Banks in Need of Even More Bailout Money

WASHINGTON — Even before word came on Tuesday that Citigroup might split into pieces to shore up its finances, an unpleasant message was moving through Congress and President-elect Barack Obama’s transition team: the banks need more taxpayer money.

In all likelihood, a lot more money.

Mr. Obama seems to know it; a week before his swearing-in, he is lobbying Congress to release the other half of the financial industry bailout fund. Democratic leaders in Congress seem to know it, too; they are urging their rank and file to act quickly to release the rescue money. And Ben S. Bernanke, the chairman of the Federal Reserve, certainly knows it.

On Tuesday, Mr. Bernanke publicly made the case that one of the most unpopular and most scorned programs in Washington — the $700 billion bailout program — needs to pour hundreds of billions more into the very banks and financial institutions that already received federal money and caused much of the credit crisis in the first place.

The most glaring example that the banking system needs even more help is Citigroup. Though it already has received $45 billion from the Treasury, it is in such dire straits that it is breaking itself into parts.

Like many banks, Citi is finding that its finances keep deteriorating as the economy continues to weaken.

Even some of the bailout program’s harshest critics acknowledge that things most likely would be even worse without it, and that the bailout had accomplished its most important goal, which was to prevent a complete collapse of the financial system.

Since last September, no major banks have failed and the credit markets have thawed somewhat.

But analysts said the problems are still acute, if less apparent on the surface. Banks have received $200 billion in fresh capital from the Treasury since last fall and have borrowed hundreds of billions of dollars more from the Fed. But in the meantime, the economy fell into a severe downturn last fall that is likely to continue until at least this summer.

Industry analysts estimate rising unemployment and business failures will lead to another $500 billion to $750 billion of losses in coming months. That could bring total losses from the credit crisis to $1.5 trillion to $1.8 trillion, twice as high as earlier estimates.

Citigroup is not alone. JPMorgan Chase, Bank of America, Wells Fargo and most other big banks all expect enormous losses as millions of consumers default on their mortgages, credit cards and automobile loans. Other losses are expected on loans made to commercial real estate developers, small businesses and for highly leveraged corporate buyout deals.

Mr. Bernanke bluntly warned on Tuesday that the government would probably have to infuse more money into financial institutions in the months ahead.

“More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets,” Mr. Bernanke said in a speech to the London School of Economics.

Mr. Bernanke, tacitly acknowledging the unpopularity of the bailout program, said the public was “understandably concerned” about pouring hundreds of billions of taxpayer dollars into financial companies — especially when other industries were getting the cold shoulder.

But, he insisted, there was no escape. “This disparate treatment, unappealing as it is, appears unavoidable,” Mr. Bernanke said. “Our economic system is critically dependent on the free flow of credit.”

Mr. Obama and his economic team have assured Congress that they would use a sizable chunk of the new money from the Troubled Asset Relief Program to help distressed homeowners refinance mortgages and escape foreclosure. That would be a big shift from the Bush administration, which refused to use TARP for reducing foreclosures.

Lawrence H. Summers, Mr. Obama’s choice to head the White House National Economic Council, assured Democratic lawmakers in writing on Monday that the administration would use some of the money to help reduce foreclosures.

But Mr. Bernanke appears to be warning Mr. Obama and Congressional Democrats that most of the remaining $350 billion — and possibly more — has to go to shoring up banks if they are to resume lending at normal levels.

During the first three quarters of 2008, banks were able to raise enough capital to offset more than their hundreds of billions in losses by tapping the giant government bailout fund as well as some early private investors.

But that was only a stopgap.

“The capital raises finally caught up with the losses,” said Michael Zeltkevic, a partner at Oliver Wyman, a consulting firm specializing in the finance industry. “It doesn’t make the situation better, but at least we caught up.”

The new tidal wave of losses stems from the worsening economy and rising unemployment, and analysts say it will take several quarters before it peaks.

Regulators require banks to keep a healthy cushion of capital. But this time around, the banks are struggling to plug their deepening holes. Private investors are scarce. For all but a small group of healthy banks, bankers and analysts say, the government may be the only investor left.

“Most banks are going to be in a defensive posture,” said Christopher Whalen, a managing partner with Institutional Risk Analytics. “You are probably not going to see the industry expand its overall balance sheet until 2010 or 2011.”

Mr. Obama’s economic team is planning a broad overhaul of the program to impose more accountability and more restrictions on executives at companies that receive government money.

Policy makers are also looking at reviving the original idea of TARP — have Treasury buy up unsalable mortgage-backed securities from financial entities.

Henry M. Paulson Jr., the Treasury secretary, had dropped the idea, concluding it would be more efficient to inject capital directly into banks by buying preferred shares.

Mr. Bernanke revived the idea, along with several other approaches, in his speech in London. So did Donald L. Kohn, vice chairman of the Federal Reserve, in a hearing on Tuesday before the House Financial Services Committee. He suggested the Treasury could buy the unwanted securities directly, or set up special banks to buy them.

Some analysts, even those who agree that the government needs to prop up the banking system with more taxpayer money, were skeptical about TARP.

Adam S. Posen, deputy director of the Peterson Institute for International Economics, said that the Bush administration had been right to inject capital into banks but wrong in not pushing banks hard enough to fix their problems or accounting.

“The problem isn’t that we’ve wasted money,” Mr. Posen said. “The problem is that we’ve put too few conditions on the banks.”

Worried EU states fly to Moscow, Kiev over gas dispute

MOSCOW/KIEV (Reuters) - Russia and Ukraine face another day of sparring over gas supplies on Wednesday and two European Union states launched fresh diplomacy to end a dispute that has left their economies without Russian gas for one week.

Russia began pumping gas meant for Europe via Ukraine on Tuesday, but the EU said little or no gas was flowing to countries suffering urgent energy shortages.

Russia accused Ukraine of shutting off gas to Europe, but Kiev said there was not enough pressure in the pipeline system.

The crisis has disrupted supplies to some 18 countries at the height of winter, shutting down dozens of factories in southeast Europe.

Two of the worst hit EU states, Bulgaria and Slovakia, sent their prime ministers to Moscow and Kiev in a fresh effort to get gas supplies restored.

Slovakian Prime Minister Robert Fico, who was in Kiev on Wednesday for talks with Ukrainian Prime Minister Yulia Tymoshenko, said the country had 11 days of gas reserves left.

"After 12 days, we will be obliged to resort to measures never seen in our history. May I simply ask how long this will go on?" he told Tymoshenko.

But Tymoshenko said her country could do little to help. "Ukraine does not have sufficient gas. We do not have our own supplies," she told Fico.

Fico is due in Moscow later to meet Russian Prime Minister Vladimir Putin alongside Bulgarian Prime Minister Sergei Stanishev and Moldovan Prime Minister Zinaida Greceanii.

Stanishev is under pressure to secure supplies for his country of 7.6 million people as limited domestic reserves are dwindling and anger among Bulgarians is mounting against his Socialist-led government.

Slovakia, which has a population of 5.4 million and gets almost all its gas from Russia, declared a state of emergency on January 6, under which gas deliveries to large clients were reduced. About 1,000 companies were forced to shut or cut production.

A deal brokered by the EU, which gets a quarter of its gas from Russia, had been intended to get supplies moving on Tuesday, with international monitors in place to ensure that Ukraine was not siphoning off any gas, as Moscow has alleged.

Russian state-controlled gas monopoly Gazprom declared force majeure on gas exports to Europe on Tuesday, meaning circumstances beyond its control prevented it from meeting its obligations to clients.

Gazprom is demanding Kiev hand over $614 million for unpaid gas bills and pay $450 per 1,000 cubic meters of gas in 2009. That is similar to rates paid by EU customers but a big rise on last year's price of $179.5.

Analysts in Kiev say Ukraine, saddled with debt and hard hit by the global slowdown, cannot afford that price.

POOR RELATIONS

The row, which has dented the reputation of both Moscow and Kiev as energy suppliers, also reflects their poor political relations. Moscow is vehemently opposed to moves by Ukraine's pro-Western leadership to join the U.S.-led NATO alliance.

The European Commission said Europe needed the gas urgently and an aide to Commission President Jose Manuel Barroso said on Tuesday that he had expressed disappointment over the low volumes pumped by Russia in a telephone conversation with Putin.

Gazprom's Deputy CEO Alexander Medvedev accused the United States of pulling the strings. "It looks like ... they (Ukraine) are dancing to the music which is being orchestrated not in Kiev but outside the country," he said.

State Department spokesman Sean McCormack rejected the charge as "totally without foundation."

Ukraine's economy -- based on steel and chemical exports -- has been hit hard by the global slowdown and its hryvnia currency has experienced sharp falls.

Holiday sales begin before turkey grows cold

Thanksgiving Day may mean leisurely time with family for many Americans, but some U.S. stores were set to open to shoppers on the holiday itself, hoping to salvage what could be a disastrous holiday sales season.

The traditional start to holiday shopping begins on Friday and runs through year's end, with the lion's share of sales occurring up to Christmas Day on December 25.

Known as "Black Friday", the day after Thanksgiving used to allow some stores to turn their profit, or move into the black, for the year.

But in 2008, U.S. retailers fear that a contracting economy and mounting job losses could cost them billions of dollars during their most crucial season of the year when they can make up to 40 percent of annual sales. Some are staying open on Thursday in hopes of capturing as much business as possible.

"Consumer spending on gifts for the holiday season is going to be down considerably," said Eric Anderson, professor of marketing at the Kellogg School of Management, Northwestern University. "Black Friday will be the first indicator of how bad it's going to be."

Experts predict this could be the worst sales season since the early 1990s as Americans hit hard by a housing slump and credit crunch make do with fewer gifts.

Based on analyst forecasts, retail sales at stores open at least a year could fall 2.2 percent for the entire month of November compared with a 4 percent rise a year ago, according to Thomson Reuters data.

Excluding expectations for growth at discounter Wal-Mart Stores Inc, one of the few companies that may prosper this season, the decline is a more precipitous 6.6 percent.

At stake is the ability for many retailers, from department stores like Macy's to specialty chains such as AnnTaylor Stores, to keep their loyal customers and eke out a profit as rivals cut prices up to 40 and 50 percent.

With times this grim, some are willing to sacrifice more profit rather than risk losing clients for good.

"It's the retailers in the middle who are trying to avoid losing customers," said Anderson. "Macy's is worried about customers who have never spent a lot of money at Wal-Mart trying out Wal-Mart and liking it."

Some consumers said they are putting a different emphasis on celebrating the holidays, focusing on time spent with family and friends rather than purchasing the latest hot toy or gadget. They may even choose to craft presents by hand or swap goods gathering dust in the attic to save money.

Others have the option of buying goods at firesale prices, after long-standing U.S. chains like Circuit City and Mervyns declared bankruptcy ahead of the holiday.

EARLY BIRDS

To drum up enthusiasm, many stores started offering steep discounts on everything from clothes to electronics weeks in advance.

Several chains are launching special promotions online and staffing stores on Thanksgiving Day itself, well before the traditional roast turkey meal has had time to grow cold.

Kmart, owned by Sears Holdings, was to open its doors early on Thursday, along with movie rental chain Blockbuster, which is touting electronics gifts like Blu-ray players and game consoles this year. Toy stalwart FAO Schwarz was also due to open.

Stores from Wal-Mart to electronics retailer Best Buy to Macy's planned to open before dawn on Friday.

One silver lining could be that penny-pinching shoppers held off buying until the Thanksgiving weekend, preferring to spend what cash they have only when better deals begin to appear. That could also explain some of the sharp decline in sales for most of November leading up to Black Friday.

Nearly 45 percent of consumers plan to shop during the Black Friday weekend, according to a survey released this week by the International Council of Shopping Centers.

More than 80 percent of those shoppers expect to stop at a discount store, while 78 percent said they would head to a department store.

Stocks Are Higher in Europe and Asia

PARIS — Stocks rose Thursday in Europe and Asia, following Wall Street’s lead and a deep cut in Chinese interest rates.

Indian stock markets were closed after a terrorist attack Wednesday in Mumbai left more than 100 people dead, and it was not immediately known when trading would resume.

In morning trading, the Dow Jones Euro Stoxx 50 index, a barometer of euro zone blue chips, rose 2.4 percent, while the FTSE 100 index in London gained 2.1 percent. The CAC 40 in Paris was up 2.6 percent, and the DAX in Frankfurt rose 2.5 percent.

“There is fresh risk-taking, but not enough to sustain a rally,” Adrian Pankiw, a strategist at Henderson Global Investors in London, said. “Everyone’s just waiting to close the books and getting ready for next year.”

“They’re doing everything they can to avoid deflation,” he said, referring to the trillions of dollars in financial bailouts and economic stimulus measures governments have announced in the last few months. “We’ve seen from the case of Japan that the cost of deflation is much higher than the cost of the measures they’re taking now. Japan is still paying for it.”

UBS rose 4.1 percent. Peter Kurer, the UBS chairman, told shareholders Thursday that 2009 would be a profitable year for the Swiss bank.

Trading in Woolworths was suspended in London. The 99-year-old British retailer appointed administrators to seek a buyer for its more than 900 stores. October data from the United States underlined the dismal economic picture. Consumer spending dropped a full percentage point, the biggest decline since 2001, while durable goods orders fell 6.2 percent, and sales of new homes declined 5.3 percent.

U.S. markets were closed Thursday for the Thanksgiving Day holiday, but futures traded on the Standard & Poor’s 500 index fell about 0.2 percent. On Wednesday, the index rose 3.5 percent in New York. Despite the rally, bond yields plunged to record lows, as prices were lifted by the Federal Reserve’s plan to buy mortgage securities.

The benchmark U.S. 10-year note closed Wednesday trading at a yield of 2.978 percent. Mr. Pankiw noted that, with the exception of Germany, most European government bonds were also trading near record lows. Part of the story, he said, is that after years of consumer “dissaving,” savings rates are beginning to rise, even as net pay falls.

The Chinese central bank’s move Wednesday to cut its main interest rate by 1.08 percentage point gave Asian stock markets a lift, with the Shanghai Stock Exchange composite index gaining 1.1 percent. Malcolm Wood, Head of Asia Pacific Strategy at Morgan Stanley in Hong Kong, said the move was an “extraordinarily aggressive policy action in the face of extraordinarily bad news,” but that this — and a flurry of measures around the world in the past two months — was grounds for optimism in the global effort to shore up the real economy.

The Tokyo benchmark Nikkei 225 stock average gained nearly 2 percent, while the Hang Seng index in Hong Kong rose 1.4 percent. The S&P/ASX 200 index in Sydney rose 1.4 percent.

U.S. crude oil futures for January delivery fell $1.68 to $52.76 a barrel in electronic trading on the New York Mercantile Exchange.

The dollar declined against other major currencies. The euro rose to $1.2915 from $1.2880 late Wednesday in New York, while the British pound rose to $1.5388 from $1.5326. The dollar slipped to 95.08 yen from 95.67 and fell to 1.1982 Swiss francs from 1.2037 francs.

Nokia to Cease Sales In Japan

Nokia, the world's biggest cellphone maker, said on Thursday it will stop selling mobile phones in Japan except for its luxury Vertu brand after struggling to expand its presence.

Finnish Nokia has previously said it will cut costs 'decisively', expecting global mobile phone sales to shrink next year amid an economic downturn.

Japan is the world's fourth largest mobile phone market after the United States, China and India. But it makes up only a tiny part of sales at Nokia, whose products have failed to lure customers away from more sophisticated Japanese ones.

Mobile phone companies also see limited scope for growth in Japan, where 109 million subscribers, or some 85 percent of the population, already own a mobile phone. In addition, a new sales model based on higher handset prices is expected to slash annual mobile phone sales in Japan by some 20 percent.

"In the current global economic climate, we have concluded that the continuation of our investment in Japan-specific localized products is no longer sustainable," Nokia executive vice president Timo Ihamuotila said in a statement.

He added that Nokia's Japanese business would concentrate on research, development and sourcing for the global market as well as specific projects such as the Vertu brand.

The quirks of Japan's mobile phone market have prevented foreign companies, including Nokia's rivals such as Samsung Electronics and LG, from successfully targeting Japanese consumers.

Most of the mobile phones used in Japan are part of third-generation networks and boast features such as TV broadcasting and electronic payment functions.

This makes it tough for foreign manufacturers to compete with domestic handsets.

Foreign companies, excluding Sony Ericsson, only occupy around 5 percent of Japan's cellphone market, according to IDC Japan, a research firm. Japanese manufacturers, in turn, have only a small presence outside their home market.

"Nokia is facing global earnings problems and many other issues, and this shows Japan was a low-priority market at a time when they are shoring up global operations, even though it may still be attractive," IDC Japan analyst Michito Kimura said.

"I'm not very surprised by the decision."

The move was still rather abrupt as NTT DoCoMo Inc, Japan's biggest mobile phone operator, said just this month that it would sell a new Nokia smartphone as part of its product line-up for the winter shopping season.

Third-ranked Japanese operator Softbank Corp also sells Nokia phones.

Nokia, which has a nearly 40 percent global market share, had originally said it aimed to increase its market share in Japan to a double-digit figure. It took only around 0.3 percent of the Japanese market last business year, according to the Nikkei newspaper.

Instead of a broad expansion, it will now focus on Vertu, its luxury unit.

The Yomiuri newspaper reported on Saturday that Nokia plans to launch mobile phone services for Vertu customers in Japan, using DoCoMo's network.

Vertu, founded in 1998, sells gem-encrusted, hand-built mobile phones with prices ranging from 3,500 euros to over 100,000 euros.

(Additional reporting by Tarmo Virki in Helsinki; Editing by Sophie Hardach)

HK Index Rises on China's Rate Cut

Hong Kong's benchmark stock index advanced for a third straight session Thursday, boosted by China's biggest interest rate cut in 11 years to spur economic growth.

The blue chip Hang Seng index rose 182.61 points, or 1.4 percent, to 13,552.06.

The gains came after China slashed a key interest rate by 1.08 percentage point -- its biggest cut since 1997 and the fourth in three months -- after markets closed on Wednesday.

Analysts said China's aggressive move helped improve sentiment, but investors still remained cautious about the global economic outlook.

''Although it looks like sentiments are better, there are still concerns about negative news or any asset liquidation of financial institutions,'' said Castor Pang, an analyst at Sun Hung Kai Financial.

Mainland Chinese property stocks soared on the country's rate cut. Guangzhou R&F Properties Co., Ltd. jumped 12.2 percent to 4.14 Hong Kong dollars. China Overseas Land and Investment also gained 7.6 percent to HK$9.79 and China Res Land was 5.3 percent higher at HK$9.30.

Chinese financial stocks also moved higher with China Construction Bank adding 2.4 percent to HK$4.20. Major Chinese lender ICBC also rose 1.6 percent to HK$3.82.

Index heavyweight HSBC was 0.8 percent higher at HK$81.65.

World Stocks Hit 2 - Week Highs

Global stocks rose to their highest level in nearly two weeks on Thursday with European equities buoyed by sharp gains in Asia and the United States, dampening demand for safer assetssuch as government debt.

Renewed expectations that Washington will bail out the U.S. motor industry and China's aggressive interest rate cut on Wednesday helped to lift some of the gloom surrounding the global economy.

But a string of dismal U.S. economic reports this week left the dollar on a shaky footing while political risk emerged after attacks in India's financial capital.

At least 101 people have been killed with hundreds more trapped by Islamist gunmen in Mumbai after attacks on luxury hotels, hospitals and a tourist cafe.

Still, with U.S. financial markets closed on Thursday for the Thanksgiving holiday, analysts expect trading in Europe to be lackluster. While stocks were eking out gains, analysts said the outlook was still bleak.

"It's going to be a bit of a nothing day, as we wait for Black Friday in the United States -- the day where all retailers go from red to black," said Justin Urquhart Stewart, investment director at Seven Investment Management. "If it goes like the UK, it could be a black Friday in the wrong sense."

The day after Thanksgiving, known as black Friday, is traditionally the busiest time for U.S. retailers and investors would undoubtedly be on the lookout for retail sales figures.

MSCI world equity index climbed 1.1 percent to 218.20, having earlier reached a peak of 218.33 -- a level last seen in November 14.

The FTSEurofirst 300 index of top European shares gained 2.4 percent, Britain's FTSE 100 index put on 2 percent and Germany's DAX climbed 2.6 percent.

Bank stocks were among the best performers, with Standard Chartered rising 11 percent and Societe Generale gaining more than 5 percent. Earlier, Japan's Nikkei rose 2 percent, while MSCI's measure of other Asian stock markets climbed 2.2 percent.

Meanwhile, the dollar eased against a basket of major currencies with the dollar index slipping 0.3 percent.

"The greenback for long the beneficiary of safe haven flows has over the past couple of days been forced on the defensive as poor economic news weighed on the market," said Mitul Kotecha Head of Global Foreign Exchange Strategy at Calyon.

"Yesterday's data releases added to these woes, showing a huge drop in durable goods orders, a decline in personal spending, a weak Chicago PMI and another big increase in initial jobless claims. The latter points to a USD unfriendly non-farm payroll report next Friday."

BOND YIELDS UP

European government bond yields crept up as stocks gained ground, snapping recent declines that mirrored steep falls in U.S. Treasury yields.

On Wednesday, the U.S. benchmark 10-year yield hit a 50-year low below 3.0 percent after a flood of bleak U.S. economic reports spurred demand for safer government debt.

The 10-year euro zone government bond yield rose 1.7 basis points to 3.296 percent, off a near three-year low of 3.272 percent set on Wednesday.

Meanwhile, U.S. crude oil fell more than $1 toward $53 a barrel, reversing some of the 7 percent gains a day earlier as investors fretted about falling demand.

Recent data showed U.S. crude stocks rose sharply last week and U.S. September demand fell to its lowest level for any month in more than a decade.

Gold traded at $812.45 an ounce, near a six-week high of $830.10 set on Tuesday.

(Additional reporting by Sitaraman Shankar; editing by David Stamp)

Thai Economy Braces for Blow Amid Airport Shutdown

Thailand's already faltering economy is bracing for a fresh blow as the shutdown of the country's main airport by protesters entered its third day, stranding thousands during the tourist high season, disrupting exports and spooking investors.

Tourism losses alone in the remainder of this year could run to 150 billion baht ($4.2 billion), equal to 1.5 percent of gross domestic product, with ''devastating repercussions'' for the economy, CIMB economist Kasem Prunratanamala said Thursday.

Other vital pillars of the economy are also being hit, with exports of fresh produce and electronic components hurt as dozens of airlines cancel flights, and foreign investors pulling funds from a stock market already stricken by the global financial turmoil.

''If this crisis goes further, we will lose much more,'' said Thai Chamber of Commerce President Pramon Sutheewong.

''The confidence in Thai exporters is deteriorating, foreign importers are in doubt about our ability in deliver products on time and there is a high tendency that they will divert their orders to some place else,'' Pramon said. ''That's what we are concerned about the most.''

Beyond deterring tourists, the airport shutdown also halts exports of perishable produce such as fruit and vegetables and shipments of electronics components to places like Japan, said Federation of Thai Industries Chairman Santi Vilassakdanont.

''After one, two or three days there will be a production problem for electronics makers because their stockpiles of unsent goods will become too high,'' he said.

Losses on outbound shipments of car parts, fresh fruit and vegetables, live fish and orchids could run 2 billion to 3 billion baht a day ($57 million to $85 million), said Tanit Sorat, the federation's vice chairman.

All flights in and out of Bangkok's Suvarnabhumi were canceled after protesters took over terminals Tuesday in an attempt to unseat Prime Minister Somchai Wongsawat's government, which they claim is a puppet for ousted premier Thaksin Shinawatra. It was the latest escalation in a sometimes violent four-month campaign by protesters to bring down the government.

On Wednesday night, protesters overran a second smaller airport that mainly serves domestic routes, cutting off all commercial flights to the capital of Southeast Asia's second-biggest economy -- an important manufacturing hub for automakers like Toyota Motor Corp. and General Motors Corp.

Thailand's economy is already in a fragile state, growing at 4 percent in the third quarter -- the slowest pace in more than three years -- because of the political unrest and the global financial crisis. Some economists say growth next year will slump to about 2.5 percent from the 4.5 percent expected for this year -- a forecast that doesn't factor in the latest woes.

Tourism, a vital industry that makes up 6 percent of the economy, will take the main hit from the airport shutdown.

CIMB's Kasem Prunratanamala said about half of 4 million tourists expected between now and the end of the year could cancel their trips, with spillover affects outside tourism such as lower spending at shopping malls and other retailers. The effects will linger into 2009, he said.

Up to 20 percent of the 1 million employed directly and indirectly by tourism could lose their jobs, said Tourism Council of Thailand boss Kongkrit Hiranyakit.

Tourism Minister Weerasak Kowsurat said airport closures not only drain the coffers of airports and airlines but deprive the country of 80,000 free-spending tourist each day and, most troubling, tarnish the country's image as safe place to travel.

''If we can't solve this problem soon enough, the memory of people in general about traveling in Thailand will be heavily damaged,'' Weerasak said.

Neighboring countries have voiced concern that Thailand may not be able to host the annual ASEAN summit for 10 southeast Asian nations, scheduled to take place Dec. 15-18 in the northern city of Chiang Mai. Thailand insisted Thursday that the meeting will go ahead as planned.

Jittery foreign investors pulled a net 1.5 billion baht from the market on Wednesday, the second highest selling by foreigners this month, adding to the 150 billion baht that they have withdrawn from the market this year. On Thursday, Thailand's benchmark stock index sank 1.4 percent -- even as most other Asian markets advanced.

''It's a nightmare scenario. I can't tell clients to buy Thai shares if they can't even get into the country,'' said Andrew Yates, vice president of foreign institutional sales at Asia Plus Securities in Bangkok. ''It seems like it's easier to get into North Korea than it is to Thailand.''

China Downturn Deepens

China warned on Thursday its economic downturn was deepening with the spread of the global financial crisis and a senior European policymaker said woes could extend beyond 2009.

In India, emerging Asia's other economic titan, financial markets were closed after Islamist militants killed more than 100 people in the commercial capital Mumbai.

Violence in India and political unrest in Thailand highlighted political risk as an extra potential threat to emerging markets battered by the global crisis.

"These awful events are reinforcing the nervousness about emerging markets, which have been weak any way for some time after the U.S. slowdown and the domino effect," said Justin Urquhart Stewart, investment director at Seven Investment Management in London.

The economic warnings from China's top planner came a day after its central bank cut interest rates by the biggest margin in 11 years in response to the worst global downturn in decades.

A crisis that began last year with the collapse of the U.S. housing market has spread around the world, bringing several financial institutions to their knees and pushing the United States, Japan and Europe into recession or to the brink of it.

China's State Information Centre, a government think-tank, forecast annual growth would slow to 8 percent this quarter from 9 percent in the third quarter, a rapid cooling from double-digit rates recorded in the past five years.

"The global financial crisis has not bottomed out yet. The impact is spreading globally and deepening in China. Some domestic economic indicators point to an accelerated slowdown in November," Zhang Ping, chairman of the National Development and Reform Commission, told a news conference.

With factories closing by the thousands, Chinese officials have grown increasingly concerned in recent weeks that slowing growth may threaten the stability that the ruling Communist party craves for its 1.3 billion people.

Slowing demand for Chinese exports in the West is curbing growth and there is no relief in sight.

The euro zone is likely to be in recession next year, European Union Economic and Monetary Affairs Commissioner Joaquin Almunia said, reversing a forecast of slight growth made earlier this month.

Almunia would not give a specific forecast for 2009, but said next year may not mark the end of the euro zone's troubles. "The crisis may not end in 2009," he said.

Emphasizing the bleak outlook, the euro zone's business climate indicator fell to its lowest in more than 15 years in November, European Commission data showed.

BANKING WOES

Aggressive interest rate cuts and trillions of dollars in financial sector bailouts and stimulus packages have been the order of the day since the collapse of Lehman Brothers in September, followed by a lending freeze and the spread of financial pain to consumers and businesses.

The world's banking system is still not strong enough to support the economy and avoid a recession, the head of Britain's financial regulator told an Italian newspaper in an interview.

Adair Turner, chairman of Britain's Financial Services Authority, added that the two key issues were bank capital strength and liquidity.

Japan's Norinchukin Bank said it would raise more than $10.5 billion to shore up its capital, the largest fundraising by a Japanese financial firm since the start of the global credit crisis.

Norinchukin, the unlisted central bank for Japan's agricultural and fishery cooperatives, said it plans to raise more than 1 trillion yen ($10.5 billion) through its associated cooperatives by the end of March.

COMPANIES SUFFER

Battered global stocks rose to their highest level in nearly two weeks with European equities buoyed by sharp gains in Asia and the United States, dampening demand for safer assets such as government debt.

European government bond yields crept up as stocks gained ground, ending recent declines that mirrored steep falls in U.S. Treasury yields.

On Wednesday, the U.S. benchmark 10-year yield hit a 50-year low below 3.0 percent after a flood of bleak U.S. economic reports spurred demand for government debt. U.S. markets were closed on Thursday for the Thanksgiving Day holiday.

Despite the share price rises, there was little good news from companies.

Top global miner BHP Billiton cited a drop in China's demand for iron ore when it painted a gloomy outlook for its business and defended its decision to drop a $66 billion bid for rival Rio Tinto.

ArcelorMittal, the world's largest steelmaker, said it was likely to start short-time working and cut production at its German steel plants in December.

Two of Britain's most high profile retailers DSG and Kingfisher underlined the severity of the economic slowdown with downbeat results and gloomy outlooks, while variety story group Woolworths went into administration.

Britain's retailers face a brutal downturn in consumer spending, amid sliding house prices and rising unemployment.

China Shares Slightly Higher, Rate-Cut Rally Fades

China shares surrendered most of an early rally to close slightly higher Thursday as continued worries about the slowing economy overshadowed the country's biggest interest rate cut in 11 years.

The benchmark Shanghai Composite Index closed up 1.1 percent, or 19.98 points, at 1917.86 after rising as much as 6.6 percent. The Shenzhen Composite Index for China's smaller second market rose 1.7 percent to close at 544.1.

Elsewhere in Asia, markets rose on China's rate cut late Wednesday. Japan's benchmark Nikkei 225 jumped 2 percent, Hong Kong's Hang Seng Index was up 1.2 percent and Korea's KOSPI Composite Index added 3.3 percent.

China slashed the interest on a one-year bank loan by 1.08 percentage points to spur private borrowing and support a multibillion-dollar government package to boost slowing economic growth. Investors had been expecting a cut and markets fell Monday when it failed to materialize over the weekend.

''The interest rate cut already was factored into investors' expectations, although the cut was bigger than expected,'' said Zhang Gang, an analyst for Central China Securities.

More rate cuts and other stimulus moves are expected because ''the worst time for the economy has not arrived yet,'' Zhang said.

Real estate, construction and steel stocks gained on expectations that the rate cut might boost housing sales.

China Vanke Ltd., the country's biggest developer, jumped 3.1 percent to 7.01 yuan and Cofco Property Group added 3.5 percent to 6.17 yuan.

Baoshan Iron & Steel Ltd., the country's biggest steel producer, posted a 2.2 percent gain to 5.13 yuan, and Xinjiang Ba Yi Iron & Steel Ltd., surged by the daily limit of 10 percent to 6.29 yuan.

Tangshan Jidong Cement Ltd. soared by the daily limit to 9.65 yuan, Fujian Cement Inc. rose 5.5 percent to 4.41 yuan and Hebei Taihang Cement Ltd. added 2.2 percent to 6 yuan.

Major banks were flat on expectations that the rate cut might squeeze their profits.

China Southern Airlines and China Eastern Airlines were suspended from trading while they announced financing moves. Southern Airlines said it will get 3 billion yuan ($440 million) from the government to help the carrier through a financial crisis. China Eastern said it was seeking similar help.

In currency dealings, China's yuan was traded at 6.8289 to the U.S.dollar in over-the-counter trading around 0800 GMT, down slightly from the close of 6.8282 in the previous session.

Wachovia presses Wells Fargo deal

Wachovia Corp., at the center of a fight between Wells Fargo & Co. and Citigroup Inc. over who will buy the beleaguered bank, is moving ahead with its deal to sell itself to Wells Fargo - while questions arise about the damaging effects that prolonged litigation might have on Wachovia.

Wachovia yesterday filed a lawsuit asking a federal judge in Manhattan to allow the Wells Fargo deal to go through.

Late Saturday, New York State Supreme Court Justice Charles Ramos had issued an order blocking the sale of Wachovia, which Wells Fargo had agreed to purchase in its entirety in a $14.8 billion deal.

Citigroup had already agreed to buy Wachovia’s banking operations for $2.1 billion.

Wells Fargo: Wachovia Deal To Move Ahead

"We are pleased that the unfounded order entered (Saturday) has been vacated," Wells Fargo said in a statement late Sunday. "Wells Fargo will continue working toward the completion of its firm, binding merger agreement with Wachovia."

On Saturday, Justice Charles Ramos of New York State's Supreme Court temporarily blocked Wells Fargo's planned purchase of the Charlotte, N.C.-based Wachovia.

Early last week, Citigroup announced it would acquire Wachovia's banking operations for $2.16 billion. Citigroup's deal needed the help of the Federal Deposit Insurance Corp., which had agreed to assume most of the risk of Wachovia's loan portfolio.

But on Friday, Wells Fargo announced it would purchase all of Wachovia in a stock-for-stock deal totaling $15.1 billion, or $7 a share. The deal requires no federal assistance.

Meanwhile, the Wall Street Journal reports Federal Reserve officials were pushing for Citigroup and Wells Fargo to reach a compromise. The effort could result in carving up Wachovia between its two suitors, the Journal reports, citing people familiar with the situation.

Under a plan being discussed Sunday night, Citigroup and Wells Fargo would divide Wachovia's network of 3,346 branches along geographic lines, with Citigroup getting Wachovia's branches in the Northeast and mid-Atlantic regions and Wells Fargo taking those in the Southeast and California. Wells Fargo also would take over Wachovia's asset-management and brokerage units, the Journal reports.

The plans being discussed Sunday night don't involve either Citigroup or Wells Fargo receiving financial assistance from the U.S. government, according to the Journal.

The talks ended late Sunday with no resolution, but were expected to resume Monday morning.

Bailout Fallout

LOS ANGELES If there were any doubts about whether the tremors from Wall Street would spread uptown to Madison Avenue, the events of last week dispelled them.

Banking failures and buyouts involving Washington Mutual and Wachovia sparked wildly volatile developments involving five ad agencies and nearly $300 million in combined ad expenditures.

Last Monday, JPMorgan Chase stopped an old-fashioned run on Washington Mutual with a takeover. Almost immediately, the reskinning of the latter's Web site began (branches are to follow with new signage), signaling the beginning of the end of a WaMu rebranding effort began just months ago by Omnicom Group's TBWA\Chiat\Day, Playa del Rey, Calif., the bank's agency of scarcely a year.

TBWA\C\D faces the prospect of losing the entire account practically overnight. The business, worth $135 million, per Nielsen Monitor-Plus, would presumably be picked up by Chase's lead agency, independent mcgarrybowen in New York.

TBWA\C\D and WaMu executives declined comment. It was not clear if the agency is owed money for ads it already created or, if so, how much. Omnicom Media Group handles media for the client.

["With] WaMu and Wachovia, no amount of due diligence would have protected you," said Mike Sheldon, president of Interpublic Group's Deutsch/LA in Marina del Rey, Calif. "How can an ad agency outsmart people who do this for a living?"

The week also left the immediate future of WaMu's creative in question. By Wednesday night, a WaMu print ad appeared with the headline, "We love Chase. And not just because they have a trillion dollars." According to a source, mcgarrybowen crafted the ad using the template of TBWA\C\D's campaign.

Chase declined to address speculation that mcgarrybowen might inherit the business. Working with mcgarrybowen and other agencies, JPMorgan Chase spent $355 million on advertising in 2007, per Nielsen Monitor-Plus.

Bidding for Wachovia, meanwhile, came less than one business day after a team led by WPP Group's Ogilvy & Mather, New York, had won a protracted review for its $145 million ad business. The uncertainty about the future of that account was compounded by the interest of not one but two suitors: Citigroup and Wells Fargo.

Citi approached Charlotte, N.C.-based Wachovia first. But by Friday, Wells Fargo said that it, not Citi, would buy the bank, with no government help. However, with its position reportedly backed by the FDIC, Citi threatened a lawsuit against Wachovia and also mulled a higher offer to purchase it.

Ogilvy, meanwhile, was left in limbo. Sources estimated its pitch might have cost the agency more than $250,000. The agency declined to comment.

The Wells Fargo offer did nothing to improve Ogilvy's chances of keeping the business. In fact, Wells might be less committed than Citi to allowing the Wachovia brand to remain intact. As part of its initial approach, Citi suggested in a call to investors that the Wachovia brand might survive in some form because several Wachovia divisions were not part of the deal and because Wachovia's branches outnumber Citi's three to one. By contrast, Wells Fargo said it would buy all of Wachovia divisions.
The agency assignment will depend upon the outcome. If some divisions retain the Wachovia name -- such as Wachovia Securities, which has also advertised substantially in the past -- the business could conceivably be split between Ogilvy and Citi's agency, Publicis USA. But sources indicated that even if Ogilvy were offered a consolation prize, it might not wish to become conflicted in the financial category for a smaller slice of pie.

If Wells Fargo's offer prevails, its agency, Omnicom's DDB L.A. in Venice, Calif., not Publicis, could be handed the new banking entity's account. "[The agency assignment] is undetermined at this point," said Mary Beth Navarro, a Wachovia rep.

Executives at Publicis declined to comment.

The "What's in a name?" question is becoming more and more pertinent following such financial-brand consolidations. One source wondered if Merrill Lynch would even return as Merrill Lynch after its acquisition by Bank of America goes through. "At first you'd think they'd be crazy to kill that brand name," said the source. "But what if the name no longer inspires investor confidence?"

If Wells Fargo prevails for Wachovia, DDB will live by a sword it has died by in the past. Former subprime lender Ameriquest spent $310 million at its peak in 2003 as DDB was taking it "from 8-by-10 envelope direct-mail pieces to two Super Bowls," recalled Mark Monteiro, the shop's chief creative officer. "When the end comes, you just have to man up and deal with it," said Monteiro.

DDB president Nick Bishop would only say: "We are very excited about Wells Fargo's continued strength and stability, given all the uncertainty in the financial markets."

Outright losses to agencies, rather than account shifts, started to rack up with the subprime mortgage meltdown. Countrywide, for example, built its ad spending from $10 million in 2003 to $400 million in 2007 before it was suddenly absorbed by BofA. AIG, which spent $150 million on ads in 2007, bought 21st Century Insurance, robbing $25-30 million from shops like IPG's Sedgwick Rd., before AIG itself became embroiled in the liquidity crisis, threatening the future of M&C Saatchi, New York, on that account.

"I've never seen so much loss of faith in financial institutions," said Russel Wohlwerth, principal at consultancy Ark Advisors in Playa del Rey. But he sees a positive side, too: fewer reviews. "I don't think we're going to see CEOs worrying about changing agencies to get a new campaign," he said.

Court Temporarily Halts Citigroup Exclusivity Agreement With Wachovia

A North Carolina court issued a temporary restraining order Sunday preventing Citigroup Inc. from enforcing an "exclusivity agreement" it signed with Wachovia as part of a $2.1 billion deal to buy the Charlotte, N.C. bank.

One of the plaintiffs in the case was Leslie "Bud" Baker, Wachovia's former chief executive officer. A North Carolina Superior Court, in issuing the order, said "there is significant evidence that Citigroup has taken and continues to take actions designed to cause the seizure or collapse of Wachovia."

Wachovia shareholders "will be irreparably harmed" without immediate action from the court, said the judge presiding in the case.

Following the announcement of the Wells Fargo-Wachovia combination last Friday, "Citigroup has taken steps apparently designed to cause the Wachovia/Wells Fargo merger to fail."

Fed Pushes to Resolve Wachovia Deal Dispute

In a sign that the federal government is worried about the volatile battle for Wachovia Corp., officials from the Federal Reserve were pushing for Citigroup Inc. and Wells Fargo & Co. to reach a compromise. The effort could result in carving up the Charlotte, N.C., bank between its two suitors, people familiar with the situation said.

Under the leading plan being discussed Sunday night, Citigroup and Wells Fargo would divvy up Wachovia's network of 3,346 branches along geographic lines, with Citigroup getting Wachovia's branches in the Northeast and mid-Atlantic regions and Wells Fargo taking those in the Southeast and California, according to people familiar with the talks. Wells Fargo would also take over Wachovia's asset-management and brokerage units.

Unlike Citigroup's original agreement to take over Wachovia's banking assets, in which the Federal Deposit Insurance Corp. agreed to shoulder potentially hundreds of billions of dollars in toxic loans, the plans being discussed Sunday night don't entail either buyer receiving financial assistance from the U.S. government, according to people briefed on the talks.

The talks ended late Sunday night with no resolution, but were expected to resume Monday morning, according to a person familiar with the matter.

The fact that Citigroup and Wells Fargo are duking it out for Wachovia, which was seen as in perilous condition barely a week ago, ought to be an encouraging sign for the shaky U.S. banking industry. But the second straight weekend of frantic negotiations also highlights how vulnerable the industry is to panicky customers and how the government is increasingly playing a significant role in the fate of major financial institutions.

Even as negotiations to split up Wachovia were proceeding, lawyers for Wachovia and Citigroup were sparring in court over the validity of an "exclusivity agreement" Wachovia had signed when it agreed to sell its banking business to Citigroup for $2.1 billion. A New York state appeals court Sunday night reversed a lower-court ruling from the day before that had extended the expiration of that agreement to Friday from Monday.

Citigroup, which contends Wachovia reneged on the binding deal, said it would appeal the decision that reversed the lower court's ruling.

But the legal back-and-forth didn't appear to derail the discussions about splitting up Wachovia, said people familiar with the matter. Regulators and bankers are scrambling to quickly end the drama in part out of concern that if Wachovia remains in limbo when U.S. markets open Monday morning, it could further spook already jittery investors and bank customers.

Regulators seemed to be focusing their powers of persuasion on Citigroup and Wells Fargo, going so far as to often exclude Wachovia from the weekend talks even though Wachovia shareholders would presumably need to bless a sale.

The weekend negotiations were being led by senior Federal Reserve officials. The Treasury Department was also involved, but Secretary Henry Paulson recused himself from the talks because of his ties to Wachovia Chief Executive Robert Steel, a former top Treasury official before taking Wachovia's helm in July, according to a person familiar with the matter.

Without some sort of compromise, the fate of Wachovia could drag out for weeks or months in a legal battle that leaves the battered bank in limbo, distracted by controversy and further weakened by the mountain of bad loans that led to its government-engineered deal with Citigroup a week ago.

After agreeing in principle to a shotgun marriage early last Monday morning, Citigroup and Wachovia spent the next several days trying to hammer out the specifics of the deal, which called for Wachovia shareholders to receive just $1 a share for most of the company.

On Wednesday, New York-based Citigroup offered to boost the amount it was paying to buy most of Wachovia, and that proposal remains on the table, according to people familiar with the matter. The terms of that revamped proposal weren't clear and were delivered before Wells Fargo's surprise offer on Thursday night.

People close to Wachovia confirmed that Citigroup made a newer offer and that it did go before the board. But these people said the offer was still "many dollars" lower than Wells Fargo's bid, that it was not for the whole company, and that Citigroup wanted Wachovia to reassume certain liabilities.

Also, a person close to Wachovia said as late as Thursday that Citigroup was still trying to renegotiate terms that had been agreed to verbally by the banks' two chief executives, Citigroup's Vikram Pandit and Wachovia's Mr. Steel, including the ultimate location of the retail-banking operations, severance and certain benefits.

Illustrating the competing interests at play, a sworn affidavit filed this weekend in federal court by Mr. Steel paints a picture in which the eighth-largest U.S. bank in stock-market value is caught between two takeover bids while facing pressure from the FDIC to sell itself. The affidavit suggests that Wachovia has come within inches of failing at least twice during the past week.

The affidavit also suggests that the FDIC has pushed Mr. Steel toward the Wells Fargo deal, as the government would be taken off the hook for any future losses. The FDIC declined to comment on the affidavit.

Mr. Steel's 57-page filing says that the Sept. 25 failure of Washington Mutual Inc. and the uncertainty about the bailout legislation "resulted in significant downward pressure in the market on the price of Wachovia stock."

The next day, Wachovia and Citigroup entered into their "exclusivity agreement" about a possible acquisition. Wells Fargo and Wachovia entered into a similar agreement the same day.

On Saturday night, Citigroup persuaded a New York state trial-court judge to extend the exclusivity agreement signed by Wachovia and Citigroup until Friday, according to Wachovia lawyer David Boies. Lawyers for Citigroup visited the judge, Charles Ramos, at his beach home in Cornwall, Conn., without anyone from Wachovia initially present, according to people familiar with the matter. Toward the end of the meeting, Wachovia's general counsel was allowed to dial in by phone.

Wachovia and Wells Fargo sought to overturn Judge Ramos's ruling. On Sunday, the company went to state appellate court to try to get the order overruled. Wachovia questioned the manner in which Judge Ramos issued the Saturday-night restraining order. A U.S. District Court judge didn't rule on the dispute Sunday but did say both sides had until an Oct. 7 hearing to submit briefs.

On Sunday night, a state appeals-court judge overturned Judge Ramos's ruling extending the duration of the exclusivity agreement. "I believe substantial questions have been raised regarding the authority of Justice Ramos to have issued the order while physically located outside the state of New York," Associate Justice James McGuire said in his ruling.

The exclusivity agreement restricted Wachovia from entering into merger discussions with any other bank. But a provision in the federal financial-system bailout added a wrinkle to the situation, rendering unenforceable certain agreements that restrict merger talks between banks.

The provision was inserted into the rescue legislation last week, at the behest of the FDIC, according to people familiar with the matter. Lawyers said the clause appears to defang the exclusivity pact between Wachovia and Citigroup.

A spokesman for Wells Fargo, Larry Haeg, said the bank believes the statutory language "invalidates Wachovia's claimed exclusivity agreement with Citi." But Mr. Haeg said the bank had "no role in suggesting the language."

Citigroup officials were caught off-guard by the provision, with senior officials not being aware of it until Friday afternoon -- after President George W. Bush had signed the bill into law. Citigroup executives argued that the provision also could invalidate Wachovia's subsequent deal with Wells Fargo -- an assertion that those banks dismissed.

Mecklenburg County Court Issues Temporary Restraining Order Against Citigroup

Order Enjoins Citigroup From Continuing to Take any Action to Enforce Terms of Exclusivity Limitations against Wachovia or Wells Fargo

Mary Louise Guttmann and Leslie M. ("Bud") Baker, shareholders of Wachovia Corporation, announced that the Mecklenburg County General Court of Justice, Superior Court Division, today issued a temporary restraining order prohibiting Citigroup, Inc. from taking any action to enforce any of the provisions regarding the exclusivity limitations in the letter agreement between the two companies dated September 29, 2008. In addition, the Court's order prohibits Citigroup from filing or continuing any legal action against Wachovia or Wells Fargo to enforce the terms of the exclusivity limitations; making public representations about the validity of the exclusivity limitations; and making public representations about the invalidity of the Wachovia/Wells Fargo merger agreement.

Ms. Guttmann and Mr. Baker said, "We are delighted that Judge Robert Johnston has agreed that Citigroup should be prohibited from attempting to enforce what it has incorrectly claimed were lawful exclusivity provisions in the letter agreement between Wachovia and Citigroup.

"We are especially pleased that Judge Johnston directed Citigroup to take no action attempting to utilize those provisions, or to make any public statement that casts doubt on the validity of the Wachovia/Wells Fargo merger agreement.

"Furthermore, we commend Wachovia's Board of Directors for putting the interests of shareholders first by accepting the superior proposal from Wells Fargo.

"We look forward to the opportunity to vote on the Wachovia/ Wells Fargo merger."

Affidavit Suggests Wachovia Neared Failure

A sworn affidavit filed this weekend in federal court by Wachovia Corp. Chief Executive Robert K. Steel paints a picture of a perilous situation in which the eighth-largest U.S. bank in stock-market value was caught between competing takeover bids while facing enormous pressure from the Federal Deposit Insurance Corp. to sell itself.

The affidavit suggests that Wachovia has come close to failing at least twice in the last week. Were the Charlotte, N.C., bank to collapse, it would rank as by far the largest failure of a federally insured bank in U.S. history.

The filing also suggests that the FDIC pushed Mr. Steel toward making a deal with Wells Fargo, based in San Francisco. Upending Wachovia's initial pact with Citigroup Inc. would let the government off the hook for its agreement to absorb certain future loan losses at Wachovia.

In the 57-page filing, Mr. Steel, a former Treasury Department undersecretary and Goldman Sachs Group Inc. executive, said the Sept. 25 failure of Washington Mutual Inc. and that week's uncertainty about the bailout legislation in Washington "resulted in significant downward pressure in the market on the price of Wachovia stock."

The next day, Wachovia and Citigroup entered into a confidentiality agreement about a possible acquisition. Wachovia and Wells Fargo entered into a similar agreement the same day.

On Saturday, Sept. 27, Wells Fargo Chairman Richard Kovacevich told Mr. Steel that Wells Fargo was willing to enter into a deal without any government assistance. "A merger could be executed before the market opened Monday," Mr. Steel said he was told.

At 6 p.m. the next day, Mr. Kovacevich backed out, saying Wells Fargo couldn't follow through under the "compressed timetable to acquire Wachovia without substantial government assistance," according to the affidavit. An affidavit is a written declaration made under oath as a truthful representation of facts.

FDIC Chairman Sheila Bair then contacted Mr. Steel, advising him to "commence negotiations with Citi," since the government felt that government-assistance would be likely in any deal.

On Monday, Sept. 29 at 6:30 a.m., Mr. Steel told Wachovia's board of directors that there were two options. Either the holding company, called Wachovia Corp., could file for bankruptcy, with its banking subsidiaries going into receivership, or parts of the company could be sold to Citigroup.

Wachovia directors agreed to take Citigroup's offer, valued at about $2 billion.

In the affidavit, Mr. Steel said that subsequent negotiations with Citigroup "proved extremely complicated and difficult," though he didn't go into more detail in the affidavit.

"Wachovia was under tremendous pressure from Citi and the regulators to conclude a transaction with Citigroup with definitive agreements by the following Monday, October 6, 2008."

On Thursday, Oct. 2, Mr. Bair contacted Mr. Steel and asked if he had talked to Mr. Kovacevich recently. Mr. Steel said he hadn't, according to the affidavit. Ms. Bair said Wells Fargo would be making a counteroffer, adding that Mr. Steel should give it "serious consideration."

Mr. Steel was on a plane about to take off, so Ms. Bair called Wachovia's general counsel and went over some of the details, the affidavit states. Mr. Kovacevich called Mr. Steel at 9 p.m., once the flight had landed. Four minutes later, Mr. Kovacevich sent a signed merger agreement from Wells Fargo. Wachovia's board had a conference call at 11 p.m. that night.

"The Company's advisors and I told the board that we believed that unless a definitive merger agreement was signed with either Citigroup or Wells Fargo by the end of the day Friday, October 3, that the FDIC was prepared to place Wachovia's banking subsidiaries into receivership," Mr. Steel said in the affidavit.

Ex-CEO of S&L bought by Wachovia defends record

Once hailed for running their savings-and-loan company like an endearing mom-and-pop shop, Herb and Marion Sandler are now being vilified as ruthless home lenders who helped destroy Wachovia Corp. and contributed to the financial decay that led to the U.S. government's $700 billion rescue plan to buy rotten mortgages.

After deflecting the media for months, Herb Sandler defended his lending record in an interview Sunday. He also tried to make a case for why Wachovia is worth substantially more than the $14.8 billion that Wells Fargo & Co. has offered for the company.

Sandler, 77, spoke to The Associated Press in the San Francisco office of his family's charitable foundation the morning after NBC's "Saturday Night Live" broadcast a skit deriding the Sandlers as predatory lenders who had duped unsophisticated borrowers and Wachovia, too. A caption shown during the sketch skewered the Sandlers as "people who should be shot."

Although the timing of the interview was coincidental, Sandler was seething after watching a replay of the skit on the Internet.

"I have been listening to this crap for two years," Sandler said. "We are being unfairly tarred. People have been telling us to speak out for some time, but we didn't think it was appropriate. That was clearly a mistake."

The public ridicule represents a 180-degree turn for the Sandlers, who were considered to be the voices of reason while they steered Golden West Financial Corp. and its subsidiary, World Savings, through a period of financial recklessness that led to the failure of thousands of other S&Ls in the 1980s and 1990s.

Golden West never strayed from its staid lending approach while the Sandlers scolded others for their risky investments in commercial real estate and exotic business ventures.

Herb Sandler agrees with his critics on one point: He and Marion, who were Golden West's co-chief executives for more than 40 years, couldn't have picked a better time to sell the company than when they closed their $24.3 billion deal with Wachovia in October 2006.

After years of double-digit increase, home prices began to crumble once Wachovia took over, and now the Charlotte, N.C.-based bank is in such deep trouble that it has agreed to be sold to Wells Fargo for just $7 per share — nearly 90 percent below the company's stock price at the time of the Golden West takeover.

Citigroup Inc. is fighting in court to enforce an earlier agreement that would allow it to buy Wachovia's banking operations for $2.1 billion, or $1 per share.

The Sandlers were the biggest winners in the Golden West sale, collecting Wachovia stock that was worth more than $2 billion when the deal closed. More than $1 billion of the stock was used to fund the couple's charitable foundation. Herb declined to say how much of the stock the couple still owns, saying only they still have enough shares to care what happens to Wachovia.

Sandler maintains that Wachovia's mortgage problems aren't as severe as they might seem, especially now that the federal government is prepared to take some of the deteriorating mortgages off lenders' books.

Once the clean-up work is complete, Sandler believes Wachovia will be worth $60 billion to $100 billion. Although he thinks Wells should have been pressured to pay more, Sandler says it's preferable to the Citigroup bid, which was negotiated with the help of federal regulators. He doubts Wells or any other bidder will up the ante for Wachovia because of the turmoil in financial markets.

More than anything else, Sandler wants to burnish his and his wife's legacy.

Taking advantage of regulations passed in 1981, World Savings had thrived for decades by specializing in adjustable rate mortgages that gave borrowers the option of deferring the interest due on their monthly payments. These so-called option-ARMs have been widely derided for driving up the amount that borrowers owed on their loans, ultimately saddling them with payments that they can't afford.

But Sandler contends the troubles cropping up in World's option-ARM, or "pick-a-pay," portfolio haven't been severe enough to drag down Wachovia. The bank has charged off about $850 million of the $122 billion pick-a-pay portfolio so far, but the bank's management has indicated the losses could rise to $12 billion.

If Wells Fargo prevails in its effort to buy Wachovia, it intends to take a $32 billion hit on the pick-a-pay portfolio — an action that implies the loans, on average, are only worth 74 cents on the dollar.

Sandler contends the loss projections are grossly exaggerated and rely on improbable Depression-era assumptions about the U.S. economy. He doubts the losses on World's former mortgage portfolio will rise above $10 billion, largely because none of the loans were made to borrowers with shoddy, or "subprime," credit records.

Sandler said World's pick-a-pay loans were made under the same qualifying standards that had been in effect during the previous 25 years when the savings and loan's losses were among the lowest in the industry and the Sandlers were consistently praised for their prudence.

"We had a great track record for 40 years," Sandler said. "If this product was so dangerous, how could that be? There is something anomalous about that, isn't there?"

(This version CORRECTS ADDS dropped word "have" to 11th graf, corrects 2nd, 13th and 14th grafs to reflect Sandler isn't seeking higher Wells Fargo bid even though he believes Wachovia is substantially more. Moving on general news and financial services.)

Citigroup wins first round for Wachovia

Citigroup has won the first round in a bitter match with Wells Fargo over the takeover of Wachovia after a New York court gave it more time for exclusive negotiations with the sixthlargest US bank.

Citi is also suing Wachovia for up to $60bn in damages, accusing it of breaking an exclusivity agreement when it clinched a rival deal with Wells, according to people close to its case.

However, Justice Charles Ramos of the Supreme Court of the state of New York did not rule on that claim when he granted Citi an emergency extension of the exclusivity agreement on Saturday night.

Yesterday it emerged that hours before Wells trumped its bid for Wachovia on Thursday, Citi had sweetened its offer for the Charlotte-based lender. A deal was close to being signed between Citi and Wachovia but it was scuppered by Wells Fargo's intervention.

People close to the situation said that Citi's increased offer, the details of which are not known, remained on the table.

Citi claimed that prolonging the exclusivity agreement until at least Friday, when both sides are due to appear in court, has frozen merger talks between Wachovia and Wells Fargo.

The San Francisco-based lender trumped Citi's government-aided $2.2bn bid for the banking operations of Wachovia with a $15.1bn all-share offer.

Citi said that the exclusivity agreement, which would have expired on Monday, "unconditionally bars Wachovia from negotiating or entering into a merger/acquisition agreement with any party other than Citi".

People close to Wachovia said the extension of the agreement simply meant it would keep talking to Citi but added that its management still favoured a deal with Wells.

Citi, Wachovia Claim Gains From Sunday Court Hearing

Citigroup Inc. (C) and Wachovia Corp. (WB) both claimed victory Sunday following a hearing in a federal court in New York related to the two companies' souring deal agreement.

Previously, Citigroup had scored a win Saturday night, when the Supreme Court of the State of New York granted the banking giant's motion to temporarily prevent Wachovia from negotiating a merger with anybody but Citi. Citigroup had agreed in principle to buy Wachovia's banking operations Monday, Sept. 29.

Wachovia rushed to the United States District Court for the Southern District of New York on Sunday to obtain a restraining order preventing Citi from interfering with Wachovia's deal to sell the entire company to Wells Fargo & Co. (WFC), which was announced Friday. That deal collided with an agreement in principle Wachovia had struck with Citi on Monday, where Citi would buy Wachovia's banking operations.

The hearing was oral, and no written decision was available, but both sides claimed gains from Sunday's hearing. Judge John George Koeltl was not immediately available for comment.

A spokeswoman for Wachovia said, "We are pleased that Judge Koeltl granted our motion for expedited resolution of the exclusivity agreement between Wachovia and Citigroup."

Citi had not objected to an expedited proceeding, but a spokeswoman said: "We are very pleased that Wachovia's motions for emergency injunctive relief and a temporary restraining order were denied today in Federal Court."