Hartford, Lincoln Move Closer to U.S. Aid on Takeover Approvals

By Andrew Frye

Jan. 10 (Bloomberg) -- Hartford Financial Services Group Inc. and Lincoln National Corp. moved a step closer to getting capital relief from the U.S. government after a federal regulator approved the insurers’ plans to buy lenders.

Hartford won permission for its acquisition of Florida-based Federal Trust Corp., and Lincoln was given approval to purchase Goodland, Indiana-based Newton County Loan & Savings, the Office of Thrift Supervision said on Jan. 9.

Life insurers turned to the government last year to help replace capital eroded by investment losses and slumping retirement products. The industry lost $77 billion in surplus in 2008, according to consulting firm Conning & Co., and stock declines of 50 percent or more at some of the biggest carriers made private capital increases expensive.

“The markets are effectively closed” to insurers seeking to sell equity, said Doug Meyer, an analyst with Fitch Ratings. “No one is really in a position to raise new capital externally.”

The $700 billion federal bailout, originally designed to buy soured loans and securities from banks, has since become a tool for the Treasury to bolster firms including credit-card companies and carmakers. The 11-member Standard & Poor’s Life & Health Index, which includes No. 1 MetLife Inc. and No. 2 Prudential Financial Inc., declined by half in 2008.

Life insurers are also lobbying regulators in an attempt to bolster capital. The industry’s Washington-based association, the American Council of Life Insurers, is pushing watchdogs to change reserve rules in time to apply the relaxed standards to 2008 results.

Volatile Climate

Carriers need capital flexibility “to operate in a highly volatile economic climate,” the ACLI told officers at the National Association of Insurance Commissioners in a letter dated Jan. 7.

American International Group Inc. previously got a $40 billion injection from the government, as regulators saved the insurer to limit losses at banks that did business with the firm. Analysts including Robert Haines of CreditSights Inc. have questioned the need to prop up life insurers, saying their failure wouldn’t hurt the economy as much as a collapse at AIG, which sold protection on bonds to investment banks.

U.S. life insurers, which hold more than $1 trillion in corporate debt, need Treasury aid to buy bank bonds and help inject liquidity into the nation’s credit markets, according to the ACLI.

“The point we made to Treasury -- and I think we made successfully -- is that while banks are retail credit, life insurance companies are wholesale credit,” said Gary Hughes, general counsel and executive vice president of the ACLI, in an interview in November. “If you really want to unlock credit you have to address the retail and wholesale side of it.”

Regulators

Insurers, which are typically regulated by individual U.S. states, would be overseen by a federal watchdog such as the OTS after acquiring banks. Genworth Financial Inc.’s application is still pending, said William Ruberry, a spokesman for the OTS. MetLife and Prudential are already regulated by the OTS or Federal Reserve.

North American insurers have posted more than $120 billion in writedowns and unrealized losses tied to the collapse of the subprime mortgage market since the beginning of 2007.

Lincoln has said it may win access to $3 billion by taking over Newton County, which has about $7 million of assets. Philadelphia-based Lincoln halved its dividend in October.

Hartford has said acquiring Federal Trust may entitle it to $3.4 billion in U.S. capital. Hartford, based in the Connecticut city of the same name, is seeking a second capital injection after agreeing in October to sell $2.5 billion in stock and bonds to Allianz SE, Europe’s largest insurer.

“We’re pleased that we received approval from the Office Thrift Supervision,” said Shannon Lapierre, a spokeswoman for Hartford. Lincoln’s Laurel O’Brien didn’t respond a telephone call.

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net.

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Rubin’s Career at Citigroup Ends After $20 Billion of Losses

By Josh Fineman

Jan. 10 (Bloomberg) -- Robert Rubin, the former Treasury secretary who advised Citigroup Inc. as it lost $20 billion in the subprime mortgage crisis, resigned his position as senior counselor and won’t stand for re-election to the board.

Rubin’s departure comes as Citigroup and Morgan Stanley are in talks to merge their brokerage units, said a person familiar with the matter. Rubin, 70, intends to “deepen his involvement in outside activities and organizations to which he has been strongly committed,” the New York-based bank said in a statement on Jan. 9.

Rubin, who served at the Treasury’s helm from 1995 to 1999 under President Bill Clinton, was criticized by investors for collecting more than $150 million in pay in a decade while failing to steer Citigroup away from subprime securities. The investments led to four straight quarterly losses and prompted the bank to turn to the government for a rescue package.

“His reputation has very much been damaged by what has happened at Citi,” Bert Ely, chief executive officer of Ely & Co., a bank consulting firm in Alexandria, Virginia, said in a Bloomberg TV interview. “Fair or not, Citi’s problems do reflect negatively on him.”

Citigroup, the biggest bank recipient of U.S. bailout funds, completed an agreement for a $20 billion government investment, on top of an earlier $25 billion injection and a U.S. guarantee on $306 billion in troubled assets.

“My great regret is that I and so many of us who have been involved in this industry for so long did not recognize the serious possibility of the extreme circumstances that the financial system faces today,” Rubin said in a letter to Chief Executive Officer Vikram Pandit.

Rubin’s Hiring

Rubin was hired at Citigroup in 1999 by then co-CEOs Sanford “Sandy” Weill and John Reed as chairman of the executive committee, three months after leaving the Treasury. Rubin was to be part of a “newly constituted” three-person office of the chairman, Citigroup wrote in an Oct. 26, 1999, press release announcing his appointment.

At the time, then-Credit Suisse First Boston analyst Mike Mayo, who’s now at Deutsche Bank AG, warned in a report to clients that the advantages of Rubin’s hiring included “an attractive Rolodex for gaining business, strategic and economic insights, regulatory connections and more management depth if needed.”

Disadvantages included “too many chefs in the kitchen” and “less accountability at the top,” Mayo wrote. “We prefer to see one person in control.”

Treasury

Rubin left Goldman, Sachs & Co. -- now Goldman Sachs Group Inc. -- to become a top economic adviser to Clinton in 1993. In 1994, he succeeded Lloyd Bentsen as Treasury secretary, presiding over five years of economic growth.

At Treasury, Rubin was instrumental in the dismantling of the 1933 Glass-Steagall Act, which separated commercial lending from investment banking. The repeal of the law allowed Weill, and later former CEO Charles “Chuck” Prince, to build Citigroup into its current form.

When he retired as secretary, Rubin successfully pushed for Lawrence H. Summers, his deputy, to succeed him. Two years later, in 2001, Rubin championed Summers again -- this time to become president of Harvard University.

“There is still a great deal to do, but I have great confidence that Citi will meet the long-term challenges ahead,” Rubin said in the letter.

Citigroup’s 77 percent decline in New York Stock Exchange trading in 2008 made the stock the worst performer in the 24- company KBW Bank Index for the second year in a row. The shares fell 41 cents, or 5.7 percent, to $6.75 on Jan. 9.

To contact the reporter on this story: Joshua Fineman in New York at jfineman@bloomberg.net.

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Morgan Stanley May Pay Citigroup $3 Billion in Merger

By Bradley Keoun and Christine Harper

Jan. 10 (Bloomberg) -- Morgan Stanley may pay Citigroup Inc. as much as $3 billion for control of a venture that would combine their brokerage units and overtake Bank of America Corp. as the largest financial adviser to individuals, a person with knowledge of the discussions said.

Morgan Stanley, led by Chief Executive Officer John Mack, may get 51 percent of the new company and an option to acquire the rest over three to five years, according to the person, declining to be identified because the deal isn’t complete and the talks are confidential. The transaction may be announced as soon as tomorrow, the person said.

Citigroup, which reported $20 billion of losses in the past four quarters, would get cash for its Smith Barney brokerage, while Morgan Stanley would get recurring fee revenue and more potential banking customers. The joint venture would employ about 22,000 advisers, compared with the approximately 20,000 at Bank of America after its purchase of Merrill Lynch & Co. Morgan Stanley Co-President James Gorman, 50, may oversee the company, tentatively named Morgan Stanley Smith Barney, the person said.

“There’s been a lot of pressure for Citi to monetize some of their more valuable assets and Smith Barney is certainly one,” said Michael Nix, a money manager at Greenwood Capital Associates LLC in Greenwood, South Carolina. “There’s also been a lot of pressure for Morgan Stanley to look at how they can better lever their business units.”

Bailout

Spokespeople for Morgan Stanley and Citigroup declined to comment. Both firms are based in New York.

The worst financial crisis since the 1930s has recast rivals in the financial industry as merger partners and transformed the U.S. government into one of the biggest investors in Wall Street firms, including Morgan Stanley and Citigroup.

As Lehman Brothers Holdings Inc. sank into bankruptcy in September, crippled by the frozen credit markets, Merrill, then the biggest U.S. brokerage, agreed to be taken over by Charlotte, North Carolina-based Bank of America. Morgan Stanley converted from a securities firm to a bank holding company and Citigroup, led by Chief Executive Officer Vikram Pandit, took $45 billion of U.S. bailout money.

Under the deal being negotiated now, Morgan Stanley and Citigroup would contribute their brokerage units to the joint venture, two people with knowledge of the talks said. Morgan Stanley would also pay Citigroup $2 billion to $3 billion, or 20 percent of the total value of Smith Barney, to gain majority control, one of the people said. The venture may be led by Morgan Stanley managers and a board with a majority of Morgan Stanley appointees, the person said.

Rubin Resigns

The news came as Citigroup announced that former U.S. Treasury Secretary Robert Rubin, who joined the company in 1999 and has opposed calls to break it up, plans to quit the board.

Directors have also discussed replacing Win Bischoff, Citigroup’s chairman, the Wall Street Journal reported today, citing unidentified people familiar with the talks.

The U.S. government’s taxpayer-funded cash injections into the nation’s biggest banks may cause regulators to pressure some firms to break up or restrict activities that could threaten the financial system’s stability, analysts say.

Morgan Stanley, the second-biggest U.S. securities firm before converting to a bank in September, would draw on its existing cash to pay for the brokerage merger and wouldn’t raise new money for the deal, a person familiar with the matter said.

77 Percent Drop

Morgan Stanley received $10 billion from the U.S. Treasury last year. The firm, which lost 70 percent of its market value in 2008, has been trying to attract retail deposits from brokerage customers to help reduce its reliance on debt markets for funding.

Citigroup, which is expected to post a fifth consecutive quarterly loss when it reports fourth-quarter results later this month, has received $45 billion from the U.S. Treasury and $306 billion of government guarantees for troubled mortgages and toxic assets. The bank suffered a 77 percent decline in its stock price last year.

Citigroup was formed in 1998 by the $37.4 billion merger of Travelers Group Inc., led by Sanford “Sandy” Weill, and Citicorp, led by John Reed. Travelers, which owned brokerage Smith Barney Holdings Inc., had a year earlier paid about $9 billion for Salomon Inc., the parent of Salomon Brothers Inc., to form Salomon Smith Barney Inc.

Some analysts and investors have called for the company to be broken up, saying that Citigroup is too large to manage.

Breaking Up

“Morgan Stanley has been much more efficiently run because it really wasn’t a combination of so many different things,” said Richard Lipstein, a managing director at Boyden Executive Search in New York, which specializes in financial services. “Smith Barney was having difficulty getting their arms around the cost cutting on the broker side.”

Pandit, who has been Citigroup’s CEO for more than a year, told employees on a conference call in November that he didn’t plan to dismantle the company and didn’t want to sell Smith Barney.

He and Chief Financial Officer Gary Crittenden instead said they wanted to sell businesses that weren’t crucial to the bank’s main operations. In July the company agreed to sell its German retail bank, Citibank Privatkunden AG & Co., for $6.6 billion, and last month it sold a processing business in India with about 12,000 employees for $512 million.

In a memo this week, Crittenden said the firm had sold 21 businesses over the past year and that divestitures would “again be critical in 2009.”

Dean Witter

Pandit, 51, in September replaced Sallie Krawcheck, the head of the wealth-management division, which includes Smith Barney. Taking her place was Michael Corbat, a 25-year veteran of the bank. At Morgan Stanley, Ellyn McColgan was named president of the wealth management business in December 2007, reporting to Gorman.

Smith Barney has 14,133 financial advisers in about 600 offices in the U.S., according to Citigroup’s Web site. It had about 9 million U.S. client accounts as of Nov. 3, oversaw $1.32 trillion of client assets, and generated $7.94 billion in revenue during the first nine months of 2008.

Morgan Stanley gained its retail brokerage in the company’s 1997 combination with Dean Witter, Discover & Co. The business had 8,426 financial advisers at the end of November, $546 billion in total client assets, and generated $6.3 billion in revenue during 2008 when the gain from an asset sale was excluded, according to a company report last month.

To contact the reporters on this story: Christine Harper in New York at charper@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net.

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Irish Financial Regulator to Retire After Anglo Irish Inquiry

By Ian Guider

Jan. 10 (Bloomberg) -- Ireland’s financial regulator said Chief Executive Officer Patrick Neary will retire as an inquiry showed the agency failed to take “appropriate and timely” action in relation to directors’ loans at Anglo Irish Bank Corp.

Mary O’Dea, the agency’s consumer director, was chosen to be acting head of the watchdog, the Dublin-based Irish Financial Services Regulatory Authority said in a statement late yesterday.

The review of the agency’s “regulatory approach” follows the resignation of Sean Fitzpatrick as Anglo Irish chairman in December after he failed to fully disclose loans from the bank over an eight-year period.

Staff at the agency knew that the loans hadn’t been disclosed to shareholders, the watchdog said after an inquiry. Still, the matter wasn’t pursued because of “pressure on officials from the unfolding of liquidity problems in financial markets and in individual institutions,” the agency said in the statement.

“I was not advised of any such matters in early 2008” and there was “no oral, written or e-mail escalation of these issues to me” until the Finance Ministry raised the issue last month, Neary said in a separate statement. “In taking my decision to retire now, I am conscious of the need to uphold the good standing of the regulator and public confidence in it.”

Ireland’s government last month said it would invest at least 5.5 billion euros ($7.4 billion) in three banks, including Anglo Irish, as part of a rescue package for an industry that was battered by the global financial crisis and mounting bad debt provisions.

‘Low Ebb’

“This resignation may be the first tangible signal that the people in Irish banking that brought our banking system to this low ebb will not and cannot be the people that bring us out of this mess,” said Richard Bruton, finance spokesman for Fine Gael, the country’s biggest opposition political party.

The committee investigating how the regulator handled the issue of the loans at Anglo Irish recommended that it more closely monitor directors’ borrowings and review its internal communications.

Finance Minister Brian Lenihan said in a statement he would “consider” the committee’s report.

To contact the reporter on this story: Ian Guider in Dublin at iguider@bloomberg.net:

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Pound Posts Record Weekly Gain Against Euro as BOE Cuts Rates

By Matthew Brown

Jan. 10 (Bloomberg) -- The pound posted its biggest weekly gain since the common currency’s debut in 1999, as the Bank of England slowed the pace of interest-rate cuts.

The British currency also had its largest five-day advance versus the dollar since 1989 even as the Office for National Statistics said factories raised prices at the slowest annual pace in a year and manufacturing extended its worst slump in almost three decades. U.K. policy makers cut the benchmark rate two days ago by 50 basis points to 1.5 percent, the smallest reduction of the past three.

“The correction in euro-pound has clearly been the main story of the week,” Steven Pearson, a foreign-exchange strategist in London at Merrill Lynch & Co., wrote in a research note. “While initially understandable in the context of an overshoot relative to metrics like short-term rate spreads, we would now caution against looking for too much in the way of further downward progress.”

The pound rose 1.3 percent to 88.87 pence per euro late yesterday in London, for a weekly gain of 7.7 percent. The U.K. currency strengthened 4.3 percent against the dollar in the five days to $1.5167, its largest advance since July 1989.

The week’s gains followed a record 23 percent plunge against the euro last year, which brought the pound close to parity with the European currency. Sterling weakened to an all-time low of 98.03 pence per euro on Dec. 30.

‘Further Traction’

“The pound will gain further traction against the euro and dollar as monetary and fiscal authorities seek to preserve international investor interest in sterling-denominated assets,” said Stephen Gallo, head of market analysis in London at Schneider Foreign Exchange, which counts FTSE-listed companies and wealthy individuals among its clients. “Sterling’s recent declines prompted the Bank of England to take a much more cautious approach to cutting rates this month.”

Bundesbank President Axel Weber said Jan. 8 in a speech in Cologne that the German economy, the euro region’s largest, may contract this year by more than the European Central Bank has forecast. The ECB will lower its main rate by 0.5 percentage point to 2 percent on Jan. 15, according to the median forecast of 58 economists surveyed by Bloomberg.

“The euro fundamentals are looking increasingly shaky,” Paul Robson, a currency strategist in London at Royal Bank of Scotland Group Plc, wrote in a research note that recommended selling the euro against the pound. “It’s clearer than ever the ECB has seriously misjudged the dire situation the region now finds itself in.”

Fibonacci Chart

The euro may fall to 88 British pence should the currency close below so-called support at 89.97 pence, based on trading patterns, said George Davis, chief technical analyst in Toronto at RBC Capital Markets.

The support level represents a 38.2 percent retracement of the euro’s rise to a record high of 98.03 pence on Dec. 30 from the Oct. 20 low of 76.94 pence, according to a series of numbers known as the Fibonacci sequence, he wrote in a research note yesterday. Support is where buy orders may be clustered.

U.K. government bonds rose, pushing the yield on the 10-year gilt down nine basis points to 3.14 percent. The 5 percent security due March 2018 advanced 0.71, or 7.1 pounds per 1,000- pound ($1,516) face amount, to 114.73. The yield on the note rose 10 basis points in the week. The two-year gilt yield declined 20 basis points in the five days to 1.58 percent.

To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net

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U.K. Economy Shrank Most Since 1980, Niesr Data Show

By Svenja O’Donnell

Jan. 10 (Bloomberg) -- The U.K. economy shrank at the fastest pace in almost three decades during the fourth quarter as the recession deepened, the National Institute for Economic and Social Research said.

Gross domestic product fell 1.5 percent in the three months through December, compared with a drop of 0.6 percent in the third quarter, the London-based institute, whose clients include the Treasury and the central bank, estimated in a report today. That would be the worst quarterly contraction since 1980, when Britain was in the grips of a steel workers’ strike.

“The rate of recession increased sharply in the autumn of last year,” Niesr said in a statement. “Since 1955, when quarterly figures were first produced, there have been only five quarters in which output has fallen more.”

Manufacturing extended its worst slump since 1980 in November, according to data released yesterday and factored into Niesr’s estimate. The Bank of England this week cut the benchmark interest rate to 1.5 percent, the lowest since its creation in 1694, in a bid to stem the recession.

Banks are rationing loans, starving households and businesses of credit, exacerbating the property market slump and driving up unemployment. A survey by the U.K. central bank released this month showed that financial institutions plan to constrict credit further, even after the government unveiled a 50 billion-pound ($75 billion) rescue plan last year.

Britain entered a recession in 1980 that was to last five quarters, prompting unemployment to surge. Prime Minister Margaret Thatcher responded to criticisms of a policy U-turn on the economy and her handling of the labor unions by telling the ruling Conservative Party conference in October that year that “the lady’s not for turning.”

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net.

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Dubai Aims to Raise 2009 Public-Sector Spending 42%

By Arif Sharif and Glen Carey

Jan. 10 (Bloomberg) -- Dubai, home to the world’s biggest man-made islands and tallest building, will boost government spending 42 percent in 2009 to stoke the economy amid the deepening financial crisis.

The second-biggest of the seven states that make up the United Arab Emirates will also run up a budget deficit of 4.2 billion dirhams ($1.1 billion), its first ever, to buoy an economy forecast to grow by four to six percent this year, Nasser Bin Hassan al-Shaikh, director general of Dubai’s Department of Finance, told a news conference today. Infrastructure investment in 2009 will rise 33 percent, he said.

The spending “is enough to keep our economy growing,” although “inflation is going to drop” as expansion slows, al- Shaikh said.

Dubai’s economy surged at a compound annual rate of 13 percent between 2000 and 2006, supported by record-high oil prices, low interest rates and a real-estate boom helped by laws allowing foreigners to own property. Home prices, which jumped fourfold in the last five years, are now falling as the worldwide economy suffers the worst crisis since the 1930s Great Depression.

Spending Rises

Public spending by Dubai’s rulers will rise 42 percent to an estimated 37.7 billion dirhams this year, while revenue will increase 26 percent to 33.5 billion dirhams, the government said in a statement today. The deficit, estimated at 1.3 percent of 2007 gross domestic product, will be funded by borrowing or reserves.

About 22 percent of the government budget will be allocated to social services, 19 percent to the judiciary and the security department, 45 percent to the roads and transport authority and 14 percent to economic services, including tourism, civil aviation, and the oil sector, the statement said. Salaries for the government’s 70,000 employees will account for 30 percent of spending.

Overall public sector spending, including the budgets of wholly-owned government companies like Emirates Airlines and Dubai Aluminum, will increase 11 percent to 135 billion dirhams, while revenue will rise 4 percent to 138 billion dirhams, the government said.

Dubai’s Department of Finance is “keeping an eye on the capital markets” after raising 6.5 billion dirhams from bond sales last year, al-Shaikh said. The government can raise up to 15 billion dirhams under an existing euro medium-term note program. The emirate will also seek a credit rating mid-year, for which it’s being advised by JPMorgan Chase & Co. and UBS AG.

Dubai is redrawing a strategic plan that assumes annual economic growth of 11 percent until 2015, as “this is not achievable in the current environment,” al-Shaikh said. He estimated U.A.E.’s 2007 GDP at 301 billion dirhams.

To contact the reporter on this story: Arif Sharif in Dubai at asharif2@bloomberg.netGlen Carey in Dubai at gcarey8@bloomberg.net



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Egyptian Inflation Decline Boosts Chance of Rate Cut

By Mahmoud Kassem and Abdel Latif Wahba

Jan. 10 (Bloomberg) -- Egypt’s inflation eased for a fourth month following a drop in global commodity prices, making it more likely the central bank will cut record high interest rates.

The countrywide inflation rate in the world’s largest wheat importer fell to 18.7 percent in December from 20.9 percent the previous month, the Cairo-based Central Agency for Public Mobilization and Statistics said in a faxed statement today. The rate was the lowest since July when the agency began to publish countrywide inflation rates on a monthly basis.

Prices fell 1.6 percent in the month, while urban inflation dropped to 18.3 percent, the lowest level since April, from 20.3 percent in November. Food and beverage prices declined 3.4 percent compared with November. Grain prices fell 3.2 percent, while vegetables declined 14.8 percent in December from the previous month, the agency said.

“We expect the decline in inflation to gain momentum in the coming months,” said Reham El-Desoki, a Cairo-based economist at Beltone Financial. “A clear decline in domestic inflationary pressures could result in a 50-100 basis point cut” in February. A basis point is 0.01 percentage point.

The central bank kept its benchmark rate at a record 11.5 percent for a third month on Dec. 26 as the inflation rate remained at more than double the top of the government’s target range.

Central Bank Governor Farouk Al-Okdah said Dec. 21 that Egypt may start cutting interest rates as inflation declines. The bank’s monetary policy committee next meets Feb. 12.

Wheat prices dropped 32 percent in the past 12 months.

To contact the reporter on this story: Mahmoud Kassem in Cairo at mkassem1@bloomberg.net

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Satyam’s Raju Faces Charges as Government Reconstitutes Board

By Harichandan Arakali and M.C. Govardhana Rangan

Jan. 10 (Bloomberg) -- Satyam Computer Services Ltd. founder Ramalinga Raju and his brother Rama faced charges of criminal conspiracy and breach of trust in an alleged $1 billion fraud as the government assembled a new company board.

C.B. Bhave, chairman of the Securities & Exchange Board of India, met Corporate Affairs Minister Prem Chand Gupta in New Delhi following the arrest of the brothers late yesterday. The government sacked the board members of the company, India’s fourth-largest software exporter, for failing to deliver and said a reconstituted one would meet in seven days.

“A company without a board is like a headless chicken,” said Kiran Karnik, former president of the National Association of Software and Service Companies, a lobby group. “Satyam needs people with credibility, integrity to retain customers and employees. You also need legal protection for those who come on board from future lawsuits.”

A new management may help Hyderabad-based Satyam to retain customers, including Telstra Corp., and safeguard the jobs of the 53,000 people it employs. Satyam Computer was sued by investors in at least three class-action lawsuits in federal court in the U.S. following the plunge in its shares after Raju said he falsified accounts “for several years” and quit.

“The fact that the audited accounts don’t represent true and fair picture raises an issue that is bigger than the Satyam scandal,” said M. Damodaran, former chairman of the Securities and Exchange Board of India. “If some guy has taken liberties with the system, the person or persons has to be identified and punished.”

Judicial Custody

Raju, 54, and his younger brother were produced before a Hyderabad city magistrate who remanded them to judicial custody until Jan. 23, his lawyer S. Bharat Kumar said today.

The offences carry a maximum sentence of 10 years and the brothers can’t apply for bail, Inspector General V.S.K. Kaumudi said in the southern city.

The scandal, whose scope is being likened to the 2001 bankruptcy of Enron Corp., has shaken confidence in Indian companies and accounting standards.

Houston-based Enron’s 2001 bankruptcy wiped out more than 5,000 jobs and $1 billion in employee retirement funds. The Enron scandal triggered tougher U.S. accounting rules and the creation of a board to oversee auditing firms that review the financial statements of publicly traded companies.

“The developments so far indicate that the current board of Satyam has failed to do what it was supposed to do,” Gupta told reporters in New Delhi yesterday. “The government is committed to punish everyone found guilty, including the auditors.”

Officials have seized documents and the nation’s accounting body is examining auditor PricewaterhouseCoopers LLC’s local unit.

Audit Evidence

Satyam canceled a board meeting scheduled for today after the board was replaced, it said in an e-mailed statement. Ten directors nominated by the government will meet next week to appoint managers at Satyam, Gupta said.

Interim Chief Executive Officer Ram Mynampati said Jan. 8 he was unaware of the false accounting that may force Satyam to restate earnings as he relied on audited statements. The local unit of PwC said in a statement the same day that Satyam’s accounts were supported by “appropriate audit evidence.”

The scandal eroded $2.2 billion in shareholder wealth, drawing calls from executives and auditors to accelerate the investigation. After chairman Raju claimed Jan. 7 he’d padded Satyam’s books, the company’s auditors and interim management had yet to confirm any irregularities.

Satyam fell 41 percent to 23.75 rupees yesterday. The Bombay Stock Exchange removed Satyam from its benchmark Sensitive Index, a day after the National Stock Exchange dropped the stock from the Nifty.

Investor Confidence

The ADRs, each of which represents two ordinary Satyam shares, fell $8.42, or 90 percent, to 93 cents before the opening of the New York Stock Exchange on Jan. 7, when trading was halted.

The announcement by the government on reconstituting the Satyam board will also reinforce stakeholder confidence, the National Association of Software and Service Companies said in an e-mailed statement.

Lazard Asset Management LLC increased its stake in Satyam on Jan. 7 to 5.3 percent from 4.79 percent, while Aberdeen Asset Managers Ltd. and Fidelity Management & Research Co. sold their holdings. Lazard is holding shares on behalf of clients and the acquisition of the shares was not for obtaining control of the company, it said in a filing to the Bombay Stock Exchange today.

India’s stock market regulator plans to review working papers of auditors at companies forming the nation’s main stock indexes, the regulator said in a statement in Mumbai. The Securities and Exchange Board’s Committee on Disclosures and Accounting Standards will hold a peer review of the auditor’s working papers on quarterly and full-year financial statements.

Turning Point

“We believe the Satyam incident marks a turning point in investors’ attitude toward corporate governance,” Suresh Mahadevan, an analyst at UBS AG, said. “In future, companies perceived poor on corporate governance or following aggressive accounting practices will trade at larger discounts compared to their peer group.”

Satyam’s Chief Financial Officer Srinivas Vadlamani is being questioned by the police, Inspector General V.S.K. Kaumudi said. The police is in touch with the stock market regulator and the Registrar of Companies and is helping with their investigations, he said.

Government officials have seized Satyam’s documents and a team from the ministry of corporate affairs has started inspecting eight group companies, Gupta said.

“It’s the prime concern of the government to ensure the operations of the company continue uninterrupted,” Gupta said.

Satyam has offices from the U.S. to the U.K., Brazil and Australia. The company writes software and manages computer systems for clients including ArcelorMittal, the world’s largest steelmaker, and Nissan Motor Co., Japan’s third-biggest carmaker.

Canvas Sheets

Telstra, Australia’s largest telephone company, said Jan. 8 that Satyam’s disclosure will be a factor when it cuts two out of its four major information technology suppliers this year.

Outside the group’s corporate headquarters, four canvas sheets about 6 feet by 8 feet were draped with employees’ signatures, handprints and messages.

“Satyam will come back,” one message reads. “Save Satyam, save Raju,” says another. A third, “Buy Satyam Stock.” On each of the red, green, yellow and blue-painted canvases is printed “The Spirit of Satyam,” like a watermark.

“This current management needs to go so that the 50,000 jobs are saved and client commitments are kept,” Richard Rekhy, chief operating officer of KPMG in India, said. “It is the image of India and corporate India at stake.”

The fall of Raju, named Ernst & Young Entrepreneur of the Year in 2007, began three weeks ago when Satyam proposed paying $1.6 billion for Maytas Properties Ltd. and Maytas Infra Ltd., both tied to his family. The plan was scrapped 12 hours later, after investors called it a “woeful misuse of cash.” Raju said the sale was designed to plug the hole in Satyam’s balance sheet.

“To my non-auditor mind, it is reasonably clear that something like this could not have been hidden from audit for so long,” former regulator Damodaran said.

To contact the reporters on this story: Harichandan Arakali in Bangalore at harakali@bloomberg.net; M.C. Govardhana Rangan in Mumbai at grangan@bloomberg.net.

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European Notes Rise for Fourth Week on Signs Slump Is Deepening

By Kim-Mai Cutler

Jan. 10 (Bloomberg) -- European government notes rose for a fourth straight week on signs the recession in the euro region is worsening, giving policy makers more scope to lower interest rates.

The gains pushed the two-year yield to its lowest level in at least 18 years as a government report yesterday showed German industrial production dropped for a third month in November. Bundesbank President Axel Weber signaled Germany’s economy may contract by more than the central bank previously forecast, spurring investors to buy the safest of assets.

“The risk appetite we saw at the beginning of the year is starting to fade,” said Christoph Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt. “Yields are near historic lows.”

The yield on the German two-year note fell eight basis points to 1.51 percent by 4 p.m. in London yesterday, bringing its decline this past week to 22 basis points. It dropped to 1.498 percent, the lowest since at least September 1990. The price of the 2.25 percent security due December 2010 rose 0.15, or 1.5 euros per 1,000-euro ($1,357) face amount, to 101.38.

The 10-year yield declined 11 basis points yesterday to 3.02 percent, leaving it six basis points higher over the past week. Yields move inversely to bond prices.

Bonds stayed higher after a U.S. government report yesterday showed the economy lost more than half a million jobs last month. The Labor Department said payrolls shrank by 524,000 jobs in December, while the unemployment rate rose to 7.2 percent, from 6.8 percent in November.

Yield Spread Widens

Demand for fixed income was also fueled as equity markets in the region slipped for a third time yesterday.

The spread, or difference in yield, between two- and 10-year notes widened to 1.52 percentage points, the most since September 2004, on expectations the European Central Bank will lower borrowing costs next week. The median of 58 economists surveyed by Bloomberg predict the ECB will cut its benchmark rate by half a percentage point to 2 percent on Jan. 15.

“The final quarter of 2008 may have been worse than we expected,” Weber said in the text of a speech delivered in Cologne on Jan. 8. “This would weigh on our growth projections for the current year.”

European retail sales fell 1.5 percent in November from a year-earlier, the European Union’s statistics office in Luxembourg said yesterday.

Ten-year bunds fell in the week on concern debt is flooding the market as governments look to fund bank bailouts and economic stimulus packages. Euro-region governments will issue about 20 billion euros of bonds every week during the first quarter, from a weekly average of 10-to-15 billion over the past two years, according to Societe Generale SA.

German bonds have lost investors 0.7 percent this year, compared with losses of 1.6 percent for gilts and 1.1 percent for U.S. Treasuries, according to Merrill Lynch & Co.’s German Federal Governments, U.K. Gilts and U.S. Treasury Master indexes.

To contact the reporter on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net

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Proton Targets India, Middle East to Grow, Business Times Says

By Dinakar Sethuraman

Jan. 10 (Bloomberg) -- Proton Holdings Bhd. may sell more cars overseas and is targeting India, the Middle East and Africa for expansion, the Business Times said, citing company Chairman Nadzmi Mohd Salleh.

The domestic market is not adequate for expansion as the national carmaker requires larger volumes to reduce costs and make better margins, the Malaysian daily said. Proton will be under pressure this year after foreign carmakers offer promotions to sell their stocks, it said.

The company supplies cars to 24 markets including the U.K., Iran, Australia, New Zealand, Indonesia, Singapore, Thailand, Egypt and China, the report said. The company, which sells about 150,000 cars a year in Malaysia, sells fewer than 50,000 overseas.

Malaysian vehicle sales will drop this year as consumer spending falls amid a global recession and carmakers release fewer mass-market models, Frost & Sullivan said on Jan. 6.

To contact the reporter on this story: Dinakar Sethuraman in Singapore at dinakar@bloomberg.net

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U.K. Economy Shrank Most Since 1980, Niesr Data Show

By Svenja O’Donnell

Jan. 10 (Bloomberg) -- The U.K. economy shrank at the fastest pace in almost three decades during the fourth quarter as the recession deepened, the National Institute for Economic and Social Research said.

Gross domestic product fell 1.5 percent in the three months through December, compared with a drop of 0.6 percent in the third quarter, the London-based institute, whose clients include the Treasury and the central bank, estimated in a report today. That would be the worst quarterly contraction since 1980, when Britain was in the grips of a steel workers’ strike.

“The rate of recession increased sharply in the autumn of last year,” Niesr said in a statement. “Since 1955, when quarterly figures were first produced, there have been only five quarters in which output has fallen more.”

Manufacturing extended its worst slump since 1980 in November, according to data released yesterday and factored into Niesr’s estimate. The Bank of England this week cut the benchmark interest rate to 1.5 percent, the lowest since its creation in 1694, in a bid to stem the recession.

Banks are rationing loans, starving households and businesses of credit, exacerbating the property market slump and driving up unemployment. A survey by the U.K. central bank released this month showed that financial institutions plan to constrict credit further, even after the government unveiled a 50 billion-pound ($75 billion) rescue plan last year.

Britain entered a recession in 1980 that was to last five quarters, prompting unemployment to surge. Prime Minister Margaret Thatcher responded to criticisms of a policy U-turn on the economy and her handling of the labor unions by telling the ruling Conservative Party conference in October that year that “the lady’s not for turning.”

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net.

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European Stocks Rise for Second Week; EADS, Volkswagen Gain

By Daniela Silberstein

Jan. 10 (Bloomberg) -- European stocks climbed for a second week as speculation that government stimulus packages and interest-rate cuts will revive the global economy overshadowed concern earnings will deteriorate.

European Aeronautic, Defence & Space Co. led gains among companies that get more than 20 percent of sales from North America. Volkswagen AG jumped 9.6 percent after Porsche SE boosted its stake in Europe’s largest carmaker. Next Plc, the U.K.’s second-biggest clothes retailer, advanced 8 percent after maintaining its full-year profit forecast.

The Dow Jones Stoxx 600 Index added 1.6 percent to 207.82, completing the first back-to-back weekly gains since July. The gauge has rebounded 14 percent since Nov. 21 on speculation U.S. President-elect Barack Obama will revive the world’s biggest economy with $775 billion of tax cuts and spending, while policy makers lower interest rates to combat the biggest financial crisis since the Great Depression.

“It’s a classic January rally,” said Jacques Porta, a fund manager at Ofi Patrimoine in Paris, which oversees about $615 million. “There’s a lot of cash in the market. Risk aversion has diminished. We’ve had a big confidence crisis. The new president will restore confidence.”

The Stoxx 600 slumped 46 percent last year, the worst annual performance on record, as credit losses and writedowns at financial firms topped $1 trillion and the U.S., Europe and Japan entered simultaneous recessions.

U.S. Unemployment

The measure pared its weekly advance after a report showed U.S. businesses cut 524,000 jobs last month, making last year’s collapse in employment the worst since the end of World War II, while the unemployment rate rose to 7.2 percent, a 15-year high.

National benchmark indexes slipped in nine of the 18 western European markets this week. Germany’s DAX fell 3.8 percent as Commerzbank AG slid 31 percent. France’s CAC 40 lost 1.5 percent, while the U.K.’s FTSE 100 dropped 2.5 percent.

The global recession prompted the Bank of England to reduce its key interest rate to 1.5 percent on Jan. 8, the lowest since the bank was founded in 1694.

Confidence in the economic outlook for Europe fell to the lowest on record and unemployment rose to a two-year high, adding to pressure on the European Central Bank to extend a series of interest-rate cuts that already has seen its key rate fall by 1.75 percentage points to 2.5 percent since October.

EADS, which owns planemaker Airbus SAS, rallied 8.4 percent. SAP AG increased 5.9 percent. The world’s largest maker of business-management software generates about a third of its sales in the Americas.

Volkswagen, Peugeot

Volkswagen surged 9.6 percent. Porsche, which raised its holding to more than 50 percent, said reaching a target 75 percent stake this year will take time as the company pledged to keep enough stock on the market for other investors to trade.

PSA Peugeot Citroen climbed 11 percent, while Renault SA gained 4 percent. The French government is considering further assistance to the country’s biggest carmakers which could take the form of state-backed loans, French daily Les Echos reported.

Next climbed 8 percent. The U.K. retailer said its full-year profit forecast remains “in line” with analysts’ estimates after resisting price cuts before the Christmas holiday and clearing inventory from its stores faster than last year.

Debenhams Plc, the second-largest U.K. department-store company, soared 45 percent as a sales drop slowed on demand for exclusive fashions and debt declined. Marks & Spencer Group Plc gained 11 percent. Britain’s biggest fashion retailer posted a 7.1 percent decline in same-store sales for the fiscal third quarter, less than the 8.3 percent drop forecast by analysts surveyed by Bloomberg.

Commerzbank Slumps

Commerzbank was the worst performer in the Stoxx 600 this week, tumbling 31 percent. Germany’s second-largest lender said it will receive additional capital of 10 billion euros ($13.5 billion) from the country’s Soffin stabilization fund, while the government will take a 25 percent stake in the company.

The injection comes as Commerzbank is nearing the completion of its takeover of Dresdner Bank from Allianz SE.

Deutsche Postbank AG retreated 12 percent. Germany’s biggest consumer bank by clients said it will post a pretax loss for 2008 after capital market deteriorated and it suffered losses from selling stock investments.

Analysts estimate earnings at companies in the Stoxx 600 dropped 16 percent on average last year and will decline 1.2 percent in 2009, according to data compiled by Bloomberg.

Metro AG, Germany’s largest retailer, slid 11 percent. Merrill Lynch & Co. downgraded the stock to “underperform” from “buy,” saying profit will fall by about 4 percent in 2009 as “deflationary pressure” increases.

Carrefour SA, Europe’s biggest retailer, retreated 5.9 percent after Wal-Mart Stores Inc., the world’s largest, said fourth-quarter profit will miss its forecast.

To contact the reporter on this story: Daniela Silberstein in Zurich at dsilberstei2@bloomberg.net.

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London's Luxury Home Values Drop in 2008 by the Most on Record

By Simon Packard

Jan. 10 (Bloomberg) -- Luxury home values in central London fell in 2008 by the most in more than three decades as the worst banking crisis since World War I decimated demand from the city's financial professionals.

The average value of a house or apartment in London's nine most expensive neighborhoods fell almost 17 percent last year, according to Knight Frank LLP, which tracks prices dating back to 1976. Values declined 2.2 percent in December, the ninth consecutive monthly drop in an index that mostly covers homes costing at least 1 million pounds ($1.5 million).

Demand for residential property in the U.K. capital has waned amid a worldwide credit crisis that the research firm Oxford Economics estimates could cost London 60,000 jobs in banking, finance and insurance by the end of 2010.

``The market's fortunes will be driven by economic conditions -- especially those in the City,'' said Liam Bailey, Knight Frank's head of residential research, referring to London's main financial district.

Worst hit so far have been homes worth up to 2.5 million pounds, a segment of the market where values fell 22 percent last year. Homes in that tier are favored by financial professionals who have been hit with job losses and ``fears of further job cuts in 2009,'' Bailey said.

London slipped behind Monaco as the world's most expensive market for prime residential real estate last year.

The number of houses and apartments real estate brokers at Knight Frank sold for at least 1 million pounds last year fell 49 percent from 2007's record to 2,746, a level likely to be repeated again this year, the company estimates.

The fall in values, which began in April 2008, will probably reduce prices by 30 percent by the time the real estate slump ends in the second half of this year.

London-based Knight Frank compiles its monthly index from appraised values of properties in the Mayfair, St John's Wood, Regent's Park, Kensington, Notting Hill, Chelsea, Knightsbridge, Belgravia and the South Bank neighborhoods of London.

To contact the reporter on this story: Simon Packard in London at packard@bloomberg.net.

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Compal Cuts Target for Notebook Computer Shipments on Recession

By Tim Culpan

Jan. 10 (Bloomberg) -- Compal Electronics Inc., the world’s second-largest maker of notebook computers, cut its shipment forecast for this year as the global economic recession continues to dampen demand.

Compal, which supplies Hewlett-Packard Co. and Acer Inc., expects to ship between 32 million and 35 million laptops this year, down from its earlier estimate of at least 35 million, Gary Lu, chief financial officer of the Taipei-based maker, said today.

By Tim Culpan

Jan. 10 (Bloomberg) -- Compal Electronics Inc., the world’s second-largest maker of notebook computers, cut its shipment forecast for this year as the global economic recession continues to dampen demand.

Compal, which supplies Hewlett-Packard Co. and Acer Inc., expects to ship between 32 million and 35 million laptops this year, down from its earlier estimate of at least 35 million, Gary Lu, chief financial officer of the Taipei-based maker, said today.

Notebook shipments totaled 25.6 million in 2008, Compal reported today, 20 percent fewer than the target it set at the start of the year.

Compal expects to supply 3.4 million to 3.8 million televisions this year, Lu said. It shipped 1.9 million flat- screen televisions last year, mostly 32-inch and 37-inch models on contract for Toshiba Corp. and Hitachi Ltd., as well as 1.9 million computer monitors, Chang Chih-ming, a spokesman for the company, said today.

To contact the reporter on this story: Tim Culpan in Taipei at tculpan1@bloomberg.net.

Notebook shipments totaled 25.6 million in 2008, Compal reported today, 20 percent fewer than the target it set at the start of the year.

Compal expects to supply 3.4 million to 3.8 million televisions this year, Lu said. It shipped 1.9 million flat- screen televisions last year, mostly 32-inch and 37-inch models on contract for Toshiba Corp. and Hitachi Ltd., as well as 1.9 million computer monitors, Chang Chih-ming, a spokesman for the company, said today.

To contact the reporter on this story: Tim Culpan in Taipei at tculpan1@bloomberg.net.

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Acer Climbs as ‘Netbook’ Model Helps Keep Margin Firm

By Chinmei Sung

Jan. 10 (Bloomberg) -- Acer Inc., the world’s third-biggest maker of personal computers, climbed from a four-year low in Taipei trading after saying its operating margin may have risen in the final three months of 2008.

Acer gained 2.5 percent to NT$40.70 on the Taiwan Stock Exchange, rising from its lowest since September 2004 as the island’s benchmark Taiex index dropped 0.8 percent.

The company may have benefited from its July introduction of the Aspire One computer, an ultra-compact model that retails for about $400. Global shipments of so-called “netbooks” will probably increase by 11.3 percent this year to about 138 million units from 124 million in 2008, Taipei-based researcher Market Intelligence Center predicted.

“This highlights Acer’s success in capturing consumer needs by offering low-cost laptop computers in the second half when the global economy took a drastic turn in direction,” said Eric Yao, who owns Acer shares in the $152 million funds he helps manage at Truswell Securities Investment Trust Co. in Taipei.

Fourth-quarter operating margin may have bettered or equaled its 2.9 percent third-quarter result, Taipei-based Acer said in a statement after the market closed yesterday.

To contact the reporter on this story: Chinmei Sung in Taipei at csung4@bloomberg.net.

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Mega Financial Fourth-Quarter Profit Falls on Investment Slump

By Janet Ong

Jan. 10 (Bloomberg) -- Mega Financial Holding Co., Taiwan’s third-largest financial company by market capitalization, had a 19 percent drop in fourth-quarter profit as the value of its investments slumped.

Net income at the Taipei-based company fell to NT$3.08 billion ($93 million), from NT$3.8 billion a year earlier. The figure was derived by subtracting nine-month profit from full- year unaudited figures the company released in a statement today.

Mega International Commercial Bank Co., its banking unit, on Dec. 1 booked losses of $6.5 million and 9.56 million euros ($12 million) on the value of overseas investments. The bank in October said it had NT$9 billion of investments linked to Lehman Brothers Holdings Inc., Merrill Lynch & Co. and American International Group Inc. and $47.3 million linked to Iceland- related financial products.

Mega Financial reported that its full-year profit fell 96 percent to NT$711 million, or NT$0.06 a share, from NT$17.1 billion, or NT$1.55 a year earlier.

To contact the reporter on this story: Janet Ong in Taipei at jong3@bloomberg.net.

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Japan Government Bonds Complete Weekly Fall on Surge in Sales

By Theresa Barraclough and Yasuhiko Seki

Jan. 10 (Bloomberg) -- Japanese 10-year bonds had the first weekly decline in a month as the government stepped up debt sales to help fund a plan to revive Japan’s economy.

Yields on the securities reached a three-week high as supply concerns hurt demand at an auction of the debt this week. The Ministry of Finance said Dec. 20 it will sell 113.3 trillion yen ($1.24 trillion) of bonds in the year starting April 1, up from a revised 106.3 trillion yen this fiscal year.

“There is a lot of concern surrounding the supply and demand balance given that issuance will increase,” said Tomohiko Katsu, deputy general manager of the capital market division at Shinsei Bank Ltd. in Tokyo. “In the near-term yields will be under rising pressure as investors adjust to the rising supply.”

The yield on the benchmark 10-year bond due December 2018 increased 12.5 basis points this week to 1.29 percent in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The yield on Jan. 8 reached 1.325 percent, the highest since Dec. 17. A basis point is 0.01 percentage point.

Five-year yields rose 5.5 basis points this week to 0.735 percent. Ten-year bond futures for March delivery lost 1.20 this week to 138.92 at the Tokyo Stock Exchange.

The Jan. 8 sale of 1.9 trillion yen in 10-year securities drew bids worth 2.33 times the amount offered, compared with a so-called bid-to-cover ratio of 2.9 times at the prior auction in December.

Prime Minister Taro Aso announced a stimulus package of 10 trillion yen on Dec. 12, doubling a 5 trillion yen plan he announced two months earlier.

Deepening Recession

The decline in bonds this week was limited on speculation three-week high yields attracted investors after President-elect Barack Obama warned the U.S. economy risks sinking deeper into a crisis without more government spending.

The debt ended a four-day slide yesterday as Obama’s comments added to concerns that weakening U.S. demand for Japanese goods will prolong the Asian nation’s first recession since 2001. A government report next week is estimated by economists to show Japan’s machinery orders declined for a second month in November.

“Given the state of the global economy and prospects of monetary policies, there are no reasons to believe that the slump in bonds will be sustained,” said Kazuto Uchida, chief economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo. “The 10-year government bond yield may fall toward 1 percent in the first half of this year.”

Japan’s factory orders, an indicator of capital spending in the next three to six months, declined 8 percent from October, when they slid 4.4 percent, according to the median estimate of economists surveyed by Bloomberg News. The report is due Jan. 15.

Obama highlighted the need for more government spending and a cut in tax rates to overcome the recession as he urged Congress to act quickly on a stimulus package that may total $775 billion.

To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net; Yasuhiko Seki in Tokyo at Yseki5@bloomberg.net.

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Satyam’s Raju Arrested, Board Sacked, in Fraud Probe

By Harichandan Arakali and Kartik Goyal

Jan. 10 (Bloomberg) -- Satyam Computer Services Ltd. chairman Ramalinga Raju and his brother Rama were arrested and the remaining directors of the software exporter sacked as India started investigating an alleged $1 billion fraud.

The brothers were detained on charges including forgery, breach of trust and criminal conspiracy, Inspector General V.S.K. Kaumudi told reporters in the southern city of Hyderabad.

Officials have seized documents and the nation’s accounting body is examining auditor PricewaterhouseCoopers LLC’s local unit, Corporate Affairs Minister Prem Chand Gupta said.

“The developments so far indicate that the current board of Satyam has failed to do what it was supposed to do,” Gupta told reporters in New Delhi. “The government is committed to punish everyone found guilty, including the auditors.”

Satyam, India’s fourth-largest software exporter, plunged for a second day yesterday in Mumbai trading on concern it may run out of money after Raju said he falsified the accounts “for several years.” The scandal, whose scope is being likened to the 2001 bankruptcy of Enron Corp., has shaken confidence in Indian companies and accounting standards.

“The fact that the audited accounts don’t represent true and fair picture raises an issue that is bigger than the Satyam scandal,” said M. Damodaran, former chairman of the Securities and Exchange Board of India. “If some guy has taken liberties with the system, the person or persons has to be identified and punished.”

Bank Statements

The government will obtain records of Satyam’s financial transactions from banks, minister Gupta said in televised comments after the Times of India newspaper reported today that the company’s bank statements were missing.

Houston-based Enron’s 2001 bankruptcy wiped out more than 5,000 jobs and $1 billion in employee retirement funds. The Enron scandal triggered tougher U.S. accounting rules and the creation of a board to oversee auditing firms that review the financial statements of publicly traded companies.

Ten directors nominated by the government will meet next week to appoint managers at Hyderabad-based Satyam, Gupta said.

Satyam canceled a board meeting scheduled for today after the board was replaced, it said in an e-mailed statement.

Interim Chief Executive Officer Ram Mynampati said Jan. 8 he was unaware of the false accounting that may force Satyam to restate earnings as he relied on audited statements. The local unit of PwC said in a statement the same day Satyam’s accounts were supported by “appropriate audit evidence.”

Eroded Wealth

The scandal has eroded $2.2 billion in shareholder wealth, drawing calls from executives and auditors to accelerate the investigation. More than two days after chairman Raju claimed he’d padded Satyam’s books, the company’s auditors and interim management had yet to confirm any irregularities.

Satyam fell 17.35 rupees to 22.9 rupees yesterday. The Bombay Stock Exchange removed Satyam from its benchmark Sensitive index, a day after the National Stock Exchange dropped the stock from the Nifty.

The company was sued by investors in at least three class- action lawsuits in federal court in the U.S. after the shares in Mumbai plunged. Satyam’s American depositary receipts, each of which represents two ordinary shares, fell $8.42, or 90 percent, to 93 cents before the opening of the New York Stock Exchange on Jan. 7, when trading was halted.

Turning Point

“We believe the Satyam incident marks a turning point in investors’ attitude toward corporate governance,” Suresh Mahadevan, an analyst at UBS AG, said. “In future, companies perceived poor on corporate governance or following aggressive accounting practices will trade at larger discounts compared to their peer group.”

India’s stock market regulator plans to review working papers of auditors at companies forming the nation’s main stock indexes, the regulator said in a statement in Mumbai. The Securities and Exchange Board’s Committee on Disclosures and Accounting Standards will hold a peer review of the auditor’s working papers on quarterly and full-year financial statements.

Raju had planned to meet investigators from the Securities and Exchange Board today, his lawyer S. Bharat Kumar said before the arrests. Raju had been summoned by regulators yesterday though wasn’t given sufficient notice, he said.

Raju, 54, and his younger brother will be produced before a magistrate within 24 hours, inspector general Kaumudi said. The offences carry a maximum sentence of 10 years and the brothers can’t apply for bail, he said.

Government officials have seized Satyam’s documents and a team from the ministry of corporate affairs has started inspecting eight group companies, Gupta said.

Prime Concern

“It’s the prime concern of the government to ensure the operations of the company continue uninterrupted,” Gupta said.

Satyam employs about 53,000 people and has offices from the U.S. to the U.K., Brazil and Australia. The company writes software and manages computer systems for clients including ArcelorMittal, the world’s largest steelmaker, and Nissan Motor Co., Japan’s third-biggest carmaker.

The announcement by the government to reconstitute the Satyam board will also reinforce employee and stakeholder confidence, the National Association of Software and Service Companies, a lobby group, said in an e-mailed statement.

‘Buy Satyam’

Outside the group’s corporate headquarters, four canvas sheets about 6 feet by 8 feet are draped with employees’ signatures, handprints and messages.

“Satyam will come back,” one message reads. “Save Satyam, save Raju,” says another. A third, “Buy Satyam Stock.” On each of the red, green, yellow and blue-painted canvases is printed “The Spirit of Satyam,” like a watermark.

“This current management needs to go so that the 50,000 jobs are saved and client commitments are kept,” Richard Rekhy, chief operating officer of KPMG in India, said. “It is the image of India and corporate India at stake.”

The fall of Raju, named Ernst & Young Entrepreneur of the Year in 2007, began three weeks ago when Satyam proposed paying $1.6 billion for Maytas Properties Ltd. and Maytas Infra Ltd., both tied to his family. The plan was scrapped 12 hours later, after investors called it a “woeful misuse of cash.” Raju said the sale was designed to plug the hole in Satyam’s balance sheet.

“To my non-auditor mind it is reasonably clear that something like this could not have been hidden from audit for so long,” former regulator Damodaran said.

To contact the reporters on this story: Harichandan Arakali in Bangalore at harakali@bloomberg.net; Kartik Goyal in New Delhi at kgoyal@bloomberg.net.

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