Friday, January 30, 2009

Putin Turns Down Michael Dell’s Aid Offer

Perhaps Vladimir Putin is more of a Mac man.

After a speech Wednesday at the World Economic Forum in Davos, Mr. Putin, Russia’s prime minister, took some questions from Davos attendees. Michael Dell, the founder and chief executive of Dell, posed the first query. He asked how technology companies could help Russia make the best use of its talent and technology. Mr. Putin appeared less than impressed with the question.

“You see, the trick is that we don’t need any help,” Mr. Putin said, according to a video of the event on YouTube. “We are not invalids. We do not have limited capacity.”

Reports from the event suggest that the audience was taken aback by Mr. Putin’s aggressive remarks. The version of the event on YouTube, however, seems to put things in a less caustic light. (The reports also have Mr. Putin saying Russia does not have “limited mental capacity” rather than just “limited capacity” in an infrastructure sense, as the translation seems to imply.)

Mr. Putin appeared set on defending Russia as an advanced nation and not a developing country in need of aid. He celebrated the broad use of computers and Internet access at Russian schools and boasted about Russian software developers.

“Our programmers are some of the best in the world,” Mr. Putin said. “No one would contest that here –- not even our Indian colleagues.”

To that point, companies such as Sun Microsystems and Intel have long tapped Russia for help on some of their most sophisticated software projects. Freelance criminal software programmers are also known worldwide for their ability building malware.

In the video clip floating about, Mr. Dell did not have a chance to follow up on his original question, and Dell’s corporate public relations staff declined to comment on the matter.

Mr. Dell may have set himself up for a spirited response by prefacing his question with a jab at Mr. Putin’s politics.

“Mister Prime Minister, you spoke of the dangers of excessive government involvement, and I found myself really struck by that comment and surprised to hear that comment,” Mr. Dell said. “Six months ago, I would have never imagined hearing that comment from yourself, but I have to say I completely agree with you.”

Net Income Fell in Quarter for AT&T

AT&T, the telecommunications giant, reported on Wednesday that its fourth-quarter profit fell from a year ago but the figures were clouded by changes to the way it accounts for sales of the iPhone.

The company said net income for the fourth quarter was $2.4 billion or 41 cents a share, compared to $3.1 billion, or 51 cents a share, in the period a year earlier.

However, about a nickel of that difference was the up-front fee that AT&T pays for each iPhone it sells, rather than spreading that cost over time. AT&T started to install that accounting change this summer with the release of Apple’s latest iPhone model.

More broadly, AT&T reported mixed financial results for the fourth quarter. The company benefited by continued growth in the wireless business, and faced declines in the landline business.

Revenue for the fourth quarter was $31.1 billion up slightly from $30.4 billion in the quarter a year ago.

Excluding one-time charges, the company had a profit of 64 cents a share. On that basis, a consensus of Wall Street analysts had projected the company would earn 65 cents a share.

For the year, the company earned $12.9 billion, or $2.16 a share, up from $11.95 billion, or $1.94 a share, for 2007. Revenue rose 4.3 percent to $124 billion.

In the wireless side of its business, AT&T said it added 2.1 million subscribers in the quarter, compared with 2.7 million in the quarter a year ago, a drop in part attributable to the fact that most Americans already have phones and service plans.

But AT&T saw the revenue that it earned from each subscriber grow to $59.59, up from $57.35 a year ago. The growth came largely from increasing use of data.

On the landline side of the business, the company lost 1.56 million access lines in the fourth quarter and 6 million overall in 2008. Those figures are consistent with long-term trends as consumers and business move away from landlines and toward wireless products and services.

AT&T continued to see increased growth of its U-verse television service, which gained 264,000 subscribers in the fourth quarter compared with an increase of 105,000 a year ago. The company gained 236,000 broadband customers in the fourth quarter, down from 396,000 a year ago — a fall that is in part attributable to the challenging economy.

Ed Snyder, an industry analyst with Charter Equity Research, said the performance was more-or-less inline with Wall Street’s expectations.

“The wireline business was weak but the wireless business was a little better than expected,” he said. “No big surprises.”

Hurt by Weak Film Sales, Kodak Trims Work Force

ROCHESTER (AP) — The Eastman Kodak Company said Thursday it was cutting 3,500 to 4,500 jobs, or 14 percent to 18 percent of its work force, as it posted a fourth-quarter loss of $137 million on plunging sales of both digital and film-based photography products. Its stock tumbled nearly 30 percent.

Kodak, a 129-year-old manufacturer, said it lost 51 cents a share in the fourth quarter. That compares with a year-ago profit of $215 million, or 75 cents a share.

Sales slumped 24 percent to $2.43 billion, from $3.22 billion a year ago. The company had a sharp slowdown in demand for digital cameras and inkjet printers, lower royalties from patents and unfavorable foreign exchange rates.

Revenue from digital products dropped 23 percent to $1.78 billion, and traditional film-based revenue fell 27 percent to $652 million.

Excluding revamping charges and one-time items the loss came to $21 million, or 8 cents a share. Analysts surveyed by Thomson Reuters expected, on average, a profit of 21 cents a share and sales of $2.81 billion.

“There was a point when Kodak had too many people. Now it’s going the other way,” said Ulysses Yannas, a broker for Buckman, Buckman & Reid in New York. “I don’t see that there’s any fat left, which says that when and if this thing turns around, you’re going to have a wild ride.”

The latest cuts that Kodak aims to complete in 2009 could trim its ranks to 19,900, a level not reached since the 1930s Depression era. Its payroll peaked at 145,300 in 1988.

“The second half of 2008 will go down in history as one of the most challenging periods we have seen in decades,” Kodak’s chief executive, Antonio M. Perez, said in a statement.

Kodak’s shares dropped $2.08, to close at $4.99 in Thursday trading.

In all of 2008, Kodak earned $339 million, or $1.20 a share, down 50 percent from $676 million, or $2.35 a share, in 2007. Sales fell 9 percent to $9.42 billion, from $10.3 billion.

At Reader’s Digest, Layoffs Are Part of ‘Recession Plan’

As publishers reel from the recession and a plunge in advertising, the Reader’s Digest Association said Thursday that it would lay off close to 300 people, about 8 percent of its work force, as well as put employees on unpaid furloughs and suspend contributions to their 401(k) plans.

The company said it was not closing any of its United States magazines or other businesses, but trimming all of its operations in 79 countries. In addition to publishing domestic magazines like the flagship Reader’s Digest and Every Day With Rachael Ray, it has dozens of magazines overseas and popular Web sites like, and produces dozens of books annually.

It recently started a new magazine and membership organization, Purpose Driven Connection, in partnership with the Rev. Rick Warren, the popular author and minister.

“We have announced a comprehensive ‘recession plan,’ which is our internal roadmap for dealing with the extraordinary effects of this recession on consumer spending,” Mary G. Berner, the president and chief executive, said in a statement. “We hope and expect that most of these moves will be temporary.”

Ripplewood Holdings, a private equity firm, bought Reader’s Digest Association less than two years ago in a deal that greatly increased its debt burden. The new management has been more aggressive about marketing new products, selling ads and trimming costs.

The company said it was eliminating the equivalent of 280 full-time jobs, out of 3,500 worldwide. It employs about 1,300 people in the United States.

It said it would impose unpaid time off “where permitted by laws and agreements,” both this year and in 2010, to avoid further layoffs. It did not disclose the duration of the furloughs, or say how many employees would be affected.

Richest 400 Earned on Average 263 Million in 2006.

The income of the 400 wealthiest Americans swelled in 2006, soaring nearly 23 percent from the previous year, to an average of $263 million, according to data released Thursday by the Internal Revenue Service. Since 1996, this group has nearly doubled its share of all income earned in the United States.

The top 400 paid just more than $18 billion in federal income taxes in 2006, or an average of $45 million, on a record $105 billion in total income — the lowest effective tax rate in the 15 years since the agency began releasing such data.

That compares with nearly $1 trillion paid by all other individual taxpayers in 2006.

The gains for the richest took place amid a booming economy, in which hedge funds and private equity firms blossomed and the subprime lending machine went into high gear.

The rising wealth of the nation’s richest taxpayers will most likely intensify debate among tax and policy analysts about the equitability of the tax code, which analysts say favors the ultrawealthy.

Tax cuts enacted by the Bush administration that benefit the wealthy are set to expire by 2011.

“Until recently, we had a financial system that rewarded investors, and we have a tax system that does as well,” said Robert S. McIntyre, the director of Citizens for Tax Justice.

Now wealthy people, he said, pay income tax rates well below those of working-class citizens because of a myriad of tax breaks. A lower capital gains tax, now at 15 percent, down from 28 percent in 1997, benefits investors with big portfolios.

The average adjusted gross income in 2006 of more than $263 million for the top 400 taxpayers compared with an average of $214 million in 2005. It was three and a half times what they earned in 1996, which was $74 million.

And their average tax rate continued to a 15-year low of 17 percent.

But their contribution to federal coffers rose slightly, to nearly 1.8 percent of total contributions by all individual taxpayers. About 130 million taxpayers file returns each year.

The growth in income came primarily from dividends and interest income, not rising salaries and wages. Capital gains income jumped to 63 percent of the adjusted gross income of the richest 400, up from 58 percent in the previous year.

As a percentage of their income, salaries and wages fell to 7.4 percent of their total income, down from more than 12.5 percent just two years earlier. But taxable interest as a percentage of their income rose to nearly 7.8 percent, the highest level since the dot-com boom era of 1995.

The higher income also came from a sharp rise in claims for foreign tax credits, typically through privately owned entities. Such claims rose in 2006 to an average $2.5 million from $1.7 million the year earlier, and quadruple the level in 1996.

More than half, or nearly 54 percent, of all the itemized deductions taken by the wealthiest were related to their charitable contributions, a figure roughly unchanged since 1996.

And while the top 400 wealthiest earned more deductions from their charitable contributions, such gifts still account for just 5.19 percent of all itemized charitable contributions by all taxpayers.

2 Banks to Send Madoff Trustee $535 Million

The Bank of New York Mellon Corporation and JPMorgan Chase & Company have agreed to transfer about $535 million to the trustee liquidating the brokerage of Bernard L. Madoff, the man accused of engineering a global Ponzi scheme, according to court documents filed Thursday.

In the filings in United States Bankruptcy Court in New York, the trustee and the banks asked a judge to approve the transfers at a hearing on Feb. 4.

The move is part of the trustee’s effort under the Securities Investor Protection Act to gather assets to be returned to defrauded investors.

Bank of New York Mellon would send a wire transfer of about $301.4 million, and JP Morgan Chase would send about $233.5 million to the court-appointed trustee by Feb. 6, the documents said. The accounts are held by Mr. Madoff’s brokerage company.

A New York lawyer, Irving H. Picard, is the trustee overseeing the liquidation of Bernard L. Madoff Investment Securities, which collapsed after Mr. Madoff was arrested and charged last month with securities fraud.

Mr. Madoff, a former chairman of the Nasdaq stock market, is under house arrest and 24-hour surveillance in his luxury Manhattan apartment as criminal and civil authorities investigate his global operations, which are said to have lost $50 billion.

Eli Lilly, Reporting a Loss, Cites Imclone Acquisition

Eli Lilly reported flat fourth-quarter sales Thursday and said earnings fell on charges related to its acquisition late last year of ImClone Systems, the biotechnology company.

The company posted a loss of $3.63 billion, or $3.31 a share, in contrast to a profit of $854.4 million, or 78 cents a share, in the period a year earlier.

Excluding one-time items like the $4.73 billion charge related to its acquisition of ImClone, Lilly earned $1.07 a share, slightly better than the $1.05 expected by analysts.

Global sales of $5.21 billion were little changed from a year earlier and were below analysts’ average forecast of $5.39 billion, according to Reuters Estimates. Sales would have risen 3 percent if not for the stronger dollar, which lowers the value of overseas sales.

Sales of the schizophrenia drug Zyprexa, the company’s biggest product, fell 10 percent, to $1.15 billion on continuing lower demand in the United States. Sales also declined overseas, where the product previously had shown strength.

Zyprexa has been hurt by generic competition in Germany and Canada and concerns that the pill causes weight gains that can increase the risk of diabetes.

The drug is expected to face generic competition in the United States in October 2011.

Lilly hopes an experimental blood clot preventer called prasugrel will soon by approved by the Food and Drug Administration and produce blockbuster sales that can help offset expected plunging sales of Zyprexa.

A federal advisory panel of doctors will review prasugrel, which has decreased the risk of blood clots in clinical trials but raised the risk of dangerous bleeding, next week. The agency has delayed a decision on the medicine twice.

Fourth-quarter sales of Cymbalta, a depression drug, rose 15 percent, to $721 million, and sales of a cancer drug, Alimta, rose 31 percent, to $319 million.

Shares of Lilly, which is based in Indianapolis, fell $1.12, to $37.97.

Shares in Sony, Nintendo and Toshiba Fall After Warnings on Outlook

HONG KONG — Shares in the Japanese electronics giants Toshiba and Nintendo plunged on Friday after the companies warned late on Thursday of disappointing earnings ahead.

The problems facing Japanese companies were highlighted after a government report early Friday showed a record decline in industrial production last month.

Toshiba, Nintendo, Sony and NEC Electronics, some of the biggest names in consumer electronics and technology, all reported disappointing results and gloomy outlooks on Thursday, further proof that the slowdown had expanded well beyond big-ticket items like cars and houses, and revealing the extent of consumer pessimism around the globe.

Toshiba, whose products span chips to household appliances, said it now expected a record net loss of 280 billion yen ($3.13 billion) for the business year ending in March, rather than the 70 billion yen profit it had forecast in September, setting off a decline of 14.8 percent in its share price on Friday.

Toshiba lost 121.1 billion yen in the last three months of 2008 and said it would halve capital spending, to 230 billion yen.

“Demand does not seem to be getting any better from the fourth quarter on,” Naofumi Hara, senior vice president at Sony, told a news conference, according to Reuters.

As the global economic downturn drags on, ordinary consumers everywhere, scared by mounting job losses and the stock market rout last year, have slowed spending to a trickle. Companies, too, have cut back investments on anything from factory machinery and research to photocopiers, computers, information technology upgrades and business travel.

As a result, companies in virtually every sector of the economy, from the software giant SAP to automakers around the world, have had to lay off workers, further depressing consumers’ confidence.

Government data on Friday showed Japanese industrial production fell a record 9.6 percent in December, underscoring the point that Japan’s recession deepened much more rapidly than most observers had expected during the last three months of 2008.

Analysts are skeptical that a recovery will come any time soon.

“Given the current severe market conditions, Toshiba’s expectation of the time it will need to recover its profitability and financial profile may prove overly optimistic,” Kazusada Hirose, a senior analyst at the ratings agency Moody’s wrote on Thursday after downgrading the company.

Adding to the gloom Thursday, the games maker Nintendo cut its outlook, setting off a 12.4 percent plunge in its shares on Friday.

Although Nintendo remains one of the few Japanese consumer electronics giants to still expect a handsome profit for the current business year, its popular Wii game console has turned out not to be as recession-proof as many analysts had thought. Nintendo now expects profits of only 230 billion yen, rather than 345 billion yen, for the current business year.

NEC Electronics, which makes chips, warned of a full-year net loss of 65 billion on Thursday and announced job cuts.

And Sony, the sprawling consumer electronics company behind the Walkman, PlayStation 3 game console and Bravia TV sets, last week issued its second profit warning in three months. The company now expects a net loss of 150 billion yen, rather than a profit of 150 billion yen, for the year through March.

Quarterly results announced by Sony on Thursday revealed that the bulk of the bleeding stems from the electronics division. That includes Sony’s television brands, which are suffering both from collapsing demand and fierce price pressure as competition from other manufacturers heats up.

Sony shares, which fell sharply after last week’s profit warning, slid another 5 percent on Friday.

The announcements, along with the latest economic data, underscore the depth of Japan’s recession in the last three months of last year.

Japanese companies have been racing to cut output and lower costs, and more job cut announcements and profit warnings are expected to become a familiar feature of the current earnings season. NEC Electronics and Toshiba between them announced on Thursday that they were shedding 5,200 temporary staff, adding to the thousands of job cuts already announced by Sony and other Japanese companies.

Disney’s TV Unit Will Cut 400 Jobs

The television division of the Walt Disney Company announced Thursday that it would eliminate about 400 jobs from its work force of 6,500 to 7,000, as part of a cost-cutting effort to deal with what it called a weakening economy.

The job cuts will affect all the departments of the Disney-ABC Television Group, as the division is called. Disney-ABC did not release any specific breakdown of the job cuts, though one ABC News executive said that 37 news jobs were included in the reductions.

No ABC executives would offer any other details of the layoffs on the record, but one senior executive said that although 400 jobs were being eliminated, only 200 active workers will be laid off. The other 200 jobs had been vacant and will not be filled, the executive said.

The announcement comes one day after another Disney TV division, the cable sports channel ESPN, announced it would eliminate 200 jobs within the next year. ESPN did not rule out layoffs but said the goal was to reach that number by attrition.

Both Anne Sweeney, the president of the Disney-ABC Television Group, and George Bodenheimer, the ESPN chief executive, cited worsening economic conditions for the job contractions. Mr. Bodenheimer also said he was freezing the salaries of the channel’s top executives.

In a memo to ABC employees, Ms. Sweeney said, “After months of making hard decisions across our businesses to help us adjust to a weakening economy, we’re now faced with the harsh reality of having to eliminate jobs in some areas.”

Ford Reports a Record $14.6 Billion Loss for 2008

DETROIT — After closing the books on a $14.6 billion loss in 2008 — the worst annual result in its 105-year history — Ford Motor Company said Thursday that it would draw the last $10.1 billion from its lines of credit to add to its cash hoard so that it could survive the increasingly bleak vehicle market.

Ford’s chief executive, Alan R. Mulally, said the company, which tapped credit markets to build its cash reserves well before the economy soured, remained determined to finance its operations without the federal aid that was extended to its crosstown rivals, General Motors and Chrysler.

“I think there’s more awareness than ever that Ford is on a very different path,” Mr. Mulally said in an interview.

He added that it had become a marketing advantage for Ford with consumers shopping for an American car. “Our dealers have told us that people know that Ford is in a better place,” Mr. Mulally said.

Ford joined G.M. and Chrysler in December in asking Washington for a combined $34 billion in loans, but has since backed away from seeking its portion of the request. G.M. and Chrysler, however, needed $17.4 billion in emergency loans from the Treasury Department to avoid filing for bankruptcy.

Both G.M. and Chrysler must deliver plans to government officials by Feb. 17 to show they are pursuing the drastic restructuring actions that were required of them as a condition of receiving the federal loans.

Ford’s miserable sales in 2008 worsened sharply in the fourth quarter, with nearly $6 billion of the total $14.6 billion loss coming in the fourth quarter. It was a year in which Ford’s revenue declined almost 20 percent, and its cash reserves declined by $21 billion.

The automaker ended 2008 with $13.4 billion in available cash, which it will augment by tapping into its credit lines for another $10.1 billion.

Ford’s financial health owes considerably to its decision in late 2006 to mortgage its assets and arrange long-term borrowing before the credit markets dried up.

Now, with more than $23 billion in hand, Ford can keep spending billions of dollars on new products during what promises to be another tough year for vehicle sales around the world.

Ford said Thursday that it expects the United States market to total 11.5 million to 12.5 million vehicles in 2009. Last year, industry sales fell 18 percent, to 13.2 million vehicles.

The company is also forecasting lower sales in the already depressed regions of Europe and South America, and little if any growth in Asia.

Still, Mr. Mulally reiterated his pledge that Ford would break even or become profitable by 2011.

To achieve that, Ford will continue its cost-cutting efforts, which have reduced its global employment by more than 40,000 workers in the last three years.

The company said it would reduce its structural costs by $4 billion in the coming year, primarily through cutting salaried personnel and streamlining its global manufacturing and engineering operations.

By 2010, Ford expects that 40 percent of its vehicles sold in North America will have platforms shared with its European operations. “And we expect there will be complete alignment by 2013,” Mr. Mulally said.

More of Ford’s future products will be smaller, more fuel-efficient cars. The company will introduce several important products this year, including a redesigned Taurus sedan and a new hybrid gas-electric version of the Fusion midsize car.

Yet, by most accounts, Ford will be introducing its newest models in a market that appears to be getting worse by the month.

Auto sales plummeted 35 percent in the fourth quarter of last year, and analysts are predicting another sizable drop for January.

Industry sales in January could fall to as low as 730,000 vehicles — an 18 percent decrease from December and a 30 percent decline from the same month last year, according to the auto-buying Web site

Ford and other automakers have cut their production substantially in recent months to match the drop in demand.

Scaling back production until the economy recovers is critical to Ford’s overall goals of conserving cash and avoiding the need to seek government assistance.

“Nothing is more important than matching our production to the real demand,” Mr. Mulally said.

Although Ford is not facing a government directive to cut its labor costs and reorganize its long-term debt load, the company is working toward that end in the same manner as G.M. and Chrysler.

Mr. Mulally said Ford expected to match any concessions that G.M. and Chrysler were able to negotiate from the United Automobile Workers union and their lenders.

“We are having ongoing conversations with all our stakeholders,” he said. “We will not be disadvantaged.”

Six Errors on the Path to the Financial Crisis

WHAT’S a nice economy like ours doing in a place like this? As the country descends into what is likely to be its worst postwar recession, Americans are distressed, bewildered and asking serious questions: Didn’t we learn how to avoid such catastrophes decades ago? Has American-style capitalism failed us so badly that it needs a radical overhaul?

The answers, I believe, are yes and no. Our capitalist system did not condemn us to this fate. Instead, it was largely a series of avoidable — yes, avoidable — human errors. Recognizing and understanding these errors will help us fix the system so that it doesn’t malfunction so badly again. And we can do so without ending capitalism as we know it.

My list of errors has six whoppers, in chronologically order. I omit mistakes that became clear only in hindsight, limiting myself to those where prominent voices advocated a different course at the time. Had these six choices been different, I believe the inevitable bursting of the housing bubble would have caused far less harm.

WILD DERIVATIVES In 1998, when Brooksley E. Born, then chairwoman of the Commodity Futures Trading Commission, sought to extend its regulatory reach into the derivatives world, top officials of the Treasury Department, the Federal Reserve and the Securities and Exchange Commission squelched the idea. While her specific plan may not have been ideal, does anyone doubt that the financial turmoil would have been less severe if derivatives trading had acquired a zookeeper a decade ago?

SKY-HIGH LEVERAGE The second error came in 2004, when the S.E.C. let securities firms raise their leverage sharply. Before then, leverage of 12 to 1 was typical; afterward, it shot up to more like 33 to 1. What were the S.E.C. and the heads of the firms thinking? Remember, under 33-to-1 leverage, a mere 3 percent decline in asset values wipes out a company. Had leverage stayed at 12 to 1, these firms wouldn’t have grown as big or been as fragile.

A SUBPRIME SURGE The next error came in stages, from 2004 to 2007, as subprime lending grew from a small corner of the mortgage market into a large, dangerous one. Lending standards fell disgracefully, and dubious transactions became common.

Why wasn’t this insanity stopped? There are two answers, and each holds a lesson. One is that bank regulators were asleep at the switch. Entranced by laissez faire-y tales, they ignored warnings from those like Edward M. Gramlich, then a Fed governor, who saw the problem brewing years before the fall.

The other answer is that many of the worst subprime mortgages originated outside the banking system, beyond the reach of any federal regulator. That regulatory hole needs to be plugged.

FIDDLING ON FORECLOSURES The government’s continuing failure to do anything large and serious to limit foreclosures is tragic. The broad contours of the foreclosure tsunami were clear more than a year ago — and people like Representative Barney Frank, Democrat of Massachusetts, and Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, were sounding alarms.

Yet the Treasury and Congress fiddled while homes burned. Why? Free-market ideology, denial and an unwillingness to commit taxpayer funds all played roles. Sadly, the problem should now be much smaller than it is.

LETTING LEHMAN GO The next whopper came in September, when Lehman Brothers, unlike Bear Stearns before it, was allowed to fail. Perhaps it was a case of misjudgment by officials who deemed Lehman neither too big nor too entangled — with other financial institutions — to fail. Or perhaps they wanted to make an offering to the moral-hazard gods. Regardless, everything fell apart after Lehman.

People in the market often say they can make money under any set of rules, as long as they know what they are. Coming just six months after Bear’s rescue, the Lehman decision tossed the presumed rule book out the window. If Bear was too big to fail, how could Lehman, at twice its size, not be? If Bear was too entangled to fail, why was Lehman not?

After Lehman went over the cliff, no financial institution seemed safe. So lending froze, and the economy sank like a stone. It was a colossal error, and many people said so at the time.

TARP’S DETOUR The final major error is mismanagement of the Troubled Asset Relief Program, the $700 billion bailout fund. As I wrote here last month, decisions of Henry M. Paulson Jr., the former Treasury secretary, about using the TARP’s first $350 billion were an inconsistent mess. Instead of pursuing the TARP’s intended purposes, he used most of the funds to inject capital into banks — which he did poorly.

To illustrate what might have been, consider Fed programs to buy commercial paper and mortgage-backed securities. These facilities do roughly what TARP was supposed to do: buy troubled assets. And they have breathed some life into those moribund markets. The lesson for the new Treasury secretary is clear: use TARP money to buy troubled assets and to mitigate foreclosures.

Six fateful decisions — all made the wrong way. Imagine what the world would be like now if the housing bubble burst but those six things were different: if derivatives were traded on organized exchanges, if leverage were far lower, if subprime lending were smaller and done responsibly, if strong actions to limit foreclosures were taken right away, if Lehman were not allowed to fail, and if the TARP funds were used as directed.

All of this was possible. And if history had gone that way, I believe that the financial world and the economy would look far less grim than they do today.

For this litany of errors, many people in authority owe millions of Americans an apology. Richard A. Clarke, former national security adviser, set a good example when he told the commission investigating the 9/11 attacks that he wanted victims’ families “to know why we failed and what I think we need to do to ensure that nothing like that ever happens again.” I’m waiting for similar words from our financial leaders, both public and private.

Deep in Debt, and Now Deep in Worry

NOT long ago, a woman in California called me for advice. She is divorced, with two children, and has a series of interlocking financial problems.

She lives in a lovely home in a stylish inland enclave. It has an interest-only mortgage of about $2.2 million that requires a payment of $12,000 a month, very roughly. It was last appraised at $2.7 million, but who knows if it’s now worth anything remotely close to that price.

The woman, whom I’ve known since she was a teenager, has no job or other remunerative employment. She has a former husband, an entrepreneur whose business has suffered recently. He pays her $20,000 a month, of which roughly half is alimony and half child support. The alimony is scheduled to stop this summer.

She has a wealthy beau who pays her credit card bills and other incidentals, but she is thinking of telling him she is through with him. She has no savings and has refinanced her home repeatedly, always adding to indebtedness and then putting the money into a shop she owns that has never come close to earning a dime. Now she is up all night worrying about money. “Terrified,” as she put it. She wanted me to tell her what to do.

What could I say? I did the best I could, but I had to tell her that she was on very thin ice.

Ever since, I’ve been thinking of the troubles of this sweet woman, consumed with worry about money.

These gloomy thoughts have been compounded by the holiday newsletters I have been getting from old pals and classmates. I have been getting them for about 45 years. This season, for the first time I can recall, the talk in the newsletters is not the usual tales of world-beating triumph by genius children, but of jobs lost, homes in jeopardy, children whose jobs have vanished and who are on the road looking for work.

And all of this is compounded again because my handsome son, age 21, a student, has just married a lovely young woman, 20. You may have seen on television the pudgy, aging face of their sole means of support.

I have been pondering what advice to give them about money. What I keep coming up with is this: Do not act like typical Americans. Do not fail to save. Do not get yourself in debt up to your eyeballs. Work and take pride and honor from your work. Learn a useful skill that Americans really need, like law or plumbing or medicine or nursing. Do not expect your old Ma and Pa to always be there to take care of you. I absolutely guarantee that we will not be. Learn to be self-sufficient through your own contributions, as the saying goes.

This advice has served me well. It was propounded to me by my late father, who often said, “Be prudent.”

MY work as a freelance writer in Hollywood some time ago prepared me for extreme uncertainty. This is the most insecure existence imaginable. It mandates saving, ingenuity and nonstop work and creativity. Freelancers never have a day off. Never. They know that they can go months without a check. They absolutely have to save. They have to have five different levels of fall-back plans and financial escape hatches.

I am well past that now. Decades past. (I hope.) But the habits of thought linger, at least a bit.

I wish I could teach that work ethic to those close to me. I wish I could teach them that money is a scarce good, worth fighting for and protecting. But I very much fear that my son, more up-to-date than I am in almost every way, is more of a modern-day American than I am. To hustle and scuffle for a deal is something he cannot even imagine. To not be able to eat at any restaurant he feels like eating at is just not on his wavelength. Of course, that’s my fault. (I have learned that everything bad that happens anywhere is my fault.) And I hope to be able to leave him well enough provided for to ease his eventual transition into some form of self-sufficiency.

But I keep thinking of my friend in California, and what a perfect specimen of what we have become that she has become. I keep lecturing my son, as Pop lectured me, to learn prudence. I keep lecturing myself to learn it; I am far from a small player in the extravagance game.

Maybe, upon second thought, I did not learn well about prudence. Then I think that maybe it’s too late for far too many of us. The age when money was a free good, available in unlimited quantities just for signing a note, may well be over. What the heck will we do when we have to start acting like mature adults? How will we cope with limits? With reality?

America, a nation of free-spending Peter Pans. Where are our moms and dads when we need them? It’s their fault.

JPMorgan Exited Madoff-Linked Funds Last FallJPMorgan Exited Madoff-Linked Funds Last Fall

JPMorgan Chase says that its potential losses related to Bernard L. Madoff, the man accused of engineering an immense global Ponzi scheme, are “pretty close to zero.” But what some angry European investors want to know is when the bank cut its exposure to Mr. Madoff — and why.

As early as 2006, the bank had started offering investors a way to leverage their bets on the future performance of two hedge funds that invested with Mr. Madoff. To protect itself from the resulting risk, the bank put $250 million of its own money into those funds.

But the bank suddenly began pulling its millions out of those funds in early autumn, months before Mr. Madoff was arrested, according to accounts from Europe and New York that were subsequently confirmed by the bank. The bank did not notify investors of its move, and several of them are furious that it protected itself but left them holding notes that the bank itself now says are probably worthless.

A spokeswoman, Kristin Lemkau, said the bank withdrew from the Madoff-linked funds last fall after “a wide-ranging review of our hedge fund exposure.” Ms. Lemkau acknowledged, however, that the bank also “became concerned about the lack of transparency to some questions we posed as part of our review.”

Investors were not alerted to the move because, under sales agreements, the issues did not meet the threshold necessary to permit the bank to restructure the notes, she said. Under those circumstances, she added, “we did not have the right to disclose our concerns.”

That doesn’t satisfy some investors. As they see it, they were the first people who should have been alerted to the bank’s concerns. “Instead, we continued to pay our fees to the bank and remained the only ones exposed to the risks that JPMorgan did not want to assume,” said the chief asset manager of an Italian investment firm, who declined to be identified because of potential litigation.

The tale began several years ago when a unit of JPMorgan Chase in London issued a series of complex derivatives that gave investors a way to triple their bets on the Fairfield funds, whose solid consistency mirrored the track record that had quietly — and ruinously — drawn investors to Mr. Madoff for decades.

Leveraged notes issued by big banks like JPMorgan Chase and Nomura became conduits through which fresh money flowed from institutional investors into the Fairfield Sentry and the euro-based Fairfield Sigma funds, both run by the Fairfield Greenwich Group — and, in turn, into Mr. Madoff’s hands.

The arrangement worked like this: Investors put up cash to buy the notes from the bank. In return, the bank promised to pay them up to three times the future earnings of the Fairfield funds. When the notes matured in five years, assuming the funds did well, these investors would get more than if they had invested in the funds directly. The bank collected just under 2 percent in fees, investors said.

And because the bank had to hedge its entire risk, it put up to three times the face amount of the notes into the Fairfield funds. Thus, Fairfield Greenwich got more cash to manage than it otherwise would have, increasing its own fee income. To reward note-holders for making that possible, Fairfield paid them a so-called rebate of a fifth to a third of a percentage point a year, according to documentation of those transactions.

The first sign of trouble came in early October, when Fairfield Greenwich notified investors that it would no longer pay them rebates.

The reason, according to the Italian asset manager, was that JPMorgan Chase had “suddenly cashed out” of the Fairfield funds. “The official explanation was that there had been a strategic decision to get out of all hedge funds,” the asset manager said. “The Fairfield official was quite upset.”

Several other European money managers said they were told the same thing.

A spokesman for Fairfield Greenwich declined to comment on the bank’s actions last fall, citing restrictions imposed by the beleaguered firm’s lawyers.

Given the turbulent times, the Italian asset manager said he thought the bank urgently needed to raise cash. That seemed the only way to explain why the bank would pull out of a fund that was up 5 percent when other major market indexes were down 30 percent, he added.

A source close to JPMorgan Chase, however, recalled bank officials saying that the bank’s “due-diligence people had too many doubts” about the performance of the underlying funds.

What Red Ink? Wall Street Paid Hefty Bonuses

By almost any measure, 2008 was a complete disaster for Wall Street — except, that is, when the bonuses arrived.

Despite crippling losses, multibillion-dollar bailouts and the passing of some of the most prominent names in the business, employees at financial companies in New York, the now-diminished world capital of capital, collected an estimated $18.4 billion in bonuses for the year.

That was the sixth-largest haul on record, according to a report released Wednesday by the New York State comptroller.

While the payouts paled next to the riches of recent years, Wall Street workers still took home about as much as they did in 2004, when the Dow Jones industrial average was flying above 10,000, on its way to a record high.

Some bankers took home millions last year even as their employers lost billions.

The comptroller’s estimate, a closely watched guidepost of the annual December-January bonus season, is based largely on personal income tax collections. It excludes stock option awards that could push the figures even higher.

The state comptroller, Thomas P. DiNapoli, said it was unclear if banks had used taxpayer money for the bonuses, a possibility that strikes corporate governance experts, and indeed many ordinary Americans, as outrageous. He urged the Obama administration to examine the issue closely.

“The issue of transparency is a significant one, and there needs to be an accounting about whether there was any taxpayer money used to pay bonuses or to pay for corporate jets or dividends or anything else,” Mr. DiNapoli said in an interview.

Granted, New York’s bankers and brokers are far poorer than they were in 2006, when record deals, and the record profits they generated, ushered in an era of Wall Street hyperwealth. All told, bonuses fell 44 percent last year, from $32.9 billion in 2007, the largest decline in dollar terms on record.

But the size of that downturn partly reflected the lofty heights to which bonuses had soared during the bull market. At many banks, those payouts were based on profits that turned out to be ephemeral. Throughout the financial industry, years of earnings have vanished in the flames of the credit crisis.

According to Mr. DiNapoli, the brokerage units of New York financial companies lost more than $35 billion in 2008, triple their losses in 2007. The pain is unlikely to end there, and Wall Street is betting that the Obama administration will move swiftly to buy some of banks’ troubled assets to encourage reluctant banks to make loans.

Many corporate governance experts, investors and lawmakers question why financial companies that have accepted taxpayer money paid any bonuses at all. Financial industry executives argue that they need to pay their best workers well in order to keep them, but with many banks cutting jobs, job options are dwindling, even for stars.

Lucian A. Bebchuk, a professor at Harvard Law School and expert on executive compensation, called the 2008 bonus figure “disconcerting.” Bonuses, he said, are meant to reward good performance and retain employees. But Wall Street disbursed billions despite staggering losses and a shrinking job market.

“This was neither the sixth-best year in terms of aggregate profits, nor was it the sixth-most-difficult year in terms of retaining employees,” Professor Bebchuk said.

Echoing Mr. DiNapoli, Professor Bebchuk said he was concerned that banks might be using taxpayer money to subsidize bonuses or dividends to stockholders. “What the government has been trying to do is shore up capital, and any diversion of capital out of banks, whether in the form of dividends or large payments to employees, really undermines what we are trying to do,” he said.

Jesse M. Brill, a lawyer and expert on executive compensation, said government bailout programs like the Troubled Asset Relief Program, or TARP, should be made more transparent.

“We are all flying in the dark,” Mr. Brill said. “Companies can simply say they are trying to do their best to comply with compensation limits without providing any of the details that the public is entitled to.”

Bonuses paid by one troubled Wall Street firm, Merrill Lynch, have come under particular scrutiny during the last week.

Andrew M. Cuomo, the New York attorney general, has issued subpoenas to John A. Thain, Merrill’s former chief executive, and to an executive at Bank of America, which recently acquired Merrill, asking for information about Merrill’s decision to pay $4 billion to $5 billion in bonuses despite new, gaping losses that forced Bank of America to seek a second financial lifeline from Washington.

A Treasury department official said that in the coming weeks, the department would take action to further ensure taxpayer money is not used to pay bonuses.

Even though Wall Street spent billions on bonuses, New York firms squeezed rank-and-file executives harder than many companies in other fields. Outside the financial industry, many corporate executives received fatter bonuses in 2008, even as the economy lost 2.6 million jobs. According to data from Equilar, a compensation research firm, the average performance-based bonuses for top executives, other than the chief executive, at 132 companies with revenues of more than $1 billion increased by 14 percent, to $265,594, in the 2008 fiscal year.

For New York State and New York City, however, the leaner times on Wall Street will hurt, Mr. DiNapoli said.

Mr. DiNapoli said the average Wall Street bonus declined 36.7 percent, to $112,000. That is smaller than the overall 44 percent decline because the money was spread among a smaller pool following thousands of job losses.

The comptroller said the reduction in bonuses would cost New York State nearly $1 billion in income tax revenue and cost New York City $275 million.

3 Airlines End Tough Year With Deep Losses

Three big airlines — Continental, JetBlue and US Airways — each reported deeper fourth-quarter losses on Thursday amid pessimism over the near-term outlook for air travel.

The results essentially completed a dismal set of fourth-quarter reports for the industry, which has suffered whiplash in the last year, first from record fuel prices that peaked during the summer, then from the sour economy.

Airlines began cutting flights, routes and aircraft in the fourth quarter, in reaction to jet fuel prices that at one point in 2008 were nearly double what they paid in 2007. Carriers thought the retrenchment, which is expected to continue this year, would allow them to charge higher ticket prices.

But passengers balked at paying more, and companies pulled back on business travel in the wake of the economic slump. Now, lots of carriers are instituting fare sales in hopes of winning back travelers.

“You have an operating backdrop that rivals any we’ve seen in our industry for the past few years,” Lawrence W. Kellner, the chief executive of Continental Airlines, told analysts during a conference call.

Continental lost $266 million, or $2.33 a share, compared with $32 million, or 33 cents a share, in the 2007 quarter. The 2008 result included a one-time charge of $169 million to pay for retirement costs for pilots, and to reflect losses on fuel hedging contracts, an issue that also has affected other airlines.

Many carriers lock in the price of fuel in advance, a strategy that can protect them when prices rise. But when the cost of jet fuel drops, airlines have to take charges to account for the difference between the hedge price and the going rate.

Revenue at Continental was $3.5 billion, down 1.5 percent.

Continental noted a significant shift in its international flights from first-class to coach travel. Several companies have banned first-class business travel as a cost-cutting move. “Our international business is pretty solid,” Mr. Kellner said. “It’s just not as profitable as it used to be.”

Continental shares dropped 10.6 percent, to $14.51.

US Airways, which was in the news earlier this month when one of its planes made an emergency landing in the Hudson River, said it lost $541 million, or $4.74 a share, compared with a $79 million loss, or 87 cents a share in the 2007 quarter.

Revenue at US Airways was $2.76 billion, essentially flat with 2007. The airline took a special charge of $234 million that included its impact from fuel hedging contracts.

US Airways shares fell 11.37 percent, to $6.47.

JetBlue Airways said it lost $49 million, before taxes, in the fourth quarter compared with a pretax loss of $3 million in 2007. The 2008 results included a one-time charge of $53 million to revalue auction-rate securities.

JetBlue said its results were preliminary and would be completed after it determined the tax implications of its special charge. Its revenue was $811 million, up nearly 10 percent.

It shares fell 2.74 percent, or 18 cents, to $6.38.

JetBlue, which has grown rapidly since it began flying in 2000, said it expected to reduce its flights by 2 percent in 2009. But the airline announced plans to start service from Kennedy International Airport to Los Angeles International Airport, and said it would add service to Jamaica.

David Barger, the chief executive of JetBlue, told analysts that voting among its pilots would end Tuesday on whether they would join a new union, the JetBlue Pilots Association.

The group is independent of the nation’s biggest pilots’ union, the Air Line Pilots Association.

Financial Crisis Dims Hopes for Giant Cross-Border Banks in Europe

FRANKFURT — Only a few years ago, the future of European banking was said to belong to European champions, big border-straddling banks that would compete with the American giants.

Instead, European integration has been replaced by Balkanization.

Because of the financial crisis, banks are retrenching and refocusing on their home markets, all but abandoning ambitions of banking on a Continental scale — or bigger. Strings-attached government rescue plans and basic business logic are driving the change.

So instead of strategies for global conquest, Martin Blessing, the chief executive of Commerzbank, is concentrating on ways to keep credit flowing to the small and medium-size businesses that form the backbone of the German economy.

“We will see a domestic refocusing of banking but not because everyone is turning nationalist or because one or the other governments take stakes,” he said during a recent interview at his office in the bank’s stunning Norman Foster-designed office tower here. “Banks are going to look at where their franchise is strongest.”

These new realities could end up hurting Eastern Europe most. After communism, privatization led to an extended gold rush for Western bankers. Now those investors are having to decide whether to continue lending at home — in France or Austria — or in Poland, the Czech Republic or Hungary. In the global financial crisis, with the health of many banks dependent on the good will of their home governments, the choice is not hard. The thinking at the heart of cross-border expansion in Europe was always straightforward: Europe needed banks that could achieve economies of scale and have the global reach, global clients and global influence to compete with American titans.

Operating on that basis, a handful of European banks moved to grow and consolidate. In 2004, Banco Santander of Spain bought Abbey National of Britain. A year later, Italy’s UniCredit swallowed the bank HVB Group of Germany. In early 2007, Royal Bank of Scotland led a consortium that snapped up ABN Amro of the Netherlands for 70 billion euros, or $92 billion at current exchange rates.

That deal is already coming undone, with the implosion last year of Fortis, one of Royal Bank’s partners.

More broadly, nationalist impulses are on the move across the Continent, with many politicians arguing — as some Democrats are in the United States — that if the government is going to bail out banks, then taxpayers should get some ownership and some say in how they operate.

For example, Gordon Brown, the British prime minister, has said he wants to stay out of the operating side of the banks Britain has bailed out. But his government is under heavy pressure to help small businesses at home, and the documents that created the new British vehicle for investing in banks, United Kingdom Financial Investments, cite domestic lending as its priority.

French and German governments have also injected cash into their banks, both with the goal of keeping money flowing to businesses inside their borders.

Daniel Gros, director of the Center for European Policy Studies in Brussels, called the developments the Balkanization of European finance.

“Whenever governments get into the share capital of banks, even in a small way, of course they think nationally,” Mr. Gros said.

For instance, few banks expanded more rapidly in Germany over the last decade than Royal Bank of Scotland. The British financier muscled onto Continental turf with attractive financing packages for German manufacturers. Today, Royal Bank is majority-owned by the British government after losses in 2008 from £7 billion to £8 billion, or $9.2 billion to $10.5 billion.

According to two senior German executives, Royal Bank is now playing tough with German clients, calling in loans as the bank retrenches in favor of its British business. The executives, who asked not to be identified, because they were not authorized to publicly discuss confidential negotiations, said Royal Bank had demanded that its clients on the Continent sell assets, despite the catastrophic state of financial markets, so the bank could recover its cash quickly, perhaps to lend in Britain.

Most recently, Royal Bank was a major creditor of Adolf Merckle, the German billionaire who killed himself when it became clear the banks — with Royal Bank in the lead, the executives said — would insist on the sale of his prized possession, the generic drug maker Ratiopharm.

Christine Kortyka, a Royal Bank spokeswoman in Germany, denied the bank was retrenching. “We are an international bank with international clients and we will continue to serve them where they need us,” she said.

Mr. Blessing, who took over at Commerzbank just in time to sell a 25 percent stake to the German government to stabilize its finances and complete a major acquisition, does not dispute that governments are angling for national advantage.

Commerzbank styles itself the bank of Germany’s Mittelstand, as this country’s small and midsize companies are known.

Mr. Blessing says he is comfortable with focusing on serving the Mittelstand, because that has always been the bank’s core mission. .

As part of the deal for a cash infusion, the German government received the right to veto major decisions by the bank. That means it can ward off any acquisition from abroad — or any effort at a European expansion.

Latest Reports Indicate Economy Is Getting Worse

Thursday brought a hat trick of grim economic news: New-home sales fell to their slowest pace on record, businesses cut their orders and jobless claims continued to rise.

Taken together, the three reports released by the government painted a picture of an economy that continued to slide as falling consumer spending and rising unemployment amplified the effects of a yearlong recession.

The Commerce Department reported that American businesses ordered fewer durable goods like computers, construction equipment and vehicles in December, cutting the prospects for growth as companies braced for a difficult 2009.

Orders of durable goods fell 2.6 percent last month, to $176.8 billion. It was the fifth consecutive month of declines, after a 3.7 percent drop in November as the country slipped deeper into a recession now nearly 13 months old.

Excluding transportation, new orders of durable goods orders fell 3.6 percent. Excluding orders for military equipment, durable goods fell 4.9 percent.

For all of 2008, orders fell 5.7 percent, a decline topped only by a 10.7 percent drop in 2001.

“This is pretty much what you expect when the economy is in the process of shrinking and businesses don’t see any need to purchase any capital goods,” said Bernard Baumohl, managing director of the Economic Outlook Group. “Even if you did want to increase your capital investments, it’s going to be difficult to get the capital to purchase this.”

Orders for computers and electronic goods dropped by 7.2 percent in December, and factory orders for metals, machinery, transportation equipment and communications equipment slumped as businesses cut their outlooks.

Shipment of goods also fell for a fifth month, declining 0.7 percent.

“The data show clear declines in sectors as diverse as cars, computers, metals and machinery,” Ian C. Shepherdson, chief United States economist at High Frequency Economics, wrote in a note. “The industrial recession is deep and broad, and there’s no prospect of any easing of the downward pressure anytime soon.”

As businesses struggled, the problems of the housing market continued to multiply. The Commerce Department reported that sales of new single-family homes in December fell 14.7 percent to an annual rate of 331,000, a record low.

In all, 482,000 new homes were sold last year as housing prices tumbled and credit dried up. That figure was 37.8 percent lower than the 776,000 homes sold a year earlier.

Also on Thursday, the Labor Department reported that first-time unemployment claims rose to a seasonally adjusted 588,000 for the week that ended Jan. 24, up 3,000 from a revised 585,000 for the week before.

Employers had long resisted making mass layoffs as the economy cooled, seeking instead to cut costs through shorter work weeks, pay cuts and hiring freezes, but they are now cutting jobs by the thousands.

The national unemployment rate has risen to 7.2 percent since the economy slipped into recession last December, and the jobless rates in Michigan and Rhode Island have already reached 10 percent. Some economists expect that the national unemployment rate will rise to 9 percent before the economy gets back on track.

Markets Reverse a Rally on Signs of Long Slump

Caution returned to Wall Street on Thursday as unemployment claims reached a record high and new home sales hit a record low — two glaring signs that the economy was still in a deep slump.

The major stock indexes gave back all of Wednesday’s gains, and then some.

The Dow Jones industrial average sank 226.44 points, or 2.7 percent, to 8,149.01. The Standard & Poor’s 500-stock index fell 3.3 percent, or 28.95 points, to 845.14. The Nasdaq also dropped more than 3 percent, to close at 1,507.84. Stocks had soared Wednesday on hopes that the government would take bad debt off banks’ books.

Investors took a step back Thursday after getting some harsh reminders that it might be a while before the recession, already in its 14th month, ended.

The Labor Department said the number of people continuing to receive unemployment benefits reached a seasonally adjusted 4.78 million the week that ended Jan. 17, the highest level on records that go back to 1967. As a proportion of the work force, that was the highest level since August 1983.

Companies across a variety of industries have been slashing their payrolls by the thousands.

Eastman Kodak said it would cut 3,500 to 4,500 jobs after weak sales. Its shares fell $2.08, or 29 percent, to $4.99, after it reported a $137 million fourth-quarter loss on a big drop in sales of both digital and film-based photography products.

After the markets closed on Wednesday, Allstate reported a loss of $1.13 billion for the fourth quarter and said it would cut 1,000 jobs. On Thursday, shares of Allstate fell $6.14, or 20.7 percent, to $23.50.

“It seems like we’ve gotten through the financial crisis. Now we’re dealing with global synchronized recession,” said Brian Battle, vice president for trading at Performance Trust Capital Partners in Chicago.

As more people lose their jobs, fewer of them are buying new homes. The Commerce Department said home sales plunged 14.7 percent to an adjusted annual rate of 331,000 in December.

Earlier this week, the National Association of Realtors said existing home sales posted an unexpected increase last month, but the sales were mostly of foreclosed homes.

“This all began as a housing crisis, and clearly, the housing crisis continues,” said Nathan Rowader, director of investments at Forward Management. “Bad housing numbers are not going to encourage anyone to be buying stock.”

The Commerce Department also said orders to factories for big-ticket manufactured goods fell for the fifth consecutive month in December.

Still, some in all fourth-quarter results were positive. Colgate-Palmolive said its earnings rose nearly 20 percent, partly as a result of higher prices and new products. Shares of Colgate-Palmolive rose $1.37, or 2.2 percent, to $65.22.

Many corporate results, however, were grim.

Qualcomm fell $1.69, or 4.6 percent, to $35.13 after reporting a steep drop in its earnings and slashing its forecast. The company, one of the world’s largest suppliers of chips for mobile phones, has seen demand fall as customers trim inventories.

The number of stocks falling outpaced advancers by 5 to 1 on the New York Stock Exchange. Trading volume came to 1.44 billion shares.

The dollar was mixed against other major currencies, while gold prices rose.

Bond prices sank Thursday. The Treasury’s 10-year note fell 1 23/32, to 107 18/32. The yield, which moves in the opposite direction from the price, rose to 2.86 percent from 2.67 percent late Wednesday.

In trading early Friday in Asia, stocks fell for the first day in four after the government reported a decline in factory output.

Chill of Salary Freezes Reaches Top Law Firms

LARGE law firms have long been known for lock-step salary increases and annual bonuses. But the recession and other economic pressures are changing that, with many firms deciding to freeze salaries and rethink bonuses.

In mid-December, the legal profession was taken aback when Latham & Watkins, considered a market leader, announced that it would keep 2009 associate salaries at their 2008 levels. At least 20 large firms nationwide have since done the same.

Although many associates are angry about the freezes, others are relieved, said David Lat, founding editor of, a blog about law firms and the profession.

“There is this sense that firms didn’t act prudently during the boom and now they are getting religion, and that it’s better late than never,” Mr. Lat said. “Many associates we have spoken to think the freeze probably saved jobs.”

For decades, when top-tier firms raised starting salaries, other firms would follow suit, in order to compete for the best talent.

“Lawyers are very conservative and tradition-bound,” Mr. Lat said. “There is a certain security in knowing what you are doing now is what others are doing and what has been done in the past. With salary freezes, you are seeing a sort of reverse ratcheting. If one firm sees a competitor lowering salaries, they feel it’s safe to lower salaries, too.”

Salaries of associates, as opposed to non-equity partners, appear to have been the most affected by freezes. (The pay of equity partners is closely tied to a firm’s profitability.)

Law is one of the few professions in which a 25-year-old with little experience can make a six-figure salary. Top law firms generally pay their new associates $140,000 to $160,000 a year.

Of course, not every lawyer’s starting salary is that high. According to the National Association for Law Placement, 16 percent of the class of 2007 law school graduates employed full time make $160,000 or more, while 38 percent make $55,000 or less.

Top-tier firms have been watching one another’s compensation moves since 1968, when the New York firm Cravath, Swaine & Moore raised first-year salaries to $15,000, well above what any other firm was paying at the time, said William D. Henderson, an associate professor at the Michael Maurer School of Law at Indiana University, who studies the legal labor market. “It was a watershed moment for the industry, akin to a shot heard round the world,” he said.

Starting salaries rose gradually through the 1990s, and in 2000, those at top firms jumped to $125,000, according to the association. Firms that did not meet that increase were perceived as second-rate, Professor Henderson said. “But today the thinking is, ‘If we meet the market, it may threaten our franchise.’ It’s too dangerous now,” he said.

Although the recent spate of salary freezes is a response to the recession, law firms have been facing other economic issues. For several years, corporate clients have complained about high billing rates, especially for relatively inexperienced junior lawyers.

In 2008, revenue and profits fell at many firms, and some managing partners at those firms are now rethinking their business model, Professor Henderson said.

Guy Halgren, chairman of Sheppard Mullin Richter & Hampton, which announced a salary freeze earlier this month, said the firm had been moving for the last few years toward a more merit-based advancement system. .

“We already do some of that — part of our bonus system is merit-based and it’s been like that for many years,” he said. “This has been happening in the profession slowly, but I think it will accelerate in the next year or two. We’ve been thinking about going to more merit-based incentives.”

This month, Morgan, Lewis & Bockius sent a memo to its associates announcing that 2009 bonuses would be merit-based, rather than hours-based.

Ralph Baxter, chairman of Orrick, Herrington & Sutcliffe, which announced salary freezes in late December, said his firm began reassessing its business model long before the economic crisis. In the last two years, the focus has been on operating more efficiently and at a lower cost to clients. Last year, Orrick announced that in addition to having partner-track associates, it would add substantial numbers of lawyers not working toward partnership, and a significant number of staff members who are not lawyers at all.

“This was born of our focus on adapting to a changed world, one in which our clients are facing greater and greater pressure to control their costs,” Mr. Baxter said.

The criteria for promotion toward partnership is not based just on hours billed, he said. “The criteria have changed over time,” he said. “Today you need a greater capacity to build personal relationships and far more entrepreneurial skill.”

MR. LAT says the focus on efficiency and cost control represents a change in the way law firms view themselves. “Law is becoming more of a business, and you will see more of an emphasis on results than in the past,” he said. “I think some breakdown in the lock-step mentality might actually stick. Firms are recognizing that on a certain level, it makes sense to pay people in a way that reflects their performance.”

A return to the days when starting salaries at top firms were under $150,000 is unlikely, however. A legal education is still expensive, and firms at the top of the rankings — those that traditionally drive salary increases — will continue to compete for graduates of leading law schools. “Clients want the best talent,” Mr. Halgren said. “Law firms like ours have to recruit and retain that top legal talent, and we need to pay competitively to do that.”

Global Worries Over U.S. Stimulus Spending

DAVOS, Switzerland — Even as Congress looks for ways to expand President Obama’s $819 billion stimulus package, the rest of the world is wondering how Washington will pay for it all.

Few people attending the World Economic Forum question the need to kick-start America’s economy, the world’s largest, with a package that could reach $1 trillion over two years. But the long-term fallout from increased borrowing by the United Stated government, and its potential to drive up inflation and interest rates around the world, seems to getting more attention here than in Washington.

“The U.S. needs to show some proof they have a plan to get out of the fiscal problem,” said Ernesto Zedillo, the former Mexican president who helped steer his country through a financial crisis in 1994. “We, as developing countries, need to know we won’t be crowded out of the capital markets, which is already happening.”

Mr. Zedillo said that Washington, unlike most other countries, had the option of simply printing more money, because the dollar was a reserve currency for the rest of the world.

Over the long run, that could force long-term interest rates higher and drive down the value of the dollar, undermining the benefits that come with its special status.

Until now, most fears about surging government debt have focused on borrowing by European countries like Spain, Greece and especially Britain, which is also in the midst of a sizable bank bailout. That recently forced the British pound to a 23-year low against the dollar.

While the dollar’s status as refuge in a time of turmoil should prevent that kind of sell-off for now, a number of financial specialists warned that if fundamental factors like the lack of American savings and bloated budget deficits did not change, the dollar could eventually fall sharply .

“There aren’t that many safe havens,” said Alan S. Blinder, a Princeton economist who is a former vice chairman of the Federal Reserve in Washington, explaining why the dollar’s status as a reserve currency is unlikely to be threatened.

Instead, it is the dollar’s long-term value against other currencies that is vulnerable. “At some point, there may be so much Treasury debt, that investors may start wondering if they are overloaded in dollar assets,” Mr. Blinder said.

While the focus in Washington has been on putting together a stimulus package that will attract broader political support when it comes up for a vote in the Senate, here in Davos the talk has been about the coming avalanche of Treasury debt needed to pay for the plan on top of the bailout measures approved last fall, like the $700 billion Troubled Asset Relief Program, or TARP.

The stimulus was approved Wednesday by the House without Republican support, and could grow larger — mostly likely with additional tax cuts — to attract a bipartisan coalition.

American officials maintain they are aware of the challenge. A top White House adviser, Valerie Jarrett, promised in Davos on Thursday that once the stimulus plan achieved its intended affect, the United States would “restore fiscal responsibility and return to a sustainable economic path.”

To be sure, Congress and the White House will ultimately need to refill the government’s coffers, but how they might do that is barely on the radar screen in Washington at this point.

“Even before Obama walked through the White House door, there were plans for $1 trillion of new debt,” said Niall Ferguson, a Harvard historian who has studied borrowing and its impact on national power. He now estimates that some $2.2 trillion in new government debt will be issued this year, assuming the stimulus plan is approved.

“You either crowd out other borrowers or you print money,” Mr. Ferguson added. “There is no way you can have $2.2 trillion in borrowing without influencing interest rates or inflation in the long-term.”

Mr. Ferguson was particularly struck by the new borrowing because the roots of the current crisis lay in an excess of American debt at all levels, from homeowners to Wall Street banks.

“This is a crisis of excessive debt, which reached 355 percent of American gross domestic product,” he said. “It cannot be solved with more debt.”

While Mr. Ferguson is a skeptic of the Keynesian thinking behind President Obama’s plan — rather than borrowing and spending to stimulate the economy, he favors corporate tax cuts — even supporters of the plan like Mr. Zedillo and Stephen Roach of Morgan Stanley have called on the White House to quickly address how it will pay for the spending in the long-term.

“It’s huge,” Mr. Roach, the chairman of Morgan Stanley Asia, said. “President Obama has now laid out a scenario of multiyear, trillion-dollar deficits.”

The stimulus is widely expected to pass, but once it does, Mr. Roach said the focus would shift to “who foots the bill and what is the exit strategy. We don’t have the answer to either question.”

Mr. Zedillo, who remembers how Mexico was forced to tighten its belt when it received billions from Washington to keep its economy from collapsing in 1994, was even more blunt.

“People are not stupid,” Mr. Zedillo said. “They see the huge deficit, the huge spending, and wonder what comes next.”

n His Way Out, Blagojevich Makes a Day of It

CHICAGO — As the nine-seat airplane raced through the skies on Thursday somewhere between Springfield and here, an onboard telephone began to ring.

Rod R. Blagojevich, the soon-to-be ex-governor of Illinois, instructed his aides not to answer. It might be the news, he said, that he had been removed from office and that he no longer controlled the state’s thousands of employees or even, especially pertinent, the state-owned airplane taking him home.

“I’ll tell you what,” Mr. Blagojevich said, laughing, as the phone went on ringing. “I’m not jumping out. Not for those people, no way. I don’t like heights.”

So went Mr. Blagojevich’s final day as governor of Illinois. Six years ago, he had been elected on a message of reform, but on Thursday — a few hours after his plane, with a silhouette of Lincoln near its nose, landed — the State Senate unanimously voted him out of office. It was the first time that an Illinois governor had been convicted in an impeachment trial.

Through the day, Mr. Blagojevich was, by turns, furious over the methods of the trial, morose as he said goodbye to the cooks from the Governor’s Mansion and brimming with an odd gallows humor long before the lawmakers cast their votes. All the while, his assistant packed his belongings into cardboard boxes — among them, family photographs, a bust of Lincoln and a statue of Elvis.

“I’m still governor for now, and I say you take the afternoon off!” he cheerily told employees, many of them tearful. At another point, he pondered the more practical consequences of losing his job. “I wonder if we’ll have to hitchhike home,” he said. “Maybe we could take the bus.”

In the end, he left the Capitol in Springfield through a secret basement corridor full of grunting, clanking pipes, bare walls and puddles.

Mr. Blagojevich, who was arrested Dec. 9 on corruption charges, including an accusation that he tried to sell the Senate seat vacated by President Obama, had first refused to take part in his impeachment trial. Instead, as senators met in Springfield this week, he set forth on a campaign of appearances on national television talk shows to proclaim his innocence. Then, on Wednesday, he announced that he wished to make a “closing argument” in the trial he had mocked on show after show.

So on Thursday, he set off on a six-hour trip from his home on this city’s North Side to the Capitol and back again, allowing a reporter and a photographer for The New York Times to accompany him at the newspaper’s expense.

At moments during the day, Mr. Blagojevich reflected on what was ahead, most immediately how best to pay his mortgage come March 1 without his $177,000-a-year salary. He spoke of the guilt he felt toward his family for entering a political life, the “personal Greek tragedy” that he said he saw as his circumstances, and, all the while, his love of his job. His biggest error, he said, was the friends he had picked.

“I come out of the alleys of Chicago politics,” said Mr. Blagojevich, 52, who entered Democratic politics in 1992, first as a state representative, then a United States representative. “That’s a tough place. The politics there is not motivated by idealism or high purpose. It’s nuts and bolts, and you scratch my back, I’ll scratch yours. I came up that way.”

Mr. Blagojevich, who began the morning tracked by news helicopters following his sport utility vehicle’s every turn en route to the airport, said he lately had been trying to remember how to be a regular person. Not long ago he made the state troopers who drove him let him take the wheel; he had last driven six years ago. He said he tried to sneak out through a neighbor’s back fence for a jog without his security team, wanting to know what it felt like.

In Springfield, as he waited to speak to the State Senate, Mr. Blagojevich sat in silence in his chandeliered office not far from the impeachment hearing room, nervously jiggling a leg and jotting changes to the speech he had written overnight in longhand on graph paper. He repeatedly called his wife, Patti. He carried his black hairbrush (the one he is known for insisting be available at all times) to his private bathroom behind a heavy wooden door. Minutes before he was to appear on the Senate floor, Mr. Blagojevich stood up and told an aide: “Let’s go home. Screw it. It won’t matter.” Then he walked out and made his speech.

Obama Calls Wall Street Bonuses ‘Shameful’

WASHINGTON — President Obama branded Wall Street bankers “shameful” on Thursday for giving themselves nearly $20 billion in bonuses as the economy was deteriorating and the government was spending billions to bail out some of the nation’s most prominent financial institutions.

“There will be time for them to make profits, and there will be time for them to get bonuses,” Mr. Obama said during an appearance in the Oval Office with Treasury Secretary Timothy F. Geithner. “Now’s not that time. And that’s a message that I intend to send directly to them, I expect Secretary Geithner to send to them.”

It was a pointed — if calculated — flash of anger from the president, who frequently railed against excesses in executive compensation on the campaign trail. He struck his populist tone as he confronted the possibility of having to ask Congress for additional large sums of money, beyond the $700 billion already authorized, to prop up the financial system, even as he pushes Congress to move quickly on a separate economic stimulus package that could cost taxpayers as much as $900 billion.

This week alone, American companies reported as many as 65,000 job cuts, and public anger is rising over reports of profligate spending by banks and investment firms that are receiving help from the $700 billion bailout fund. About half of that money is still available, but the new administration has yet to announce how it will use it, and many analysts think it will take far more to stabilize the banking system.

Should Mr. Obama have to go to Congress to seek more money for the bailout fund to avert the failure of more banks, he would most likely encounter opposition within both parties and demands for tighter restrictions on pay for executives of institutions that receive government assistance.

Mr. Geithner has already signaled a willingness to impose stricter compensation limits as part of a revamped approach to dealing with the banking crisis, but with his strong words on Thursday, Mr. Obama seemed intent on reassuring Congress and the public that he would step up the pressure on bankers before granting them additional assistance.

Mr. Obama was reacting to a report by the New York State comptroller that found financial executives had received an estimated $18.4 billion in bonuses for 2008, less than for the previous several years but the same level of bonuses as they received in 2004, when times were flush.

“That is the height of irresponsibility,” Mr. Obama said. “It is shameful. And part of what we’re going to need is for the folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility.”

The Obama administration and lawmakers have begun to consider ways to control executive pay; the bailout fund, known as the Troubled Asset Relief Program, or TARP, would be the main vehicle for exerting such control. The administration of former President George W. Bush issued guidelines last October to try to control executive pay at companies receiving government help, but so far they have done little to curb large salaries.

During his confirmation hearings, Mr. Geithner said the administration is preparing rules that would require executives at companies receiving taxpayer money to agree that any compensation above a certain amount — he did not specify how much — be “paid in restricted stock or similar form” that could not be liquidated or sold until the government had been repaid.

Some lawmakers, meanwhile, have said they are considering so-called “clawback” provisions that could be invoked by the government to take back bonuses and executive pay from officials at companies that encountered problems.

In the meantime, public outrage is already forcing some companies to rein in their lavish spending. John A. Thain, the former Merrill Lynch executive who was forced out of Bank of America, said this week he would reimburse Bank of America for an expensive renovation of his office that included an $87,000 area rug and $35,000 commode.

But it took the urging of the Obama administration to force Citigroup, which received an infusion of taxpayer funds last year, to abandon plans to buy a $50 million corporate jet. On Thursday, Mr. Obama made reference to the jet, without singling out Citigroup by name; his remarks came one day after the president met at the White House with business leaders, including Richard D. Parsons, the new chairman of Citigroup.

On Capitol Hill, Senator Christopher J. Dodd of Connecticut, the chairman of the Senate Banking Committee, issued his own warning on Thursday, saying companies would be summoned to testify if taxpayer money was involved.

“Whether it was used directly or indirectly, this infuriates the American people and rightly so,” Mr. Dodd said. “So I say to anyone else who does it, if you do it, I’m going to bring you before the committee.”

There is also political pressure to rein in pay in industries beyond banks and investment firms. The pressure reflects the substantial disparities between pay increases for senior executives, the low rate of wage growth for workers and the frequent disconnect between compensation and the long-term strategic success or failure of corporations.

Mr. Obama’s message on Thursday was reinforced by Vice President Joseph R. Biden Jr., who pledged in an interview with CNBC and The New York Times that the government would spend the remaining $350 billion of the troubled assets money “wisely and prudently and transparently.”

Mr. Biden said that he, like the president, was outraged by reports of large bonuses going to Wall Street executives.

“I’d like to throw these guys in the brig,” he said. “They’re thinking the same old thing that got us here, greed. They’re thinking, ‘Take care of me.’ ”

Obama slams Wall Street over bonuses

President Barack Obama lashed out on Thursday at “shameful” Wall Street executives for claiming billions of dollars in bonuses while their stricken institutions asked taxpayers for support.

Mr Obama was responding to a report showing that financial sector employees received $18.4bn (£12.9bn) in bonuses last year, amid dire financial crisis. The figure was down 44 per cent from 2007 but was still the sixth largest payout in history.

Mr Obama described the bonuses as the “height of irresponsibility”, and made clear that additional government support for the industry would be subject to tough conditions on pay and other perks.

“Part of what we’re going to need is for the folks on Wall Street who are asking for help to show some restraint,” he said. “There will be time for them to make profits, and there will be time for them to get bonuses. Now is not that time.”

The White House is working on plans for the second $350bn tranche of funds available through the troubled asset relief programme as well as additional measures to clean up “toxic assets”.

Mr Obama is under pressure to adopt a tough line against Wall Street amid mounting public anger over how the first $350bn of bail-out funds was used.

The president recently chided Merrill Lynch, which has received taxpayer support, for spending more than $1m renovating the office of John Thain, its former chief executive, and his administration pressured Citigroup to cancel its order for a $50bn corporate jet.

“We shouldn’t have to do that, because they should know better,” he said yesterday, referring to Citigroup.

“The American people understand that we’ve got a big hole that we’ve got to dig ourselves out of, but they don’t like the idea that people are digging a bigger hole even as they’re being asked to fill it up.”

Bankers reacted to the president’s remarks with a mixture of anger and resignation.

“Attacking Wall Street is like fishing out of a barrel at the moment,” said one financial executive. “Obama is in the middle of a tough political battle to get the stimulus plan approved. He has to say these things.”

Mr Obama’s proposals for tougher oversight of Wall Street received backing on Thursday from a congressional panel charged with overseeing the government response to the crisis.

The Congressional Oversight Panel said policymakers and the financial industry ignored multiple warning signs that a crisis was brewing and called for tighter regulations to prevent it happening again.

In a draft report released on Thursday, the panel recommended greater supervision of financial institutions deemed “too big to fail” and limits on leverage throughout the sector.

Sweden offers lessons for US toxic clean up

Lars Thunell, head of the World Bank’s International Finance Corporation, is one of the few people in the world who has actually run a so-called “bad bank” – Securum – formed by Sweden to absorb toxic assets during its banking crisis in the 1990s.

He says the US can learn general lessons from Sweden but differences in the nature of the two financial sectors and the assets involved mean the US cannot import it wholesale.

“To get the system running again you have to get uncertainty out of the system, and the way to do that is, one way or another, to ringfence the bad assets,” Mr Thunell says. “At the same time you have to recapitalise the remaining good bank.”

He says: “The mindset of people involved in the good bank and bad bank should be very different . . . One is in run-off, the other should be extending credit to the economy.”

Mr Thunell says banks need to be dealt with “on a case-by-case basis” but with “clear rules of the game”. Sweden categorised its banks according to their capital ratios.

He says the whole process is much easier if – as with Sweden’s Nordbanken – the restructuring takes place in temporary government ownership. “This way, you don’t have to worry about the price at which assets are transferred to the bad bank.”

Securum simply bought all the assets from Nordbanken at face value and then wrote everything down, Mr Thunell says. “We then got capital in an amount equivalent to the writedown, plus operating expenses from the government.”

But since most US banks remain above regulatory capital minimums, he says, the US government will have to deal with private shareholders.

“It was easier for us because we were dealing with industrial loans, or real estate loans, for which we could actually identify each piece of real estate. We could estimate a fair value based on its yield in a normal market.”

The problem now, he says, is that “it is very hard to identify the underlying assets and know what the final losses are likely to be. In some ways it is more like an insurance crisis.”

Because Securum understood the assets well, he says, it could accelerate the run-off by selling assets quickly. A US bad bank, he says, may have to hold assets longer.

Moreover, at the time when Sweden did its banking sector clean-up it had only five banks, plus savings unions.

“You can scale up this model. But it needs to be adapted,” he says.

Trichet warns on capital hoarding

Jean-Claude Trichet gave a stark warning to financial markets on Thursday to stop putting pressure on banks to hold more capital, insisting that such views were exacerbating the global recession.

The president of the European Central Bank criticised the prevailing view among investors that banks should hoard funds, insisting that the view was contrary to those of the European authorities. Such ideas did nothing to contain the deepening recession, he said, and also provided non-financial companies with incentives to postpone investment.

Mr Trichet’s comments at the World Economic Forum in Davos, came as leading bankers and policymakers also warned on Thursday that the wave of bank bail-outs in Europe and the US could usher in a new era of financial protectionism that could lead to a deeper global economic slump.

Asked by Josef Ackermann, chief executive of Deutsche Bank, whether the markets were right to press banks to hold more capital, the ECB president insisted three times that “what the markets are suggesting is not appropriate”.

It was “very important as far as the authorities are concerned”, he added, that the route forward was “not in line with the ideas that [banks] should now augment capital ratios”.

In the turmoil that followed the collapse of Lehman Brothers last September, investors have increasingly punished those banks with relatively low capital ratios, thereby encouraging them to hoard capital rather than expand their loan books.

Mr Trichet said it was now up to companies and markets to do their bit by resuming normal business practices and regain some of their lost confidence. Private companies were becoming too short-termist in their outlook and fear of investment, he said and “have to get back to a normal horizon of investment”.

Mr Trichet’s message of support for bank lending and business investment came at a time of increasing political pressure on banks to shrink their business overseas while maintaining lending to domestic consumers and companies, which has contributed to a sharp drop in international capital flows.

Bankers warned on Thursday that this trend was a creeping form of protectionism that could plunge the world into a deeper economic slump.

“One lesson we must learn is that we can not turn the clock back (in finance),” said Stephen Green, chairman of HSBC, the global bank which has extensive operations in Asia.

“If we do, the casualties will be emerging markets which depend on international capital movements.”

Singapore Air cuts flights to US, Europe, India

SINGAPORE, Jan 28 (Reuters) - Singapore Airlines (SIAL.SI) said on Wednesday it will reduce the number of flights connecting the city-state to parts of the United States, Europe, India and Thailand.

The frequency of flights will be reduced from Singapore to New Delhi, Hyderabad and Mumbai in India, while some flights to Bangkok and London will be suspended.

The frequency of all-business flights from Singapore to the U.S. will also be reduced, but flights to Kuwait and Cairo will be increased.

Wednesday, January 28, 2009

Caterpillar to slash 20,000 jobs

NEW YORK (AFP) - - US construction equipment giant Caterpillar announced Monday that it intends to cut about 20,000 jobs worldwide to cope with plunging sales amid a sharp economic slowdown.

The layoffs, equivalent to about 18 percent of its workforce, came even as the company chalked up its sixth consecutive year of record sales and revenues in 2008.

Some 4,000 production and 7,500 administrative staff as well as about 8,000 contract staff will be among those to be downsized, the company said as it reported 2008 fourth-quarter profit dropped 32 percent to 661 million dollars.

"Fourth-quarter profit was disappointing, particularly in light of record fourth-quarter sales and revenues and a significant favorable tax adjustment," Caterpillar chief executive Jim Owens said in a statement.

The company's fourth-quarter sales and revenues was six percent higher from the same period in 2007 to 12.92 billion dollars.

Its whole year sales and revenues hit a record high of 51.32 billion dollars for 2008, up 14 percent from 2007.

"While 2008 was our sixth consecutive year of record sales and revenues, it was an extraordinarily challenging year," Owens said.

"It is now clear that we need to sharply lower our production and costs, and aggressive actions were triggered in December," he said.

Caterpillar, a top manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines, said its 2009 expectations had "deteriorated" amid uncertainty following a deepening US recession.

"We have initiated actions which will remove about 20,000 workers from our business and every indirect spend dollar will be heavily scrutinized," the company said.

The cuts would be accompanied by substantial reductions in overtime and freeze on hiring and salaries for administrative staff, it said.

The company forecast 2009 sales and revenues to be in "a range of plus or minus 10 percent" from 40 billion dollars.

India cuts growth forecast

MUMBAI - INDIA'S central bank cut its growth forecast on Tuesday to 7 per cent - down from a prior estimate of 7.5 to 8.0 per cent - and warned of a deep, protracted global downturn, but left key interest rates unchanged.

Industrial production and consumer demand have slowed, business confidence is deteriorating, and the fiscal deficit is sharply up, the bank said.

Growth in the service sector, a key segment of India's economy, is also slowing. After 14 quarters of double-digit growth, India's service sector posted just 9.6 per cent growth during the July-September quarter, the bank said.

Reserve Bank of India Governor D. Subbarao said growth would likely become even more 'challenging' next fiscal year.

'The global crisis will dent India's growth trajectory as investments and exports slow. Clearly, there is a period of painful adjustment ahead of us,' he said in the bank's quarterly policy review statement.

'However, once the global economy begins to recover, India's turnaround will be sharper and swifter, backed by our strong fundamentals and the untapped growth potential,' he said.

Mr Subbarao also noted that the global slowdown clearly shows that emerging economies remain closely linked to developed markets.

'Contrary to the expectation of decoupling, which was a commonly held view even till recently, the crisis has spread to the emerging economies too,' he said.

India has already taken aggressive measures to boost growth, since September announcing two fiscal stimulus packages and pumping 3.9 trillion rupees (S$1.19 trillion) into the financial system.

Last quarter, the bank cut the repo rate - at which the central bank makes short-term loans to commercial banks - from 9 to 5.5 per cent, and the reverse repo - the rate at which it borrows from commercial banks - rate from 6 to 4 per cent, both historic lows. But economic growth has continued to slow.

Over the last five years, India's economic growth averaged 8.8 per cent a year. Gross domestic product growth from April to September was 7.8 per cent, down from 9.3 per cent for the same period the prior year.

The bank urged commercial banks to pass on easing credit to consumers more swiftly, noting that a few banks have yet to lower lending rates.

Despite the central bank's aggressive rate cuts - and a 4 percentage point cut in the cash reserve ratio, or the amount of cash commercial banks must keep on hand - commercial banks, fearful of rising bad loans, have reduced their rates to consumers by just 1.5 to 2 percentage points, according to Citigroup.

'There is room for banks to further reduce their lending rates,' Mr Subbarao told reporters.

India's fiscal deficit surged 83.3 per cent from April to November, after falling 11.0 per cent the same period the prior year.

Reduced tax collection and stimulus spending is expected to put even more strain on the budget, potentially pushing the fiscal deficit from 2.5 to at least 5.9 per cent of GDP, the bank said.

Counting the cost of oil subsidies, the deficit could hit 8 per cent of GDP, the bank said.

India's most-watched inflation indicator, the wholesale price index, has fallen by more than half since August, hitting 5.6 per cent as of Jan 10, due largely to falling commodities prices.

The bank predicted inflation would fall still further, to 3 per cent by March.

Consumer prices have fared less well, thanks to persistently high food costs, the bank said. Consumer price inflation is still in the double digits, the bank warned.

KVS Manian, head of retail liabilities at Kotak Mahindra Bank in Mumbai, said given the worrisome fiscal deficit - which he said totals 10 per cent of GDP, counting states' debts - India has little room to boost spending to stimulate growth. The reserve bank, he said, is thus trying to use monetary policy cautiously.

'They want to be cautious about releasing all their ammunition too quickly,' he said.

Mr Subbarao also said banks had relatively low exposure to beleaguered outsourcing giant Satyam Computer Services Ltd. and related companies. Satyam has been scrambling to pay employees and hold on to customers since its founder confessed to a US$1 billion fraud on Jan.7.

'There is no systemic threat to the banking system or individual banks,' he said.

The investigation into banks' role in the scandal is ongoing, he said. So far, he added, 'we have not seen any major irregularity.' -- AP