Helping euro states vital for Germany, says Merkel

Reuters, BERLIN, June 11: Helping indebted European countries get back on their feet is vital to Germany's economic health, Chancellor Angela Merkel said on Saturday in a message aimed at the general public.

The comments come a day after Germany's parliament approved a non-binding resolution supporting extra emergency loans to fellow euro zone member Greece, but only on the condition that bondholders be made to share the bailout burden.

Asked in a weekly podcast if the euro zone debt crisis could threaten Germany's economic recovery, Merkel said: "If we don't take action in a positive way, that could happen, but it is exactly what we want to prevent."

"Therefore we should not simply allow the uncontrolled bankruptcy of a state -- instead we must see how we can increase the competitiveness of countries in difficulty and give them the chance to work off the debt," she added.

European Union leaders are due to finalize a new rescue package for Greece at a Brussels summit on June 23-24, which officials say will total 120 billion euros and ensure the country is funded through 2014.

German Finance Minister Wolfgang Schaeuble urged parliament on Friday to back additional aid for Greece but said private creditor participation in a new package was "unavoidable" and that he favored a bond swap that would push out Greek debt maturities by seven years.

In her podcast, Merkel said troubled members of the currency union must enact reforms, but warned that allowing one to go insolvent could trigger disastrous consequences for Germany.

"We should not do anything that would endanger the global recovery and put Germany back in danger," Merkel said, adding that the bankruptcy of investment bank Lehman Brothers had triggered a major recession in 2009.

"Such an event had not happened for decades and absolutely must be prevented," she said. The recession in Germany was its worst since World War II.

Iran says Saudi crude increase will not change market

Reuters, TEHRAN, June 11: An increase in crude output by Saudi Arabia will not change market conditions as demand is for lighter oil than it provides, Iran's OPEC governor was on Saturday quoted as saying, reiterating Tehran's stance that there is no need to boost production.

At a meeting in Vienna this week, OPEC failed to agree on an increase in production, which consuming countries wanted and which leading exporter Saudi Arabia pushed for, because other producers, including Iran, said they feared prices could tumble.

Saudi Arabia will raise output to 10 million barrels per day in July from 8.8 million bpd in May, Saudi newspaper al-Hayat reported on Friday, as Riyadh proceeds outside official OPEC policy.

Mohammad Ali Khatibi told the Iran newspaper that the three countries that supported an output increase -- Saudi Arabia, Kuwait and the United Arab Emirates -- had done so under U.S. pressure.

"There is currently absolutely no shortage in the market, and consequently there is no need to raise production," he said. "Raising supply in the absence of demand would amount to an interference in the market flow."

"These three countries can only raise the production of heavy and sour oils, while the market will only absorb increased production if it is of light category as there is no demand for heavy oil in the market.

"The absorption of heavy oil as feedstock by refining establishments would require a change in the refining mode and investment which is costly and time consuming and something which they won't do. They (the market) are awaiting the return of Libya's crude of (the) light category," Khatibi said.

Iran, which holds the rotating presidency of OPEC, has suggested holding an emergency meeting before the group is due to meet again in Vienna in December.

Fed prepares for last spurt of easy money flood

Reuters, NEW YORK, June 11: The flood of Federal Reserve money that has supported Wall Street and the rest of the U.S. economy for 2-1/2 years will shrink to a trickle with the conclusion of the Fed's bond purchases announced on Friday.

The Fed said it will buy $50 billion of Treasuries, the final series of government bond purchases that marks the last phase of the $600 billion program it launched in November 2010 to prevent another recession.

As a result, once the purchases are concluded on June 30, the financial sector will receive only a fraction of the roughly $100 billion a month in easy money it has been getting from the Fed.

The conclusion of the Fed's bond-buying program, known as "Quantitative Easing 2," does not mean the stimulus will come to a complete stop. The Fed will reinvest maturing securities, mainly mortgage-related debt, which analysts predict will run at $12 billion to $16 billion per month.

"From a psychological standpoint, it is important for the market to still feel the constant presence of the Fed," said Ralph Axel, interest rate strategist at Bank of America Merrill Lynch in New York.

This gradual approach to unwind policy support is likely needed given investor anxiety over a slowing U.S. economy and the festering public fiscal problem in Europe.

While still a lot of money, it is a huge step down from stimulus levels at the height of the buying campaign, dubbed by markets as QE2 because it was the second round of Fed asset-buying in the wake of the 2008 financial crisis.

A key aim of QE2 was to hold down long-term interest rates to stimulate investment in capital equipment and risky assets. It came almost eight months after the Fed's first round of bond purchases, primarily in mortgage-related securities.

The initial bout of quantitative easing, worth $1.73 trillion, began in December 2008 and ended in March 2010. It was created to stabilize the housing sector, which was the epicenter of the financial turmoil and has yet to show signs of recovery.

The Treasury bond component of the first round of purchases totaled $300 billion, from March to October 2009.

The Fed's buying assets has been controversial from the start. Critics say it is tantamount to printing money, and it has been credited with fueling a stock market rally but blamed for a surge in oil and food prices.

The end of QE2 has been well-flagged. The Fed said at the outset it would run until the end of June 2011.

Still, investors expect stocks, bonds, gold and the euro to fall after it ends, according to a Reuters poll of 64 analysts and fund managers last month.

HOUSING WOES

Come July, the Fed will rely on cash generated from its $1 trillion holding of mortgage-related securities to anchor Treasury yields and support the economy.

Proceeds from Fed's maturing mortgage-backed securities and debt issued by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) will fluctuate monthly depending on house sales and mortgage refinancings.

Recent evidence suggested the real estate conditions are deteriorating again with single-home home prices dropping below their 2009 low in March. The double-dip in housing will likely be compounded by an abrupt slowdown in job growth in May.

This grim development portends that a housing recovery is farther than previously thought and would take longer for people to sell their homes and to pay off their mortgages. This means mortgage securities will not be prepaid quickly.

"We are still at least two to three years away from seeing signs of even a baby upturn in home prices," said Anthony Karydakis, senior economist at Commerzbank in New York.

Going back to the 1950s, housing starts have typically returned to their pre-recession levels in 1-1/2 to 2 years after they hit bottom. But the current housing market is showing "atypical" behavior since its euphoric highs earlier this decade, Karydakis said.

Housing starts are stagnant after 1-1/2 years into the current economic recovery and more than a year since the initial bout of bond purchases. They had enjoyed a brief revival due to a federal first-time homebuyer credit program.

"Housing starts have stabilized at very low levels, but there have been no signs of a recovery," Karydakis said.

In April, housing starts fell 10.6 percent to an annualized rate of 523,000 units.

Troubling signs point to more losses

Reuters, NEW YORK, June 11: Don't be surprised if Wall Street racks up a seventh consecutive week of losses as the likelihood of more poor economic data and other disconcerting signals outweigh any thoughts that stocks are cheap.

After closing at its highest level in nearly three years on April 29, the S&P 500 (.SPX) has tumbled nearly 7 percent on the back of a barrage of soft economic data, sparking the debate over whether the economy is headed for a double-dip, or has merely hit a soft patch in its recovery.

The benchmark S&P 500 recorded its sixth straight weekly decline on Friday and volume has picked up, as it typically does, on down days. Another week of selling will mark the longest stretch of weekly losses for the index since 2001.

Red flags, including ugliness in the junk bond market, options activity and the ease with which support levels have been broken suggest more selling ahead.

"You have to be realistic. You've got to have some sort of correction to go into this marketplace just for the healthiness of the market," said Cliff Draughn, president and chief investment officer at Excelsia Investment Advisors in Savannah, Georgia.

As stocks have declined, both investment-grade and high-yield risk premiums in the bond market have slumped as investors sought safe-haven assets.

That's troublesome since the stock market often moves in sympathy with the junk bond market because rising borrowing costs crimp corporate profits.

The CDX HY16 North America index for high-yield bonds, which conversely falls as risk appetite decreases, closed below par for the first time this year on Wednesday. The CDX IG16 North American investment grade index, which investors use to hedge against bond losses, hit its highest level since November 30, according to Tradeweb.

In another signal of skittishness about the market's footing, Ally Financial, an auto and mortgage lender majority owned by the U.S. government, delayed a $6 billion IPO due to bad market conditions, two sources familiar with the situation told Reuters.

DATA BLITZ AND QUADRUPLE WITCH

Stocks have also been easily passing through technical support levels, with the S&P 500 most recently taking out the April 18th low of 1,294.70, leaving analysts to eye the 1,250 level as the next area of support.

And the daily volume put/call ratio for equity options on the Chicago Board Options Exchange (CBOE) hit an 18-month high on Wednesday, indicating that investors are significantly bearish on the stock market.

On top of all that, data expected for next week, including the Producer Price Index, the Consumer Price Index, May retail sales, manufacturing surveys for New York and Philadelphia as well as the index of leading indicators of economic activity are forecast to mostly show a struggling economy.

"It is a busy economic week, so we expect the market to both anticipate economic data and to react to the releases --

I don't necessarily see anything good coming out of the economic releases next week," said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York.

Several of these indicators set off the first alarm bells about the economy's health when they came out a month ago.

By the end of the week, investors will also grapple with quadruple witching, when the options for stock-index futures, single-stock futures, equity options and stock-index options for June expire.

"This trade will lead to increased volume and the possibility of big moves in the market. Expiration also has the potential for increased volatility, especially intraday volatility next week," said TD Ameritrade chief derivatives strategist Joe Kinahan.

NOT ALL SIGNS POINT DOWN

But even with the heavy losses suffered recently, the CBOE Volatility index (.VIX) has remained relatively unchanged, indicating market participants have yet to push the panic button.

"During this entire correction, the VIX hasn't budged much," said Jason Goepfert, president of sentimenTrader.com, in a report. "That could be a sign of complacency among traders, but historically a stock market correction without a spike in the VIX has been a better 'buy' signal than 'sell' signal."

However, a turnaround in stocks could be stoked by any sign of progress in Washington on the debt ceiling and budget debates, an overhang on stocks that has frustrated market participants.

"The biggest thing on the horizon right now is the inability of the U.S. Congress to come to some sort of conclusion over a budget," Draughn said.

"Once that happens, that kinds of frees Bernanke's hands to where if he needs to do monetary intervention, he can. But he essentially is handcuffed at this point, due to the fact that the Treasury is happy to restrict the amount of bonds being issued for bumping up to the debt limit."

FDIC member may get top bank regulator job

Reuters, WASHINGTON, June 11: The Obama administration might nominate Federal Deposit Insurance Corp member Thomas Curry to oversee the largest banks as the next comptroller of the currency, according to a person informed about the deliberations.

Curry is a former Massachusetts state banking regulator and is a member of the FDIC board, a position that he has held since January 2004.

The Office of the Comptroller of the Currency regulates the nation's largest banks and the top job at the agency has been vacant since August when John Dugan left the post.

John Walsh is the acting head of the agency.

A spokesman for Curry said he declined to comment. The White House also declined to comment.

The New York Times first reported late Thursday that Curry is under consideration for the OCC opening.

Curry joined the FDIC in 2004 after serving as the Massachusetts Commissioner of Banks for several years.

The OCC oversees national banks such as Bank of America, Wells Fargo and Citigroup.

Some members of Congress and consumer groups criticized the agency for not being a tough enough regulator in the lead-up to the 2007-2009 financial crisis.

Several important U.S. financial regulatory jobs need to be filled, including the top job at the FDIC and the head of the new Consumer Financial Protection Bureau.

FDIC Chairman Sheila Bair is leaving the job on July 8 and the administration is expected to nominate Martin Gruenberg, the number two official at the agency, to replace her.

The new consumer bureau opens its doors on July 21 and Democrats are pushing the administration to nominate Harvard law professor Elizabeth Warren for the job.

Warren is leading the effort to set up the agency as an adviser to the president and the Treasury Department.

The Obama administration is considering nominating former banker Raj Date as head of the bureau, a source familiar with the decision-making said on Wednesday.

Date, a former banker and advocate for the new agency, is a senior official at the bureau.

Nominees for any of the banking regulatory posts will likely have a difficult time being confirmed.

This year, nominees for the Federal Reserve Board and the Federal Housing Finance Agency have already taken themselves out of the running because of opposition from Republicans.

Last month, 44 Republicans said they would block any nominee to be director of the new bureau unless legislation is enacted changing how it is structured, a move Democrats say is intended to weaken the watchdog.

Goldman joins disclosure fight over Lehman claims

Reuters, NEW YORK, June 11: Goldman Sachs Group Inc (GS.N) and other banks fighting for control of Lehman Brothers Holdings Inc's (LEHMQ.PK) bankruptcy have joined efforts to avoid sharing information about claims against the failed investment bank.

In court papers filed Friday in U.S. Bankruptcy Court in Manhattan, units of Goldman, Morgan Stanley (MS.N), Deutsche Bank AG (DBKGn.DE) and others said a proposal by a group of Lehman bondholders would go "far beyond" bankruptcy rules.

The banks are part of a group proposing a plan to divvy up about $60 billion in the Lehman estate to pay back creditors of the company, which filed the biggest bankruptcy in U.S. history in September 2008. The bondholders, an ad hoc group led by hedge fund Paulson & Co, have filed a competing plan that would yield lower returns for the banks.

The bondholders in April were ordered by Judge James Peck, who oversees the bankruptcy, to disclose key points about their roughly $20 billion in claims, including the price paid for those claims. An analysis by the Wall Street Journal found that Paulson's fund, which bought its Lehman debt at a steep discount, could make profits of $350 million to $726 million from the bankruptcy.

The bondholders said all parties should be required to meet the same disclosure requirements, a position supported by Lehman. The group in May proposed a uniform standard for anyone trying to influence Lehman's payback plan.

But creditors were quick to object, saying insolvency rules require broader disclosure from committees than individual creditors.

Among the more than 15 parties who have opposed the disclosures are Bank of America Corp (BAC.N), Barclays Plc (BARC.L) and the Royal Bank of Canada (RY.TO).

The latest objections may prove central to the dispute because the Goldman group is a direct competitor to the bondholders in efforts to control Lehman's restructuring.

The group has argued that it is loosely affiliated and that its members have separate attorneys, barring it from committee status under disclosure rules.

But if disclosure rules do not encompass the banks, other parts of the bankruptcy code should, the bondholders argue. For example, a statutory provision allowing judges broad power to issue orders should be liberally interpreted to give Peck the power to demand disclosures, they say.

The Goldman group said "burdensome" disclosure is unnecessary and would discourage creditors from seeking a say in Lehman's reorganization.

"Even if some minimal benefit could be articulated, it would be completely outweighed by the chilling effect," the banks said in Friday's filing.

Other members of the group to sign on to the objection include Credit Agricole CIB, Credit Suisse International and the Royal Bank of Scotland PLC. Investment funds including Angelo Gordon & Co LP and Serengeti Asset Management LP filed court papers Friday supporting the banks' objection.

A Goldman representative declined to comment Friday.

Attorneys for Morgan Stanley and Deutsche Bank were not immediately available. A lawyer for Credit Suisse declined to comment, as did a spokesman for the bondholders.

The matter is set for hearing before Judge Peck on June 15.

The case is In re Lehman Brothers Holdings Inc, U.S. Bankruptcy Court, Southern District of New York, No. 08-13555.

Fed expanding capital tests for banks

Reuters, WASHINGTON/CHARLOTTE, North Carolina, June 11: The Federal Reserve will subject more banks to annual stress tests to determine whether they have enough capital and can raise their dividends.

On Friday, the Fed said it is proposing that banks with $50 billion or more in assets be subjected to the capital testing regime, bringing the number of banks that would face annual tests, if they were conducted today, to 35 from a prior level of 19.

Among the banks that would now fall under the testing regime, based on Fed data through March 31, are Northern Trust Corp, M&T Bank Corp, Discover Financial Services and Comerica Inc.

The tests seek to determine how a large bank whose failure could hurt the economy and markets would weather a financial shock or an economic downturn.

"Institutions would be expected to have credible plans to have sufficient capital so that they can continue to lend to households and businesses, even under adverse conditions," the Fed said in a release.

Bank stocks, already under pressure, finished the day down 0.4 percent on Friday after being down by about 2 percent earlier in the day, as measured by the KBW Bank Index of large-cap financials. Some of the biggest decliners were regional bank stocks that are now going to face annual tests.

The test has real consequences for banks and their investors.

Following the end of the latest review in March, banks such as JPMorgan Chase & Co and Wells Fargo & Co were able to announce plans to boost their dividends, while Bank of America Corp was not.

"It's an incremental negative that makes it easier to be negative and sell any financial stocks right now," Michael James, a senior trader at regional investment bank Wedbush Morgan in Los Angeles, said in reference to the Fed proposal. "The financial stocks have been a big weight and an underperformer all year, so the path of least resistance in the financials continues to be lower, and this won't help that."

Frederick Cannon, bank analyst at Keefe, Bruyette & Woods, wrote in a note to clients that the Fed proposal should not have a big impact on the banks that will now be subject to the capital tests.

He said these banks have been expecting their capital to come under greater scrutiny from regulators and the impact of the tests "should be limited and may only cause small delays of capital deployment if planned for the near term."

The biggest challenge facing the new banks on the capital test list is they have different business models than the largest institutions and will have fewer ways to raise capital if the Fed says they need to do so, some analysts said.

"These banks don't have investment banking or capital markets for growth to fall back on," said Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel Inc. "A lot of these guys have big real estate and commercial real estate exposures. This is going to make loan growth very difficult, not be a catalyst for it."

Determining exactly how the Fed capital tests will impact individual banks can be hard to gauge because the agency does not release specifics about how the tests are conducted or the results, said Christopher Whalen, senior vice president and managing director at research firm Institutional Risk Analytics.

"They have been completely opaque and there is no way of benchmarking or verifying what anyone is doing," he said.

During the 2007-2009 financial crisis, the government was forced to extend substantial support to banks such as Citigroup Inc, and the tests are one of several measures taken by regulators to help prevent the United States from having to make future bailouts.

The new Dodd-Frank law requires a set of stress tests for banks, some performed by banks and others directly by regulators, to ensure they can survive a steep downturn in financial markets.

The Fed said the expanded capital tests are intended to complement the stress tests required by Dodd-Frank.

The amount of information banks would have to provide the Fed for the capital tests would depend on the size and complexity of the institution, the Fed said.

The rule is expected to be finalized later this year and the new round of reviews is planned for early 2012.

The proposal will be out for comment through August 5.

Fed expanding capital tests for banks

Reuters, WASHINGTON/CHARLOTTE, North Carolina, June 11: The Federal Reserve will subject more banks to annual stress tests to determine whether they have enough capital and can raise their dividends.

On Friday, the Fed said it is proposing that banks with $50 billion or more in assets be subjected to the capital testing regime, bringing the number of banks that would face annual tests, if they were conducted today, to 35 from a prior level of 19.

Among the banks that would now fall under the testing regime, based on Fed data through March 31, are Northern Trust Corp, M&T Bank Corp, Discover Financial Services and Comerica Inc.

The tests seek to determine how a large bank whose failure could hurt the economy and markets would weather a financial shock or an economic downturn.

"Institutions would be expected to have credible plans to have sufficient capital so that they can continue to lend to households and businesses, even under adverse conditions," the Fed said in a release.

Bank stocks, already under pressure, finished the day down 0.4 percent on Friday after being down by about 2 percent earlier in the day, as measured by the KBW Bank Index of large-cap financials. Some of the biggest decliners were regional bank stocks that are now going to face annual tests.

The test has real consequences for banks and their investors.

Following the end of the latest review in March, banks such as JPMorgan Chase & Co and Wells Fargo & Co were able to announce plans to boost their dividends, while Bank of America Corp was not.

"It's an incremental negative that makes it easier to be negative and sell any financial stocks right now," Michael James, a senior trader at regional investment bank Wedbush Morgan in Los Angeles, said in reference to the Fed proposal. "The financial stocks have been a big weight and an underperformer all year, so the path of least resistance in the financials continues to be lower, and this won't help that."

Frederick Cannon, bank analyst at Keefe, Bruyette & Woods, wrote in a note to clients that the Fed proposal should not have a big impact on the banks that will now be subject to the capital tests.

He said these banks have been expecting their capital to come under greater scrutiny from regulators and the impact of the tests "should be limited and may only cause small delays of capital deployment if planned for the near term."

The biggest challenge facing the new banks on the capital test list is they have different business models than the largest institutions and will have fewer ways to raise capital if the Fed says they need to do so, some analysts said.

"These banks don't have investment banking or capital markets for growth to fall back on," said Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel Inc. "A lot of these guys have big real estate and commercial real estate exposures. This is going to make loan growth very difficult, not be a catalyst for it."

Determining exactly how the Fed capital tests will impact individual banks can be hard to gauge because the agency does not release specifics about how the tests are conducted or the results, said Christopher Whalen, senior vice president and managing director at research firm Institutional Risk Analytics.

"They have been completely opaque and there is no way of benchmarking or verifying what anyone is doing," he said.

During the 2007-2009 financial crisis, the government was forced to extend substantial support to banks such as Citigroup Inc, and the tests are one of several measures taken by regulators to help prevent the United States from having to make future bailouts.

The new Dodd-Frank law requires a set of stress tests for banks, some performed by banks and others directly by regulators, to ensure they can survive a steep downturn in financial markets.

The Fed said the expanded capital tests are intended to complement the stress tests required by Dodd-Frank.

The amount of information banks would have to provide the Fed for the capital tests would depend on the size and complexity of the institution, the Fed said.

The rule is expected to be finalized later this year and the new round of reviews is planned for early 2012.

The proposal will be out for comment through August 5.

Canada's TMX undeterred as hostile bid looms

Reuters, NEW YORK/TORONTO, June 11: The heads of TMX Group Inc (X.TO) and the London Stock Exchange Group Plc (LSE.L) said on Friday it is full steam ahead for LSE's friendly takeover of the Canadian market operator even though a hostile bid for TMX could come "any day now."

The expected $3.7 billion counteroffer from the Maple Group consortium of Canadian banks and pension funds will throw a new hurdle in the path of the LSE's offer to buy the Toronto Stock Exchange parent for about $3.5 billion.

But TMX Chief Executive Tom Kloet said Maple has yet to put forth a "genuine offer." The CEOs of the two exchanges said they were on a "roadshow" to boost the credentials of the LSE deal ahead of the June 30 shareholder vote.

LSE's planned takeover must pass muster with the Canadian government, which will decide if it meets the terms of the Investment Canada Act, which says foreign takeovers must carry a "net benefit" to Canada.

"We think we're in quite good shape now," Kloet told a global exchanges conference hosted by Sandler O'Neill in New York on Friday.

He said the company is "in active dialogue" with the government over the deal, which was announced in February. "We remain confident that we're on track for that approval."

Kloet and LSE Chief Executive Xavier Rolet said their bid was different from other transatlantic exchange tie-ups in that it focused on growth and building new businesses, while other combinations have focused on cost and revenue savings.

With less than three weeks before shareholders vote, Maple Group's circular, its formal pitch, is expected soon.

That will provide additional details on the structure of Maple's $48 a share offer. A source with knowledge of the deal said the circular will not give specifics on the valuations for Alpha Group, Canada's biggest alternative trading system, and for the CDS clearinghouse.

Both entities are controlled by Canada's big banks and could be put under TMX's umbrella if the Maple deal wins regulatory and shareholder approval.

The Maple bid, once official, will face antitrust scrutiny because of the Alpha and CDS proposals give the new entity a big share of the Canadian market.

Rolet said on Friday the Maple bid was subject to "a competition review that at best looks highly problematic."

More financial institutions are set to join the Maple bid, although none have yet signed on, and time is running short for Maple to persuade TMX shareholders that its "all-Canadian" option is better for the country's capital markets.

"There's a lot of emotion in that (Maple) deal, I'm not really sure why or where it comes from," Rolet told Reuters on the sidelines, calling the emotional component surprising.

Responding to what he called mischaracterizations, Kloet said TMX and LSE did not accelerate the shareholder vote date, noting June 14 was the original target. He added the date could be changed if the pair agreed, but that wasn't his intention.

Shares of TMX were down 37 Canadian cents at C$43.93 on the Toronto Stock Exchange on Friday afternoon.

Lagarde in lead for IMF, South Africa's Manuel opts out

Reuters, PARIS, June 11: South Africa's Trevor Manuel ruled himself out of the race for the IMF's top job on Friday, making French finance minister Christine Lagarde an even firmer favorite, although the threat of a judicial inquiry remains.

Emerging market powers like Russia, India and China say they want an end to Europe's grip on the top job at the international lender, calling time on a pact that puts the IMF in European hands while the World Bank is run by an American.

Yet the only realistic rival to Lagarde as the window for nominations draws to a close on Friday is Mexican Central Bank chief Agustin Carstens, whose policy views are seen as too conservative by many of his emerging market peers.

Lagarde is backed by the European Union and a handful of smaller countries from Georgia to Mauritius. Paris is hopeful that Washington and Beijing will also stand behind her.

Brazil, Latin America's biggest economy, is leaning toward supporting Lagarde but has not yet made up its mind, officials said.

Manuel, a respected former South African finance minister, opted not to stand but said it would be "most unfortunate if we end up with a European who is bound by the EU."

"It is important to understand that decisions take place in the context of world politics. Against that backdrop, I have decided not to avail myself," Manuel told a news conference.

The United States and Europe hold 48 percent of votes at the International Monetary Fund compared with just 12 percent for emerging nations.

Manuel, who handled Africa's biggest economy deftly for a decade, had been seen as a strong developing-world candidate. Many had thought he would win more support than Carstens, despite the Mexican's impressive academic profile.

In New Delhi to drum up support for his candidacy, Carstens said Mexico and India agreed emerging market countries needed greater representation at the IMF. He also said emerging nations needed to have flexibility on capital controls.

Brazil was split between the two candidates and was waiting to see how much support they had from other emerging economies before declaring its support for either, the finance ministry's point person on the issue said on Friday.

But three other government officials, speaking off the record, said Brazil was leaning toward Lagarde although the support of other Latin American countries, including Colombia, for Carstens' candidacy has complicated Brazil's decision.

LEGAL INQUIRY STILL LOOMS

One potential pitfall for Lagarde is a legal investigation into her role in a 2008 arbitration payout.

A top French court on Friday put off until July 8 its decision on whether to open a formal inquiry into allegations brought by opposition left-wing deputies that she abused her authority in approving a 285 million-euro payout to a businessman friend of President Nicolas Sarkozy.

A French finance ministry official said the legal process was proceeding normally and Lagarde earlier told reporters that she was confident about the outcome.

"No, I am not concerned at all about this particular inquiry, and I reaffirm as I did when I put my candidacy and threw my hat in the ring, that there is absolutely no grounds to that inquiry," she told reporters.

Lagarde has recently flown to Brazil, India and China and carries on her tour to Saudi Arabia and Egypt this weekend.

Lagarde, an adept negotiator with hands-on experience of the euro zone's debt crisis, met African officials in Lisbon.

The African Union, whose representatives Lagarde met on Friday, has said it wants to see a non-European in the job but emerging market powers have failed to coalesce behind one candidate to challenge Europe's hold on the job.

"Lagarde is still the favorite," said Jacques Reland of the Global Policy Institute. "The BRICS are still quite divided."

The Fund -- shaken up by the shock departure of Frenchman Dominique Strauss-Kahn last month over charges that he tried to rape a New York hotel maid -- will name its new managing director by June 30.

A Reuters report that Secretary of State Hillary Clinton has been in talks about leaving her job next year to head the World Bank suggested it was even more likely Lagarde will get the IMF job by reaffirming the transatlantic hold over the two institutions.

Clinton on Friday said she was not in discussions over the top job at the World Bank and that she was not pursuing the post. "I have had no discussions with anyone, I have evidenced no interest to anyone and I am not pursuing that position," Clinton told reporters while on a visit to Lusaka, Zambia.

Four of the IMF's 10 managing directors since 1946 have been French. Lagarde, 55, would be the first woman in the job.

A medal-winning former synchronized swimmer and high-flying corporate lawyer, she has played a key role in Europe's battle to recover from economic crisis and is France's Group of 20 negotiator on economic issues as it holds the G20 presidency.

Carstens has an economics PhD from the University of Chicago, a haven for proponents of deregulation and laissez-faire economics.

US May budget deficit less than half prior year's

Reuters, WASHINGTON, June 11: The budget deficit fell by more than half in May from year-earlier levels to $57.64 billion as tax revenues continued to rise, the Treasury Department reported on Friday.

The monthly deficit was far below the $140 billion gap that economists surveyed by Reuters had forecast, and was down from $135.93 billion in May 2010.

Revenues have been relatively strong, given a relatively high rate of national unemployment, but lawmakers still face an urgent need to reach a deal on budget and debt issues to try to get the deficit onto a long-term downward trajectory.

That necessity is heightened by the fact that the 'baby boom" generation born after World War Two is beginning to retire in waves and to put more demands on retirement and medical care systems.

The government's financial year starts on October 1.

During the first eight months of fiscal 2011, which ends September 30, the cumulative budget deficit reached $927.44 billion. That is down from $935.61 billion in the comparable period in fiscal 2010.

The Congressional Budget Office, Congress' watchdog agency, forecasts that for all of fiscal 2011 the government will post a $1.4 trillion deficit -- a gap between spending and income that must be covered by borrowing.

BAILOUT COSTS FALLING

Government spending during May declined to $232.55 billion from $282.72 billion a year earlier. The spending figure was helped by a one-time adjustment made by Treasury in the estimated cost the government will incur for the Troubled Asset Relief Program -- the $700 billion program to bail out banks and automakers -- which had the effect of lowering the month's outlays by $45 billion.

As banks and others that received bailouts during the 2007-2009 financial crisis repay the money, the government has been steadily ratcheting down its estimates of how much taxpayers will eventually be left to swallow from TARP.

Receipts during May -- primarily from taxes and mostly on individuals -- rose 19 percent to $174.91 billion from $146.79 billion in May 2010.

The United States hit its legally set $14.3 trillion debt ceiling in mid-May, forcing Treasury to juggle funds while the Obama administration and Republican lawmakers feud about raising the borrowing limit.

AUG. 2 STILL CRUCIAL

Treasury warns it will run out of wiggle room to keep borrowing on August 2, putting the country at risk of a historic default on U.S. debt if Congress has not acted by then.

Asked whether strong May revenues meant Treasury might push back the date for risking default, a Treasury official said the numbers were already accounted for when Treasury last estimated that August 2 was when its maneuvering room expires.

On Thursday, lawmakers agreed to meet more frequently to try to reach a deficit-reduction deal though there are still wide differences between Democrats and Republicans over how to proceed, including whether taxes will need to be raised.

Republicans want deep spending cuts, insisting that tax hikes will crimp an already slow-growing economy and make it all the more difficult to create jobs because companies won't be willing or able to hire.

But there is rising pressure at home and abroad for lawmakers to reach a debt deal. In the past few weeks, three major credit rating agencies have warned they may downgrade the ratings on U.S. Treasury bonds if the debt and deficit standoff is not resolved soon.

Moody's said it wanted to see substantial action by mid-July.

China -- now the U.S.'s biggest creditor and a key source for borrowed money to cover the shortfall between Washington's spending and its income -- issued its own warning this week.

An adviser to China's central bank scolded U.S. lawmakers for "playing with fire" in debt talks. China holds about $1 trillion of U.S. outstanding debt and any move by Beijing to dump some of it or even limit buying would potentially trigger a loss of confidence in U.S. economic management.

Former TBW execs get prison time for roles in fraud

Reuters, Alexandria, Virginia, June 11: Two former senior Taylor, Bean & Whitaker Mortgage Corp executives were sentenced on Friday to several years in prison for their roles in a nearly $3 billion fraud that took down the big lender and a major bank.

The fraud ran more than seven years until August 2009 when TBW collapsed after the U.S. housing market imploded, taking Colonial BancGroup Inc's (CBCDQ.PK) Colonial Bank with it and putting hundreds of people at the firm out of work.

Company and bank officials were accused of trying to cover up enormous losses by moving money between accounts at Colonial Bank and selling mortgage loans that did not exist, were worthless or already had been sold.

The Obama administration elicited guilty pleas from six senior executives. TBW's former chairman, Lee Farkas, was convicted by a jury in April on 14 counts of bank, securities and wire fraud as well as conspiracy.

"They knew that without their fraud scheme, TBW would fail," said Neil MacBride, the U.S. attorney for eastern Virginia. "They allowed Lee Farkas to control and manipulate them into doing what they knew was wrong, and now they will pay for their crimes."

It is one of the few cases in which prosecutors have been able to penetrate the executive suites of a major firm in the wake of the 2008 global financial crisis. Most prosecutions have involved lower-level employees or much smaller firms.

Desiree Brown, TBW's former treasurer, was sentenced by District Judge Leonie Brinkema to six years in prison after she tearfully acknowledged her wrongdoing. She pleaded to one count of conspiracy to commit bank, wire and securities fraud.

"It was never my intent to commit a crime," she told the court. "It was always my intent to fix the problem."

Prosecutor Patrick Stokes sought an eight-year sentence, telling the judge that Brown had "a substantial role in the fraud" and that she had been "blinded by her loyalty to Mr. Farkas."

Her attorney urged a lesser sentence, suggesting five years and noting that she was just a "country girl from Nebraska with a high school" education. She started as a receptionist before working her way up in the company.

Brinkema also sentenced TBW's former president, Raymond Bowman, to 30 months in prison. He had pleaded guilty to a conspiracy fraud charge as well as for lying to investigators when they raided the mortgage firm two years ago.

Prosecutors had sought five years in prison.

Brinkema gave lower sentences than sought by prosecutors. One prosecutor, Charles Connolly, urged the stiff penalties be imposed because "there needs to be a message sent to the Street" that the conduct was unacceptable.

However, the judge said the two were unlikely to commit crimes again, noted their cooperation and said that they were likely decent people. However, she said it was a massive fraud and the sentences would serve as a deterrent to others.

Connolly told the judge that the TBW investigation was ongoing. Farkas is due to be sentenced on June 27.

Before its collapse, TBW was one of the country's largest privately-held mortgage lenders, doing some $20 billion in mortgage sales a year, and Colonial Bank was one of the top 50 U.S. banks before regulators took it over.

Authorities have estimated the fraud at nearly $3 billion. The executives were also accused of misappropriating money from one of its own funding mechanisms which had two big investors, Deutsche Bank AG (DBKGn.DE) and BNP Paribas SA (BNPP.PA).

As losses mounted at TBW, the firm tried to drum up capital to help Colonial Bank win $553 million in funding from the federal bank bailout program known as the Troubled Asset Relief Program, prosecutors said. No money was disbursed.

The cases are: USA v. Bowman, No. 11-cr-118 and USA v. Brown, No. 11-cr-84 in U.S. District Court for the Eastern District of Virginia.

Borders staves off closing of six bookstores

Reuters, NEW YORK, June 11: Bankrupt Borders Group Inc (BGPIQ.PK) reached agreements to avoid shuttering six of its stores that the bookseller planned to close under the terms of its bankruptcy loan.

Landlords for stores in Boston and Detroit are among those who agreed to give the insolvent bookstore chain more time to decide whether to break or maintain leases on its properties, Borders said in court papers filed Friday in U.S. Bankruptcy Court in Manhattan,

Borders told the court on Thursday that it might need to close 51 stores under the terms of a $505 million bankruptcy financing loan from General Electric Co's (GE.N) GE Capital.

The latest extensions lower that number to 45 stores. The company is working to reach similar extensions with as many of the remaining stores as possible, a Borders spokeswoman said.

The salvaged locations include Boston's Logan International Airport, Raleigh-Durham Airport, two locations in Detroit Metro Airport and stores in Westland, Michigan, and Mansfield, Connecticut. The company is also awaiting court approval of an agreed-upon extension for its Mt. Kisco, New York store, according to court documents.

Borders had until September 14 to decide whether to keep open more than 400 stores nationwide. Under the terms of its loan, the company either had to extend that deadline or start closing procedures by June 22.

It reached earlier extensions on about 360 stores. The latest agreements push the deadline to January 12, 2012.

Borders plans a June 16 auction to find a liquidation agent for closing sales at stores where extensions are not reached. Manhattan's Columbus Circle store is one of the locations that still might close.

Borders, which helped pioneer the concept of book superstores, fell into bankruptcy in February after years of falling sales, and it has closed 226 stores.

The company is trying to find buyers for as many of its remaining stores as possible, and has drawn interest from private equity firms Gores Group and Najafi Cos, according to the Wall Street Journal.

The case is In re Borders Group Inc, U.S. Bankruptcy Court, Southern District of New York, No. 11-10614.

Import prices rise for 8th straight month

Reuters, WASHINGTON, June 11: Import prices rose for an eighth straight month in May despite a drop in fuel costs, with the year-on-year increase reaching its highest level in nearly three years, according to data on Friday.

The Labor Department said import prices climbed 0.2 percent last month, confounding forecasts for a 0.7 percent decline and following April's revised 2.1 percent jump. In the year to May, import prices surged 12.5 percent, the largest gain since September 2008.

"This is simply reflecting the increase in import petroleum prices," said Anthony Karydakis, senior U.S. economist at Commerzbank AG. "Excluding petroleum, import prices have been very subdued."

The trend of higher energy prices was already being reversed with petroleum import prices falling 0.4 percent in May, the first decline since September 2010.

Overall export prices rose 0.2 percent after a downwardly revised 0.9 percent gain. Analysts had been looking for a 0.3 percent gain.

The data hinted at ongoing price pressures from overseas, but also suggested the recent decline in oil and commodity prices will soon translate into some relief for businesses in the form of lower costs.

Officials at the U.S. Federal Reserve, most recently New York Federal Reserve president William Dudley on Friday, have argued that the rapid rise in energy prices seen earlier in the year would be transitory, and therefore should not prove inflationary over the medium term.

Until late last year, policymakers had been concerned about the prospect of deflation, a damaging downward spiral in prices and wages. But since the launch of the Fed's $600 billion bond-buying program, overall inflation has firmed significantly.

U.S. consumer prices rose 3.2 percent in the year to April. But outside food and energy, the CPI climbed just 1.3 percent, below the central bank's presumed target of 2 percent or a bit below.

Last month's easing in fuel costs is expected to have helped temper U.S. inflation. A government report due on Wednesday is expected to show consumer prices rose a slim 0.1 percent in May. Outside food and energy, prices are seen up a still-mild 0.2 percent.

The year-on-year gain in overall inflation is expected to tick up to 3.3 percent, with the core price increase rising to 1.4 percent.

Lawyers cry foul as Khodorkovsky sent to secret jail

Reuters, MOSCOW, June 11: Jailed former oil tycoon Mikhail Khodorkovsky was transferred from Moscow to a prison camp in an undisclosed location, his lawyers said on Friday, decrying the move as an attempt to block his parole hearing.

Once Russia's richest man, Khodorkovsky was jailed in 2003 after falling foul of the Kremlin under then President Vladimir Putin. He is serving a 13-year sentence and is due to be released in 2016.

Khodorkovsky's defense team, who claim he is a political prisoner, said he filed again for parole on Tuesday after a Moscow court refused to hear a first request on the grounds that he did not supply the proper documents.

Lawyer Vadim Klyuvgant said the transfer was aimed "at creating an artificial delay of the hearing of our client's application for parole."

He claimed it would be easier for the authorities to reject his request for early release if the review was held far from Moscow and from journalists who could spotlight violations.

"It is clear that they are trying to prevent hearing the petition for parole in Moscow since there are no legitimate grounds for a denial," he said in a statement on his client's website.

Khodorkovsky's lawyers said both they and his wife were earlier denied a meeting with the jailed former head of oil major Yukos on the grounds he was being readied for the journey.

The European Court of Human Rights ruled last week that Russia violated Khodorkovsky's rights during his 2003 arrest and jailing on charges of fraud and tax evasion and ordered Moscow to pay him 24,500 euros ($35,300), though it found no firm proof the case was politically motivated.

Ahead of a second trial against him, Khodorkovsky was transferred in February 2009 to a Moscow jail from a Siberian prison camp outside Chita, where he was serving his first sentence.

It was unclear Friday whether he was sent back to Chita or another detention facility.

Itar-tass state news agency cited a law enforcement source confirming that Khodorkovsky had been transferred and said relatives would be informed of his new location within 10 days.

Moscow court and prison authorities could not immediately reached for comment by Reuters.

Khordorkovsky built a fortune by buying state assets cheaply after the collapse of the Soviet Union in 1991, but his business empire, which produced more oil than OPEC member Qatar, was split up and sold after his arrest in 2003.

He has said repeatedly that his convictions for fraud, theft and money laundering were ordered by senior officials who wanted to carve up his oil company and take revenge for a perceived challenge to Putin's authority.

Russian state-controlled oil firm Rosneft eventually bought the largest production assets, including Yuganskneftegaz, making Rosneft Russia's biggest oil producer.

Khodorkovsky and his business partner Platon Lebedev were sentenced to stay in jail until 2017 in a second trial in December, but the sentence was reduced by one year on appeal.

President Dmitry Medvedev said last month it would not be dangerous to release Khodorkovsky, but Prime Minister Putin has taken a tougher stance, comparing the former tycoon to American gangster Al Capone.

Deficit cut would trim growth: BlackRock's Fink

Reuters, CHICAGO, June 11: A $4 trillion reduction of the U.S. budget deficit, if enacted by Congress, would trim economic growth by one percentage point a year for the next decade, BlackRock (BLK.N) Chief Executive Laurence Fink said.

With analysts already forecasting modest growth of 2 percent to 3 percent annually, that would leave the United States with an economy expanding at only about 1 percent a year, Fink said at the Morningstar investment conference on Friday.

Still, such deficit reduction is critically needed, Fink said. "I don't think we have a choice," Fink said. "We've lived way beyond our means."

As a result, the government needs to work more closely with the private sector to bolster the economy, said Fink, who heads the world's largest money management firm.

He recommended raising tax rates on dividends so they are above those for capital gains and altering mark-to-market accounting standards that do not apply equally to corporate assets and liabilities.

Cutting corporate tax rates would encourage job growth from small businesses and multinationals, creating more jobs in the United States, he added.

Without significant deficit reduction, the United States budget is at great risk from even a small rise in interest rates, which could send debt service costs skyrocketing, Fink said. A 1 percent increase in rates would cost the government $140 billion in higher debt payments, he said.

For 2011, BlackRock has lowered its economic growth expectations, Fink said. The company expects the U.S. economy to expand 2 percent to 2.5 percent this year, not the 2 percent to 3 percent forecast six months ago. "We may even see 1.75 percent," he said. "The economy has weakened."

Fink said he is not "bearish" on the bond market, though rates could rise slightly from current levels.

In general, long-term investors should favor a globally diversified portfolio of stocks over bonds in today's market, Fink said.

"Equities are a better long-term investment than bonds at these prices," he said. But investors do not own enough stocks because of lingering fears from the past decade, Fink said. Equities are "the most underinvested asset class in the world."

While some analysts have forecast huge problems for municipal securities, Fink said the market will be "fine and solid" with only smaller, more obscure issuers running into financial difficulties.

Toyota owners set back in U.S. lawsuit over losses

Reuters, NEW YORK, June 11: A federal judge said Toyota owners outside California who seek to recover losses in their vehicles' value resulting from unintended acceleration cannot pursue their claims under that state's laws.

Wednesday's ruling by U.S. District Judge James Selna is a setback for the owners, because California consumer protection laws would give them a better chance than most states' laws to recover on their "economic loss" claims.

Toyota Motor Corp (7203.T) has said roughly 70 percent of the economic loss claims were originally filed in states other than California.

Selna, who sits in Santa Ana, California, said applying California law would revive many claims that other U.S. states would not permit, violating principles set forth by the U.S. Supreme Court on which law to apply.

"Application of California law to a nationwide class, at least in some instances, would drastically expand the scope of relief available to plaintiffs (to the detriment of Toyota)," Selna wrote.

A lawyer for the plaintiffs did not immediately return call a seeking comment. Toyota in a statement said it is pleased the court decided not to allow "a few handpicked plaintiffs" to set the course of litigation through "procedural engineering."

Toyota owners have argued that their vehicles lost value because the company failed to disclose and fix problems with electronic throttle control systems, causing the vehicles to surge forward unexpectedly.

The Japanese automaker has disputed this claim, and has said it expects to prevail in the litigation. Selna handles most of the resulting federal lawsuits.

Toyota has since late 2009 recalled several million vehicles for problems, including stuck gas pedals and floor mat flaws, that owners have linked to unintended acceleration.

The case is In re: Toyota Motor Corp Unintended Acceleration Marketing, Sales Practices and Products Liability Litigation, U.S. District Court, Central District of California, No. 10-ml-02151.