Kohn Says Fed Asset Purchases May Boost Economy by $1 Trillion

Federal Reserve Board Vice Chairman Donald Kohn said the U.S. economy may get a $1 trillion boost in coming years from the central bank’s purchases of government and mortgage debt, along with $175 billion in extra tax revenue.

Kohn defended the central bank’s response to the financial crisis and worst recession in 50 years while saying the central bank “needs a framework” for tightening credit when the economy rebounds. Some economists and Fed officials, including Philadelphia Fed President Charles Plosser, say adding the assets to the balance sheet risks spurring inflation.

“The preliminary evidence suggests that our program so far has worked,” Kohn, 66, said yesterday in a speech during a panel discussion at a conference on monetary and fiscal policy at Princeton University in New Jersey. He cited reductions in longer-term interest rates.

The Fed is in the process of buying $300 billion of long- term Treasuries through September, as authorized at the March meeting of the Federal Open Market Committee. Policy makers also at the time more than doubled planned purchases of mortgage- backed securities to $1.25 trillion this year and boosted federal agency debt purchases to $200 billion from $100 billion.

The comments make it more likely that Fed officials will “extend or expand” programs to purchase the assets, Michael Feroli, a JPMorgan Chase & Co. economist and former Fed researcher, said in a note yesterday.

Purchases may increase nominal gross domestic product as much as $1 trillion “over the next several years,” Kohn said in a footnote to his remarks.

Fire Sales

Other Fed interventions to aid bond dealers, mutual funds and credit markets also “have been successful in supporting economic growth” by lowering rates and “preventing fire sales of assets,” Kohn said.

Kohn, in his speech, said he’s “very much looking forward to” having the central bank “return to more normal modes of operation” as the economy rebounds.

While the purchases expose the Fed and taxpayers to potential losses, Kohn said several considerations make such an outcome unlikely. The Fed won’t need to sell some of the Treasury and agency debt because it will mature, and the central bank can fund the purchases at low cost. Also, the purchases boost the economy and tax receipts, he said.

Still, Kohn said “any calculation of the effect of our asset purchases on the economy is highly uncertain.”

U.S. nominal GDP fell to $14.1 trillion on an annual basis in the first quarter from $14.2 trillion in the prior three months and $14.4 trillion in the third quarter of 2008. It was the first back-to-back decline since 1958.

‘Believable’ Impact

Alan Blinder, a former Fed vice chairman who is a Princeton economics professor, said Kohn’s estimate of the effect on GDP from the mortgage-bond purchases is “believable.”

“It was supposed to reduce the risk spread between mortgage rates and other rates, and I think it has,” Blinder said in an interview. “You get these multiplier effects” on the economy from spending on housing, said Blinder, a panelist with Kohn at the conference.

Blinder said he’s “more dubious” about the Treasury purchases themselves. Any reduction in long-term rates makes it more difficult for U.S. banks to generate earnings to make up for what the Fed estimated earlier this month would be $600 billion in losses under adverse economic conditions. “It makes it harder for them to earn their way out,” he said.

Kohn reiterated his view that the U.S. economy “is only now beginning to show signs that it might be stabilizing, and the upturn, when it begins, is likely to be gradual amid the balance sheet repair of financial intermediaries and households.”

More Power

Kohn said closer cooperation between the Fed and “fiscal authorities” is an “inevitable aspect of effective policy initiatives to meet our macroeconomic objectives in the current financial and economic crises.” He reiterated that the central bank is working with the Obama administration to seek additional powers for the Fed to tighten credit.

Plosser, by contrast, said in a May 21 speech that “when a nation’s treasury or finance ministry and its central bank work too closely together, there is a clear risk that the government’s spending will end up being financed by the central bank’s power to create money and that the public will become confused as to their respective roles.”

“History shows us that you can get very bad economic outcomes with rapidly rising inflation,” said Plosser, 60, the Philadelphia Fed’s president since 2006.

Political Pressures

Central banks do “need a degree of insulation from short- term political pressures” to do their job of keeping prices stable and employment high, Kohn said.

Speaking during an audience discussion before his speech, Kohn said the central bank’s power to pay interest on banks’ deposits will do a better job of keeping the benchmark rate at the desired level as financial markets improve.

“It hasn’t been a totally effective floor,” he said. “As the balance sheet shrinks and as banks become better capitalized, that will become an effective floor.”

Geithner Adopts Part of Wall Street Derivatives Plan (Update1)

The U.S. Treasury’s plan to regulate the over-the-counter derivatives market outlined by Secretary Timothy Geithner on May 13 contains recommendations similar to those made by Goldman Sachs Group Inc., JPMorgan Chase & Co., Credit Suisse Group AG and Barclays Plc three months earlier.

The banks sent the Treasury a plan written in February titled “Outline of Potential OTC Derivatives Legislative Proposal,” saying the Federal Reserve should extend capital and margin requirements to companies and hedge funds that trade in the $592 trillion unregulated market, according to a document obtained by Bloomberg News and confirmed by the Treasury. Energy companies, corporations and hedge funds don’t face such requirements now, while banks do under central bank oversight.

“The banks appear to wish to maintain the intra-dealer market and raise barriers to new entrants to keep the OTC business as compartmentalized as possible and to protect their profitable market conditions,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York. “The Street’s lobbyists appear to be asking for a ‘club’ structure in OTC trading.”

On May 13, U.S. officials called for increased oversight of over-the-counter derivatives to reduce risk to the financial system. Derivatives contributed to the failures last year of Lehman Brothers Holdings Inc. and American International Group Inc., leading to the seizure of credit markets and causing more than $1.4 trillion in writedowns and losses amid the worst financial crisis since the Great Depression.

‘Little Impact’

The Treasury hears from many interested participants while crafting policy, said spokesman Andrew Williams. Derivatives are contracts whose values are tied to assets including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

“This proposal had little impact on our final result,” he said. “Our proposal calls for dramatically increased transparency and the enhancement of regulatory powers to prevent market manipulation that go well beyond anything in that draft.”

Bruce Corwin, a spokesman for Zurich-based Credit Suisse, and Goldman Sachs spokesman Michael DuVally and JPMorgan spokesman Brian Marchiony declined to comment on the bank draft. Representatives from New York-based Goldman Sachs and London- based Barclays didn’t immediately return calls and messages for comment left after normal business hours.

‘Robust Regime’

Geithner sent a proposal to Congressional leaders on May 13 laying out his plan to police the unregulated market where swaps based on interest rates, currencies, commodities and a company’s ability to repay debt are traded.

“All OTC dealers and other firms who create large exposures to counterparties should be subject to a robust regime of prudential supervision and regulation,” the proposal said. These included “conservative capital requirements,” “reporting requirements,” and “initial margin requirements.”

The bank-written plan, dated Feb. 13, said the systemic regulator “shall promulgate rules” requiring “capital adequacy,” “regulatory and market transparency” and “counterparty collateral requirements.”

“Better the devil you know than the devil you don’t,” said Robert Webb, a finance professor at the University of Virginia in Charlottesville, describing the bank’s preference for their current regulator.

Shifting Views

The banks sought sole authority for the Fed over the market and limited the role of the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission, according to the document. The three agencies currently share information in the $28 trillion credit-default swap market.

Geithner’s proposal didn’t specify what agency or combination of agencies should oversee the market.

The Obama administration favors the Fed becoming the new systemic risk regulator to oversee financial companies that could pose a danger to the banking system, according to participants in a May 8 White House meeting.

While the central bank has been favored to take the job since a proposal by former Treasury Secretary Henry Paulson last year, lawmakers and some regulators have shifted away from that view. Federal Deposit Insurance Corp. Chairman Sheila Bair and SEC Chairman Mary Schapiro earlier this month recommended that a council of regulators assume the role.

Geithner’s plan goes further in many aspects than what the banks laid out in their draft.

No Clearing Requirement

The Treasury Secretary is proposing mandatory guaranteeing of private contracts with clearinghouses for standardized OTC contracts such as interest-rate swaps or indexes of credit- default swaps and increased electronic trading to improve price transparency for customers. He also wants required reporting of positions and trades.

The bank proposal doesn’t endorse clearing of OTC derivatives. In annotations to the draft it states “Note that the proposed outline does not propose any specific OTC derivatives clearing requirement.” It also says reporting requirements on trade data should be made to regulators “upon request.”

Webb said any regulation over the market should be applied evenly. “It’s not clear requiring everyone to have the same capital requirements is necessary,” he said. He added that banks have worked closely with the Fed for many years.

“You’re going to see some close ties between the industry and the regulator,” he said.

Gulf Stocks Gain on Oil, Valuations; Emaar Closes at 2009 High

Gulf shares advanced, pushing Dubai’s benchmark to its highest in a month, as oil closed above $60 a barrel and Abu Dhabi Investment Co. predicted higher crude prices will help Arab stocks beat global equities.

Emaar Properties PJSC, the United Arab Emirates’ biggest property developer by market value, rose to a five-month high as institutional investors bought the shares. Dana Gas PJSC gained for a fifth day as it announced an oil discovery in Egypt. Kuwait’s Combined Group Contracting Co. advanced to the highest since September.

“Oil above $60 is giving the markets a push,” said Nadim Abou Jalad, a trader at Naeem Shares & Bonds in Dubai. “Also the relative stability in global markets and the lack of selling pressure at these levels are sustaining the gains.”

Dubai’s benchmark index trades at an average of 7.4 times its companies’ earnings, compared with a multiple of 14.5 for the Standard & Poor’s 500 Index, data compiled by Bloomberg show. Crude oil for July delivery closed at $61.67 a barrel on May 22. Oil accounted for 38 percent of the U.A.E.’s gross domestic product in 2008, according to the ministry of economy.

The Dubai Financial Market General Index jumped 4.1 percent 1,734.54, its highest close since April 19. Abu Dhabi’s ADX General Index added 0.5 percent and the Kuwait Stock Exchange Index rose 1.1 percent.

Emaar Jumps

The MSCI Arabian Markets’ relative performance oscillator, which tracks the performance of the gauge relative to world equity markets, shows that the region’s 11 biggest markets will outperform as oil may surge as much as 30 percent in the second- half of this year, said Aksel Kibar, a portfolio manager at Abu Dhabi Investment.

Emaar jumped 13 percent to 2.95 dirhams, bringing this year’s gain to 31 percent. The stock lost 85 percent last year.

“We are seeing institutional, foreign buying and that is drawing local liquidity,” said Mohammed Ali Yasin, managing director of Shuaa Securities.

Dana Gas jumped 4.8 percent to 1.09 dirhams, its highest close since Oct. 23. The U.A.E.-based natural-gas producer discovered gas at its Tulip-1 well in Egypt’s Nile Delta. The well will add as much as 30 billion cubic feet of gas to the company’s reserves in the country.

Combined Group Contracting surged 7 percent to 1,220 fils. The Kuwaiti construction company closed at its highest since Sept. 29.

Saudi Arabia’s Tadawul All Share Index gained less than 0.1 percent to 6,103.22 at 1:46 p.m. in Riyadh. Oman’s Muscat Securities Market 30 Index added 0.7 percent, while Qatar’s Doha Securities Market Index declined 0.3 percent. The Bahrain All Share Index gained 0.3 percent.

Naimi Says He’s ‘Happy’ With OPEC Output Compliance (Update2)

Saudi Arabian Oil Minister Ali al- Naimi said he’s “absolutely fine” with the adherence to OPEC production quotas by member states as the group meets in Vienna this week to discuss output policy.

“I’m happy with compliance,” al-Naimi told reporters today in Rome. “When it’s around 80, this is the best we can expect,” he said, referring to the percentage rate of compliance.

Naimi, who is in Rome attending the Group of Eight industrialized nations’ meeting on energy, said official compliance data are often inaccurate, “so when you’re around 80 they can be 70 or they can be 90” in compliance.

The 11 members of the Organization of Petroleum Exporting Countries bound by targets implemented 77 percent of planned output cuts of 4.2 million barrels a day, down from a revised 82 percent for March, the Vienna-based organization said on May 13. The group cut its 2009 forecast and now estimates daily oil demand will fall by 1.57 million barrels, or 1.8 percent, to 84.03 million barrels of oil a day this year.

Oil has climbed 86 percent from a four-year low at the end of last year, reaching a six-month high of $62.26 on May 20 as OPEC implements record supply reductions to adjust to lower demand and rising stockpiles. The group will maintain a production target of 24.845 million barrels a day when it meets May 28, according to a Bloomberg survey.

Naimi said yesterday OPEC members will probably “stay the course” when they meet. At the last summit on March 15, the group decided to leave quotas unchanged and adhere to its earlier commitment to restrict supply.

High Stockpiles

Naimi said industrial oil stockpiles are too high and wants them to drop to between 52 and 54 days. Crude inventories in the industrial economies of the Organization for Economic Cooperation and Development are at their highest since 1993, at 62 days of consumption, according to the International Energy Agency.

Saudi Arabia, the world’s biggest oil producer, is currently pumping about 8 million barrels a day in compliance with OPEC quotas compared with its production capacity of 12 million barrels. The capacity will rise to 12.5 million barrels a day by the “end of June,” al-Naimi said.

Oil peaked at $147.27 a barrel in July before tumbling as low as $32.40 in December amid the global economic crisis. Crude ended New York trading at $61.67 a barrel on May 22.

“Demand reflects the price,” Naimi said today. He said last month that helping to keep oil prices at $50 a barrel was his country’s contribution to the world economy, which is fighting the worst recession in six decades.

Opel Bids Prompt Concern Aid Sinking in ‘Black Hole’ (Update1)

German Economy Minister Karl-Theodor zu Guttenberg said he remains unpersuaded by any of the three bids for General Motors Corp.’s Opel unit even after Fiat SpA sweetened its offer aimed at winning state aid.

Guttenberg, who is leading efforts to find a “viable” bid for GM’s European operations, said today Fiat’s new offer was being reviewed to see “if they can stand up everything they say.” Questions also remain over bids by Canadian car-parts maker Magna International Inc. and RHJ International SA, a fund that has some former holdings of private-equity firm Ripplewood Holdings LLC, he said in an interview in Berlin.

“We still cannot be sure whether Magna, or Fiat, or Ripplewood will ensure that bridge loans won’t disappear into a black hole; that any further guarantees will be effective; and that they’re really offering something more than high-minded romantic ideas,” Guttenberg said.

Fiat, which is in talks to form an alliance with Chrysler LLC in North America, raised its offer for Opel after Magna emerged yesterday as the leading bidder, according to state leaders including Roland Koch. Russelsheim-based Opel has said it needs 3.3 billion euros ($4.6 billion) in state aid to survive as GM struggles to avoid a June 1 bankruptcy.

A meeting hosted by Chancellor Angela Merkel yesterday agreed to focus on Aurora, Ontario-based Magna, Canada’s largest car-parts maker, for “concrete talks” because it offers the prospect of developing new markets and avoiding “dependence on Fiat-Chrysler technology,” Koch, the prime minister of Hesse state, where Opel is based, said today in an interview.

He didn’t specify how Fiat’s new bid changed.

‘Incoming Mail’

“At the same time, we’re still reading our incoming mail,” Koch said.

All bidders, including Magna, must make it clear how much they’re prepared to invest in Opel.

“If an investor believes in his investment, they also have to put something on the table” and not just collect state loan guarantees, Koch said.

Gualberto Ranieri, a spokesman for Turin, Italy-based Fiat, declined to comment when contacted by Bloomberg News today.

While German lawmakers from both main parties in Merkel’s coalition want to save Opel jobs before elections on Sept. 27, bidders must secure the backing of Europe’s biggest economy for their plans for Opel and the U.K.-based Vauxhall brand. Magna is also preparing to improve its offer, Welt am Sonntag newspaper reported in an advance copy of an article in tomorrow’s edition.

Phone calls by Bloomberg News to the office of Magna Chief Financial Officer Vincent Galifi were not immediately returned.

Delayed Solution

“Fiat has improved its offer because it needs Opel’s technology,” Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen, said in an interview. At the same time, new offers “will unfortunately delay the process to find a solution for Opel when time is getting short because GM’s insolvency is looming on the horizon.”

The bids from Magna and RHJ include cash, while Fiat’s offer requires 7 billion euros of financing to reorganize Opel, according to people familiar with the matter. Fiat’s bid has two parts: an offer for the Opel and U.K.-based Vauxhall units, and an alternative plan to also buy GM’s operations in Brazil and Argentina, one of the people said.

Magna, which aims to join Russian partner OAO Sberbank in investing as much as 700 million euros in the deal, would be able to boost Opel’s presence in Russia, a market that is expected to grow to 5 million cars in 2015, Dudenhoeffer said.

“Magna would also be able to preserve more jobs at Opel than Fiat, which already has overcapacity problems itself,” he added.

ADIC Favors Arab Stocks as Oil Prices Gain: Technical Analysis

Stocks in the oil-rich Middle East may gain more than global equities, after the MSCI Arabian Markets Index entered a 12-month “outperformance phase,” fueled by higher crude oil prices, Abu Dhabi Investment Co. said.

“People who want to play the oil story should definitely focus on the Arabian markets,” said Aksel Kibar, a portfolio manager at Abu Dhabi Investment. “Relative performance charts indicate that this outperformance may last for another 12 months.”

The MSCI Arabian Markets’ relative performance oscillator, which tracks the performance of the gauge relative to world equity markets, shows that the region’s 11 biggest markets will outperform as oil may surge as much as 30 percent in the second-half of this year, Kibar said.

The MSCI Arabian Markets Index has risen 13 percent this year, compared with a 2.3 percent advance in MSCI’s World Index, data compiled by Bloomberg show. Crude oil gained 38 percent during the period and closed at $61.67 a barrel last week.

The MSCI Arabian Markets Index tracks markets in Kuwait, Bahrain, Oman, Qatar, the United Arab Emirates, Saudi Arabia, Morocco, Jordan, Egypt, Tunisia and Lebanon.

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index.

Obama Says He Will Announce Supreme Court Pick ‘Soon’ (Update1)

President Barack Obama said he plans to announce his choice to fill a Supreme Court vacancy “soon” and that he seeks someone who possesses intellectual heft as well as a “common touch.”

The president said he wants Senate confirmation hearings to take place in July, before lawmakers leave for summer recess. “We’re going to have an announcement soon,” Obama said in an interview with C-SPAN that will air in full today at 10 a.m. Washington time.

Obama, a former constitutional law professor, must name a replacement for Justice David Souter, who is retiring after 19 years on the highest U.S. court. The president said along with a firm grasp of the law and appreciation for the “timeless principles” of the Constitution, he seeks someone who is able to identify with the daily struggles of regular Americans.

“What I want is not just ivory tower learning,” Obama said. “I want somebody who has the intellectual firepower, but also a little bit of a common touch and has a practical sense of how the world works.”

White House spokesman Robert Gibbs yesterday refused to rule out the possibility of Obama’s pick being announced in the coming week. The president likely will do some Supreme Court- related reading while spending the weekend at presidential retreat Camp David, said Gibbs. He said he didn’t know whether Obama would be interviewing candidates over the next few days.

Importance of Empathy

Obama, when talking about the Supreme Court, stresses the importance of justices having empathy when reviewing cases.

“You have to have not only intellect to be able to effectively apply the law,” he told C-SPAN. “But you have to be able to stand in somebody else’s shoes and see through their eyes and get a sense of how the law might work or not work in practical day-to-day living.”

On timing, Obama said he wants to give his nominee enough time to be prepared to “hit the ground” running when the high court reconvenes in October. He also doesn’t want drawn out confirmation hearings.

Chief Justice John Roberts and Justice Samuel Alito, the two most recent additions to the court, both were confirmed in about 70 days, according to Obama. “I think that’s a fair timeframe for us to work with as well,” he said.

When asked whether there’s a justice, current or former, he considers a role model, Obama singled out Justice Antonin Scalia as a “terrific writer” and Justice Sandra Day O’Connor as one who seemed to see the “practical applications” of the law.

“She wasn’t a grand theoretician, but she ended up having an enormous influence on the law as a whole,” Obama said.

He also named Justices William Brennan and Thurgood Marshall because both men “focused on the broader sweep of history.”

Obama was asked whether he has an interest in serving on the Supreme Court, reminded that former President William Taft was on the court after his presidency.

“You know, I’m not sure that I could get through a Senate confirmation.”

Merkel Gets Election Boost as Koehler Wins New Presidency Term

Chancellor Angela Merkel’s candidate for the German presidency won a second term, bolstering her bid to lead a new coalition after national elections in September.

Horst Koehler was re-elected to the largely ceremonial post with 613 votes against 503 for Gesine Schwan, the candidate of the Social Democrats, Merkel’s coalition partners since 2005 and rivals in the Sept. 27 election. Merkel’s Christian Democratic Union teamed up with the Free Democrats in backing the winner.

“It sends a signal,” Guido Westerwelle, Free Democratic Party leader and Merkel’s preferred coalition partner, said on N24 television. “It’s a rejection” of the Social Democratic- led agenda.

While the president’s powers are limited to signing bills into law and representing Germany abroad, the vote by a special assembly of lawmakers and state delegates in Berlin yesterday kicked off a run of elections that will test Merkel’s handling of the country’s worst recession since World War II.

The presidential vote reflects future alliances “in so far as we and the FDP achieved our common goal,” Merkel said. Kohler is “exactly the right president we need during these times of crisis.”

Koehler, who has suspended his CDU party membership while he’s president, has drawn on his exerience as managing director of the International Monetary Fund between 2000 and 2004 to speak out about the financial crisis. He has condemned “unrestricted freedom” in financial markets.

‘Work Ahead’

“Our country stands in the midst of a crisis that’s affecting the whole world,” Koehler said in his acceptance speech. “We have a lot of work ahead of us, but we’ll succeed.”

During the campaign, Schwan, who headed Europa University Viadrina in Frankfurt an der Oder on Germany’s Polish border between 1999 and 2008, echoed union warnings that growing unemployment may trigger social unrest. “Anger” could develop into an “explosive mood,” she told the Muenchner Merkur newspaper in April.

A third candidate, Peter Sodann, a television detective series actor who stood for the Left Party, received 91 votes of the 1,223 votes cast.

Koehler “is a serious expert, precisely on economic issues,” Dieter Hundt, president of the BDA employers’ federation and a delegate to the federal assembly, told reporters. “In the current crisis, he’s highly competent.”

The latest polls show Merkel’s Christian Democrats leading the Social Democrats by between 8 and 12 points, with European elections on June 7 and three German state elections on Aug. 30.

The CDU had 36 percent against 24 percent for the Social Democrats, led by Foreign Minister Frank-Walter Steinmeier, a Forsa poll showed May 19. The Free Democrats have 14 percent support, enough to allow it to enter a Merkel-led coalition.

The presidential election “has nothing to do with the national vote,” SPD Chairman Franz Muentefering said in comments broadcast live, citing the 2005 election that resulted in a grand coalition even after Koehler won the presidency for the CDU. “That’s still in the future.”

India’s Singh Begins New Term; Rahul Gandhi Left Out (Update2)

Indian Prime Minister Manmohan Singh began a second term, taking the oath of office along with his new cabinet, with no spot for Rahul Gandhi who helped push the Congress party to its biggest poll victory in two decades.

Pranab Mukherjee, Palaniappan Chidambaram, Kamal Nath and Murli Deora return as ministers, with portfolios to be announced in two to three days, Press Trust of India reported. Singh said Gandhi, 38, hasn’t agreed to join the government yet and that he hoped to persuade him to do so in time for a second round of appointments next week, PTI said.

Congress, headed by Sonia Gandhi, was unable to agree a complete tally of ministers before the oath-taking ceremony due to a dispute with the Dravida Munnetra Kazhagam, the ruling coalition’s third-largest party. Singh said he hoped the DMK would take its place in the government, PTI reported.

“It’s a good sign that the Congress party has not given in to the demands of the DMK,” said B.G. Verghese, an analyst with New Delhi-based Centre for Policy Research. “The government will be much stronger this time as it will not be subject to the blackmail of any party.”

Singh, 76, becomes the first premier to be re-elected after serving a full five-year term since Indira Gandhi in 1971, and will have to plot a recovery for an economy expanding at its slowest pace in six years and confront growing security concerns in neighboring Pakistan. The government’s priority will be to boost the economy, Times Now cited Singh as saying.

Rupee Rally

Among allies, Sharad Pawar of the Nationalist Congress Party and Mamata Banerjee of the Trinamool Congress became ministers. Congress leader S.M. Krishna entered the cabinet with media speculating he may be made foreign minister.

Expectations that Congress will form a stable government have driven the rupee to its biggest weekly rally in 13 years and on May 19 drew the largest single day of net overseas purchases of stocks since June 2007. Congress now has 206 lawmakers in parliament, 61 more than in 2004.

Singh’s new government, sworn in by head of state Pratibha Patil at the colonial-era presidential palace in the heart of New Delhi, will face challenges meeting pre-election spending pledges and agreeing further stimulus packages without widening the budget deficit.

“The government’s borrowing program has already expanded rapidly,” Central Bank Governor Duvvuri Subbarao said. “The large borrowing is going against the Reserve Bank’s efforts in trying to maintain interest rates low.”

Finance Favorite

Mukherjee, who handled the defense and then foreign affairs portfolios in Singh’s first five-year term before a brief stint as finance minister in the run up to the elections, is the favorite to head the finance ministry.

Former finance chief Chidambaram may stay at the home ministry, where he has sought to overhaul internal security following last November’s attacks on Mumbai by Pakistani gunmen which killed 166 people.

Nath, who argued India’s position in world trade talks, will remain commerce minister, the Times of India said, while Science Minister Kapil Sibal or newcomer Krishna may emerge as foreign minister, the paper added.

Rahul Gandhi, Sonia’s son and a star poll campaigner credited with delivering Congress its biggest win in the country’s most populous state in a quarter century, hasn’t responded directly to Singh’s call for him to become a minister.

Dynastic Heir

Gandhi is the heir to India’s richest political dynasty, his father Rajiv, grandmother Indira and great-grandfather Jawaharlal Nehru having been prime ministers. His lead campaign role in the five-stage election fuelled expectations he will some day follow in their footsteps. Sonia Gandhi said her son wants to continue his work to strengthen the party, Times Now reported.

Congress has the support of a total 322 members in the 545- seat lower house, or Lok Sabha, Singh told reporters May 19. This included 48 members of parties that had pledged to support the United Progressive Alliance coalition without joining the government, he said.

Singh, a Sikh born in Gah in what is now Pakistan, won’t have to worry about resistance to economic and foreign policies from the Communist parties that frustrated plans to entice investment in his first term before being routed in the elections which ended May 16.

Among other reforms, he is expected to resume share-sale plans for state-owned firms, and may sell $20 billion of state assets in the next five years as he tries to plug a budget shortfall, said Rashesh Shah, chief executive officer of Edelweiss Capital Ltd.

China Ahead

China remains a better investment opportunity than India, said investor Jim Rogers, adding the new government will have to deliver reforms for that to change.

“I’ve heard the same thing for the last 30 years,” Rogers told an Economist Conferences forum in Singapore yesterday, saying he’s skeptical of pledges. Still, India will be “the next great investment” if Singh sticks to his commitments, Rogers said.

Geithner Calls for ‘Very Substantial’ Change in Wall Street Pay

Treasury Secretary Timothy Geithner called for major changes in compensation practices at financial companies and said the Obama administration’s plan to help realign pay with performance will be rolled out by mid-June.

“I don’t think we can go back to the way it was,” Geithner said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” to be aired tonight and over the weekend. “We’re going to need to see very, very substantial change.”

He said that Wall Street’s pay practices, which include big year-end bonuses, encouraged excessive risk-taking and helped precipitate the financial crisis. What’s needed is a set of broad standards that financial supervisors can use to make sure that doesn’t happen again, he said.

The administration’s pay plan would be part of a proposed comprehensive overhaul of financial regulation aimed at both protecting consumers and reducing vulnerability to crises. Geithner has previously ruled out setting specific caps on pay and declined to alter existing compensation contracts.

In a wide-ranging interview, the Treasury chief declined to say whether the administration would propose stripping the Securities and Exchange Commission of some of its powers as part of the plan and dismissed suggestions of a rift with Federal Deposit Insurance Corp. Chairman Sheila Bair.

Geithner, 47, shied away from declaring the financial crisis over, saying that credit is still tight and interest rates are still high for many business borrowers. He forecast that would improve gradually as companies and consumers reduced their debt levels to more financially manageable levels.

Recovery Process

“That’s going to make the process of recovery somewhat slower than it would otherwise be,” he added.

The Treasury chief said it was a “real concern” that some banks that had received money from the government would pay it back too quickly. To discourage that from happening, banks that want to repay must show they have a lot more capital than they need and are able to raise money from the private sector “on a substantial scale” without government help, he said.

Geithner told lawmakers earlier this week that every $1 of capital at banks can generate more than $8 of lending. Still, he said in the interview that the Treasury won’t require that banks commit to specific increases in their lending as a precondition for paying the government back.

‘Deep Trouble’

“Lots of countries have got themselves in deep trouble with policies that force their banks to lend,” he said. “That’s likely to lead to a weaker, less efficient banking system, a less efficient economy.”

The government has distributed almost $300 billion in capital to about 600 U.S. banks and financial firms under the $700 billion financial rescue package approved by Congress last year. A number of lenders, including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley, have applied to repay the government funds.

Geithner is under pressure to act quickly to rein in the financial services industry.

“No one bails out little grocery stores,” U.S. Representative Jose Serrano, a Democrat from New York, told the Treasury chief at a hearing in Washington yesterday.

As part of its efforts to combat the crisis, the Treasury is putting together a Public-Private Investment Program to purchase as much as $1 trillion in distressed mortgage-backed securities and other assets from the banks. The partnerships would use $75 billion to $100 billion of government funds.

Bank Pressure

Geithner played down expectations that the program would ramp up quickly once it was launched and declined to say whether banks should be pressured to participate if it doesn’t, as the FDIC’s Bair has suggested.

“We want to get these programs in place and see how they work,” he said. “They can be helpful and valuable in putting a floor under things, even if they don’t see a lot of early participation.”

Geithner said the credit crisis reflected “systematic failures” in financial oversight that would require “pretty significant changes across the board.” Among the changes the administration is considering IS the establishment of an independent agency tasked with consumer protection.

The SEC may be stripped of some of its powers under the regulatory restructuring plan being put together by Geithner and National Economic Council Director Lawrence Summers, people familiar with the matter have said. In one scenario, the agency would lose its oversight of mutual funds to a new agency for policing consumer-finance products.

SEC Resources

Geithner praised SEC Chairman Mary Schapiro and said he would support giving her agency more resources where needed. He declined to say whether he thought the SEC should lose oversight of mutual funds as part of the overhaul.

He also said the administration is working with top lawmakers to craft a new regulator that would police risk across the financial system. He said no judgments have been made yet about who would fill that task, or what the roles of the Federal Reserve and Treasury will be. A “white paper” on the subject is due in several weeks, he said.

The Treasury chief brushed off suggestions that he and Summers were at odds with the FDIC’s Bair and that the two didn’t consider her a team player. He called Bair “very creative” and said that he had worked very closely with her.

“One of her great strengths is she’s a strong advocate for her agency and strong advocate of her points of view,” Geithner said. “That’s the kind of thing that everybody wants around the table, including Larry Summers.”

The Treasury chief belittled charges by former House of Representatives Speaker Newt Gingrich and other Republican leaders that President Barack Obama was adopting a socialist agenda. While markets can’t solve all America’s problems, the administration recognizes their importance, he said.

“It’s the least plausible charge anybody could say,” Geithner said. “The president understands how important markets and businesses are to the future prosperity of the U.S.”