

Sept. 23 (Bloomberg) -- Brazil's real weakened for the first time in three days on concern the $700 billion U.S. government plan to rescue financial institutions may be stalled in Congress.

The real fell 0.6 percent to 1.8130 per dollar at 8:44 a.m. New York time, from 1.8032 yesterday. Brazil's real is the biggest decliner among the 16 most-actively traded currencies this month against the dollar, having lost 10 percent.

The yield on Brazil's zero-coupon bonds due in January 2010 rose 8 basis points, or 0.08 percentage point, to 14.96 percent. The yield on the overnight futures contract for January delivery was little changed at 14.04 percent.

To contact the reporter on this story: Adriana Brasileiro in Rio de Janeiro at abrasileiro@bloomberg.net



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Canadian Dollar Rises as Annual Inflation Accelerates in August

By Michael J. Moore

Sept. 23 (Bloomberg) -- Canada's dollar rose for a fourth day, its longest winning streak in more than three months, after a government report showed inflation accelerated last month.

The Canadian dollar strengthened versus 14 of the 16 most- actively traded currencies. Futures contracts showed traders reduced bets for more rate cuts as so-called core inflation reached the highest since October 2007.

``The core was slightly higher than expected,'' said Todd Elmer, currency strategist at Citigroup Global Markets Inc. in New York. ``What that signals is that the Bank of Canada may be more patient than some anticipated, and I think that leaves some Canadian dollar upside moving forward as interest-rate expectations continue to rebound.''

Canada's dollar strengthened 0.2 percent to C$1.0343 per U.S. dollar at 8:06 a.m. in Toronto, from C$1.0358 yesterday. The currency rose during a four-day period ended June 19. One Canadian dollar buys 96.69 U.S. cents.

The Canadian dollar strengthened yesterday after commodities rose and the U.S. dollar weakened versus most of its global counterparts.

Excluding gasoline and seven other volatile items, core inflation reached 1.7 percent in August from a year earlier and 0.3 percent from July. Economists predicted it would be unchanged at 1.5 percent from a year earlier, and 0.1 percent on a monthly basis.

Bank of Canada

The Bank of Canada left its benchmark interest rate unchanged at 3 percent on Sept. 3. The rate is ``appropriately accommodative,'' while inflationary pressures ``remain elevated,'' the central bank said. The key rate was cut four times between December and April.

Bankers' acceptances futures contracts for December rose to 3.20 percent from 3.14 percent yesterday, suggesting traders in Canada have reduced bets for more rate cuts. The futures settled at a three-month lending rate averaging 16 basis points above the central bank's target since Bloomberg started tracking the data.

The yield on the two-year government bond rose 2 basis points, or 0.02 percentage point, to 2.87 percent. The price of the 2.75 percent security due in December 2010 fell 3 cents to C$99.77.

To contact the reporter on this story: Michael J. Moore in New York at Mmoore55@bloomberg.net.



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Dollar Trades Near One-Month Low as Bernanke, Paulson Testify

By Ye Xie and Daniel Kruger

Sept. 23 (Bloomberg) -- The dollar traded near a one-month low against the euro as Federal Reserve Chairman Ben S. Bernanke said in the text of his Senate testimony that failure to pass the U.S. financial bailout would threaten the economy.

``The sooner we get a plan in place -- we can worry about the details later -- the sooner we can reduce uncertainty,'' said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon, the world's largest custodial bank, with more than $23 trillion in assets under administration.

The dollar traded at $1.4767 per euro at 9:41 a.m. in New York, compared with $1.4774 yesterday, when it dropped 2.1 percent and touched $1.4866, the weakest level since Aug. 22. It was little changed at 105.49 yen, compared with 105.51 yen. The euro was at 155.80 yen, compared with 155.91.

Treasury Secretary Henry Paulson and Bernanke provided the Senate Banking Committee with details today on the $700 billion proposal to buy troubled assets from banks to shore up the financial system.

The bailout plan proposes buying devalued securities from financial institutions that economists estimate would drive U.S. government debt above 70 percent of gross domestic product and the annual budget gap to an all-time high next year. Bernanke said in a copy of his testimony that global financial markets remain under ``extraordinary'' stress.

South Africa's rand fell was the biggest loser against the dollar among the world's most-active currencies after Finance Minister Trevor Manuel resigned, fueling concern the country's new leaders will boost spending and allow record inflation to accelerate. The rand dropped 2 percent to 8.1469 against the dollar and 1.8 percent to 12.0170 versus the euro.

Crude Oil Declines

The U.S. currency rose earlier versus the euro as crude oil fell and investors speculated the greenback's biggest decline since January 2001 yesterday was too big to sustain.

Crude oil for November delivery dropped as much as 3 percent to $106.07 a barrel in electronic trading on the New York Mercantile Exchange. The October oil futures contract, which expired yesterday, had climbed by a record $16 a barrel to the highest since Aug. 21 as traders unwound positions.

The euro-dollar exchange rate and oil have had a correlation of 0.8 in the past year, according to Bloomberg calculations. A reading of 1 would mean they moved in lockstep.

Europe's currency also weakened as Royal Bank of Scotland Group Plc's composite index fell more than expected to 47 this month, from 48.2 in August. The median forecast of 21 economists surveyed by Bloomberg News was for a reading of 47.8. The index is based on a survey of purchasing managers by Markit Economics in London. A reading below 50 indicates contraction.

European `Weakness'

``Economic data in Europe remind people there's more weakness coming,'' said Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. ``It's going to provide longer-term support for the dollar, but right now all focus is on the bailout plan.''

Short-term pressure on the U.S. dollar will subside as the government's efforts to prevent a prolonged recession support the currency as the global economy slows, wrote Morgan Stanley currency strategist Stephen Jen in a note.

While U.S. interest rates may rise as the Treasury sells debt to fund its purchase of soured mortgages and other tainted loans on bank balance sheets, much of that may be recouped, mitigating the risk to the currency, Jen wrote yesterday.

``The idea that the dollar is going to be debased by this is amusing,'' said Jim O'Neill, head of global economic research at Goldman Sachs Group Inc., in an interview on Bloomberg Television. ``If this plan gets through, once more sober heads start to think about it, for the people that claim they wanted to buy the dollar around three weeks ago when it was going crazy, you're getting another chance here.''

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net



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White Sugar Drops as Recession Fears Prompt Commodity Sell-Off

By Marianne Stigset

Sept. 23 (Bloomberg) -- White sugar fell the most in a week in London as investors sold commodities on concern that the U.S. government's plan to buy $700 billion of bank assets won't prevent a global recession.

Stocks in Europe and Asia declined, led by financial companies and commodity producers, and raw materials from crude oil to gold and corn dropped on speculation economic growth will slow. Europe's manufacturing and service industries contracted for a fourth month in September as the credit-market seizure intensified and companies scaled back production.

``Everyone is a little bit frightened, there's such intense volatility,'' Jonathan Kingsman, head of sugar and ethanol research company Societe Kingsman SA, said by phone from Lausanne, Switzerland. `` The investment community currently resembles a herd of terrorized impala which could turn and dart off in any and all directions at the same time.''

White sugar for December delivery fell as much as $11.70, or 3 percent, to $383.50 a metric ton on the Liffe exchange in London, and stood at $390.80 as of 2:14 p.m. The contract gained 5 percent yesterday, the biggest jump since Feb. 8.

Raw sugar futures for March delivery slipped 0.12 cent, or 0.8 percent, to 14.14 cents a pound on ICE Futures U.S.

With the U.S. financial markets in turmoil, U.S. Treasury Secretary Henry Paulson is seeking to implement a $700 billion plan that will allow the U.S. to purchase illiquid assets such as mortgage-related securities from banks.

Rescue Plan

The rescue plan was conceived after Lehman Brothers Holdings Inc. filed for the largest bankruptcy in history, the U.S. government seized control of American International Group Inc., and Merrill Lynch & Co. rushed into an alliance with Bank of America Corp.

World demand for sugar will surpass output by 3.8 million tons next season, ending two years of surplus, according to Kingsman. ``Overall, I'm moderately positive for sugar,'' because of the deficit, he said.

More sugar will also be used to make ethanol. Brazil, the biggest ethanol exporter, will almost triple output by 2020, country's the Center-South Sugar and Ethanol Industry Association, known as Unica, said last week.

Brazil will produce 65 billion liters (17 billion gallons) in 2020, up from 22.5 billion liters in the current April to November season, according to Unica.

Among other agricultural commodities, cocoa futures for December delivery rose 4 pounds, or 0.3 percent, to 1,517 pounds ($2,811) a ton on Liffe. Robusta for January delivery dropped $16, or 0.7 percent, to $2,160 a ton on Liffe.

To contact the reporter on this story: Marianne Stigset in Oslo at mstigset@bloomberg.net


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