China's growth accelerates on stimulus boom

China's second-quarter growth accelerated on a stimulus-fed investment boom, the government reported Thursday, sparking a rise in Asian stocks on hopes the world's third-largest economy could help to lead a global recovery.

The economy grew by 7.9 percent from a year earlier, up from the first quarter's 6.1 percent growth rate, the National Bureau of Statistics said. Analysts said full-year growth should easily reach the government's 8 percent target.

"This should give people confidence that China's economy is on strong footing and that there are a lot better days ahead," said Alan Landau, Hong Kong-based president of Marco Polo Pure Asset Management.

The pickup in growth reflected the impact of Beijing's 4 trillion yuan ($586 billion) stimulus, an effort to offset a collapse in exports by pumping money into the economy through spending on public works construction.

"We are in a blood transfusion-led economic recovery," said Rock Jin, chief economist for Sinolink Securities Co. in Beijing.

Many analysts expect China to be the first major country to emerge from the worst global slump since the 1930s. That could help propel global growth as China imports more raw materials, industrial components and consumer goods.

In the United States, a Chinese recovery could help to boost exports of factory and construction equipment and farm goods such as soybeans. But the bulk of China's imports are raw materials such as Australian iron ore and components from other Asian countries, so the direct impact on the United States and Europe might be limited.

China's strong quarterly results, coupled with higher U.S. corporate profits, spurred a rally in Asian stocks. Markets in Tokyo, Hong Kong, South Korea and Singapore all rose. In mainland China, markets fell as investors took profits after a rally, but the benchmark index is still up 75 percent this year on enthusiasm about the stimulus.

The International Monetary Fund raised its forecast of China's 2009 growth this month by one percentage point to 7.5 percent. The World Bank boosted its forecast last month from 6.5 percent to 7.2 percent, citing unexpectedly strong stimulus results.

Still, the Chinese government warned that despite the latest improvement, a full-fledged recovery is not firmly established.

"The difficulties and challenges in the current economic development are still numerous," said a statistics bureau spokesman, Li Xiaochao. "The basis of the rebound of the people's economy is not stable."

Goldman Sachs said compared with the previous quarter — the way other major countries measure economic expansion — growth accelerated to a near-record 16.5 percent on an annualized basis. JP Morgan said it calculated that sequential expansion at 14.9 percent.

China's growth sank last year as global demand for exports collapsed, wiping out up to 30 million factory jobs. But the economy was regarded as poised for a quick a recovery, with strong banks unhampered by the mortgage crisis that battered Western lenders.

State-owned banks have boosted lending to record levels, pushing new credit in the first half to a record 7.3 trillion yuan ($1.1 trillion) and sparking a revival in China's real estate market.

Most of the stimulus has gone to state-owned construction companies and suppliers of cement and steel. But money is flowing to the private sector as builders hire workers and buy other materials.

Industrial output rose 10.7 percent in June from a year earlier, faster than May's 8.9 percent growth, the statistics agency said. It said retail sales rose 15 percent in the first half from a year earlier, while spending on factories and other fixed assets was up 33.5 percent.

Sinolink's Jin said 2.5 percentage points of the 7.9 percent quarterly growth came from stimulus-financed investment and the rest from production.

Zhu Jianfang, chief economist for Citic Securities Ltd., said he expects growth to accelerate to 9 percent in the third quarter and into double digits for the final three months of 2009.

"I think the economy is in a fairly good recovery state," Zhu said. "It's not only stimulated by the government investment but also followed by some private investment. This is a positive change."

Consumer prices in June fell 1.7 percent from a year earlier, the statistics agency said, giving Beijing a freer hand to keep spending on its stimulus without a danger of adding to pressure for prices to rise.

The wave of positive data in recent weeks has encouraged investors, driving a stock market boom that has boosted China's benchmark Shanghai Composite Index by 75 percent since the start of the year.

The jump in lending and investment has prompted warnings from some analysts and even the central bank governor about a possible rise in bad loans and bubbles in real estate and stock prices. But most analysts say potential problems are still modest.

Li, the government spokesman, said Beijing is closely watching to make sure the stimulus does not ignite inflation.

"There are still quite a lot of uncertainties," Li said. "We should remain watchful about changes in prices."

CIT's shares, bonds plunge on bankruptcy fears

Shares of embattled U.S. lender CIT plummeted and its debt sold off steeply on Thursday on escalating fears about a potential bankruptcy after the company said bailout talks with the government had ended.

The announcement late Wednesday followed last-ditch talks in which U.S. Treasury officials had expressed concern about a worsening liquidity crunch at the 101-year-old company, which lends to hundreds of thousands of small and mid-sized U.S. businesses.

"This comes as a surprise as we had thought CIT had a good chance of obtaining support," analysts at brokerage Stifel Nicolaus said in a research note. "With these talks ending fruitlessly, we think CIT likely was too stressed for any temporary government solution."

"As a result, we expect the company to file for bankruptcy in short order," they added.

CNBC, citing a source close to the company, has said CIT is now pursuing a plan that is likely to include a Chapter 11 bankruptcy filing on Friday.

The company's stock swooned more than 80 percent to as low as 31 cents in early trading on the New York Stock Exchange as it reopened after being suspended on Wednesday afternoon.

CIT's 5 percent notes due in 2014 fell to 52 cents on the dollar early on Thursday from 61.5 cents late on Wednesday, according to MarketAxess.

"The prudent course for bondholders is to brace for bankruptcy," wrote analysts at independent research firm CreditSights in a research note.

The company was not immediately available to comment.

If CIT were to go bankrupt, it would join Lehman Brothers Holdings Inc (LEHMQ.PK: Quote, Profile, Research, Stock Buzz) and Washington Mutual Inc (WAMUQ.PK: Quote, Profile, Research, Stock Buzz) among large financial companies to collapse since the credit crisis accelerated last September.

While the company has indicated it needs at least $2 billion of rescue financing in the next 24 hours or it would likely file for bankruptcy, "we believe the figure is in the range of $4 billion to $6 billion plus, making outside capital sources shy away from such a heavy recapitalization," the CreditSights analysts wrote.

Costs to insure CIT's debt against the risk of default surged. CIT's credit default swaps widened to about 47 percent as an upfront cost, from 34 percent late on Wednesday, according to Phoenix Partners Group data.

SAD END

CIT's problems surfaced two years ago in the wake of Chief Executive Jeffrey Peek's decision earlier in the decade to expand into subprime mortgages and student loans, both potentially highly profitable but fraught with added risk.

Founded in St. Louis in 1908, CIT boasts on its Website that a million business customers depend on it for financing.

Many may now have to turn to another firm at a time when credit markets remain tight, reducing business activity as the government tries to lift the economy out of a deep recession.

CIT sought new help even after winning bank holding company status in December so it could draw $2.33 billion of taxpayer money from the government's Troubled Asset Relief Program.

The U.S. Treasury Department had been considering an aid package that could have included a temporary loan, access to the Federal Reserve's discount window, or asset transfers to CIT's banking unit, a person familiar with the matter said. The person requested anonymity because the talks were private.

Federal Deposit Insurance Corporation Chairman Sheila Bair, whose office is already under strain as banks fail by the dozens, had been reluctant to let CIT issue government-guaranteed debt, believing that a program allowing such issuance was designed for healthy institutions.

"This marks a sad end for the 100-plus-year-old finance company," Stifel Nicolaus analysts said.

House Health Plan Outlines Higher Taxes on Rich

House Democratic leaders took a big step toward guaranteeing health insurance for most Americans on Tuesday as they introduced a bill that would expand coverage, rein in the growth of Medicare and raise taxes on high-income people. Three House committees announced plans to begin voting on the measure this week.

After months of setbacks and uncertainty, House Democrats were jubilant as they unveiled their proposal to achieve a goal that has eluded presidents for six decades.

As of mid-afternoon, House Democratic leaders were still waiting for a cost estimate from the Congressional Budget Office.

President Obama, in a statement, praised what he termed “unprecedented cooperation to produce a health care reform proposal that will lower costs, provide better care for patients, and ensure fair treatment of consumers by the insurance industry.”

Republicans have asserted that the bill would raise taxes for millions of middle-income families. But Democrats said their proposal, which calls for a new surcharge or surtax, would affect “only 1.2 percent of all households in the United States.”

The surtax would apply at graduated rates ranging from 1 percent to 5.4 percent to families with annual adjusted gross incomes of more than $350,000 and individuals making more than $280,000.

Starting in 2011, a family making $500,000 would have to pay $1,500 of additional tax to help subsidize coverage for the uninsured. A family making $1 million would have to contribute $9,000. These taxes would rise significantly in 2013 if the federal government did not achieve specified savings in Medicare, Medicaid and other health programs.

On the other side of the Capitol, after more than three weeks of work, the Senate health committee was poised to become the first panel to approve comprehensive health legislation. But the Senate Finance Committee is still hunting for ways to pay for it all, and the chairman of the committee does not have the bipartisan support he has been seeking for months.

The House bill would create a new government-run health plan, starting in 2013, and would require employers to help pay for coverage of their workers.

An employer who does not provide health insurance to workers would generally have to pay a fee or penalty to the government equal to 8 percent of their wages, but there would be exceptions. For example, an employer with a payroll less than $250,000 a year would not have to pay any fee and could obtain tax credits to help defray the cost of coverage for its employees.

The fee or penalty would be equal to 2 percent of wages for a company with a payroll of $250,000 to $300,000; 4 percent of wages for an employer with payroll of $300,000 to $350,000; and 6 percent of wages for businesses with payroll of $350,000 to $400,000.

In a new report, the Congressional Budget Office said that such “pay-or-play requirements” could reduce the hiring of low-wage workers.

“Employees largely bear the cost of health insurance,” budget office said. But, it added, employers cannot reduce wages for workers receiving the minimum wage, “a play-or-pay provision could reduce the hiring of low-wage workers.”

ECB tells banks to lend, Geithner hopes for growth

U.S. Treasury Secretary Timothy Geithner said on Monday he was optimistic some leading economies could grow this year, but the European Central Bank urged banks to resume lending to secure a recovery.

ECB President Jean-Claude Trichet criticised banks for simply returning much of the vast sums it has supplied to them, instead of lending the money on to firms and households to secure a recovery from Europe's worst recession in decades.

"We remind banks of their responsibility to continue to lend to firms and households at appropriate rates and in suitable volumes," he said in Munich. "It may take some time, however, for the extra liquidity to be transformed into credit."

Last month the ECB injected 442 billion euros ($620 billion) of 12-month funds into the banking system to encourage them to finance the real economy. But, worried about their own health, the banks parked much of that money in the safest place they could find -- back at the ECB -- potentially delaying recovery.

Evidence began emerging around late March that the global recession was starting to bottom out, driving a second-quarter rally in share markets. But weak data in recent weeks has boosted fears that stock prices had run ahead of the prospects of a solid recovery in the second half of this year.

Such doubts hit Asian and European markets. [nLD67974] Shares fell as investors fretted about a coming wave of company earning reports, and oil dipped briefly below $59 a barrel on fears that demand will tail off if the economy stutters. CLc1

JAPAN, CHINA GIVE HOPE

Despite fears that the worst may not be over, Geithner said there was a good chance the United States and other leading economies would resume growth, though uncertainty remained.

"In my view there are still significant risks and challenges ahead," he told reporters in London when asked if he feared a possible double-dip recession. [nLAK000461]

"We have a very powerful set of policies in place, coming on stream. I think there is a very good chance we will see the U.S. economy and the world economy get back to recovery, get growing again, over the next few quarters."

That positive outlook was supported by evidence from Japan, the world's second-biggest economy, and China.

Industrial output in Japan, which is deep in recession, rose 5.7 percent in May from April, revised data showed, and a measure of companies' capacity utilisation rose. [ID:nT184581]

In contrast to ECB concerns over sluggish lending, China is worried that a boom in lending as its strives to achieve eight percent GDP growth this year will cause new speculative bubbles.

Li Dongrong, an assistant governor of the People's Bank of China, said Beijing would strengthen oversight of lending to ensure credit is reasonably controlled and properly channelled.

"We are experiencing many complicated, unprecedented changes in economic and financial conditions, both at home and abroad, which have created new challenges for monetary and credit policy," he said in comments on the PBOC website.[ID:nPEK368921]

Chinese banks extended a massive 1.53 trillion yuan ($223.9 billion) in new loans in June in a fresh show of support for the government's drive to hit eight percent growth in 2009.

Concern is growing that this credit is inflating new stock and property bubbles and could sow the seeds of a new crop of bad loans at mostly state-controlled banks.[ID:nPEK122994]

MARKETS NERVOUS

In the United States, stocks fell as caution about an upcoming spate of earnings remained.

A number of major U.S. firms including Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz), Intel (INTC.O: Quote, Profile, Research, Stock Buzz), JP Morgan Chase (JPM.N: Quote, Profile, Research, Stock Buzz) and Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz) are due to report earnings this week. [ID:nN12536585]

Earlier, Dutch conglomerate Philips Electronics (PHG.AS: Quote, Profile, Research, Stock Buzz) surprised the market with a return to profit in the second quarter and said it was hopeful of an upturn in business in the second half of 2009.

But that did not stop world stocks as measured by MSCI .MIWD00000PUS from losing close to 0.2 percent on Monday, down from earlier losses of three quarters of a percent.

The FTSEurofirst 300 index of top European shares rose more than 1 percent, but only after hitting an 11-week low earlier in the day.

"I don't think we will see an economic recovery this year and ... earnings estimates are still too high, so there is room for disappointment," said Philippe Gijsels, senior equity strategist at Fortis Bank, in Brussels.

In Tokyo the Nikkei .N225 fell 2.6 percent to its lowest close in eight weeks, hurt by growing political uncertainty after news that embattled Prime Minister Taro Aso was set to call a general election for Aug. 30. [.T] [ID:nT353403]

Oil dipped briefly below $59 a barrel but rallied later to stand above $60.50.

CardioNet shares sink on reimbursement rate cut

Shares of CardioNet Inc (BEAT.O: Quote, Profile, Research, Stock Buzz) fell as much as 36 percent Monday, a day after the company withdrew its 2009 outlook as Pennsylvania Medicare carrier Highmark cut the reimbursement rate for mobile cardiac outpatient telemetry (MCOT) services.

On Sunday, CardioNet -- a maker of technology to diagnose and monitor heart rhythm disorders -- said Highmark Medicare Services was adjusting its reimbursement rate for MCOT services to $754 per service, effective September 1.

Highmark had posted a reimbursement rate of $1,123.07 in May.

"We believe CardioNet will need to restructure as the Highmark cut creates significant margin compression and renders the company's current cost structure incompatible with profitability in 2010," Jefferies & Co analyst Joshua Jennings said and cut his price target on the stock to $5 from $17.

CardioNet said it had previously indicated that it had been aware that Highmark was conducting a normal review of the reimbursement rate for MCOT.

Analyst Jennings said the review process had been comprehensive and Highmark's decision was unlikely to be reversed.

CardioNet shares fell 36 percent to $5.63 Monday morning, making them the top percentage losers on Nasdaq.

Kellwood: Still Negotiating With Deutsche Bank On Debt Swap

Kellwood Co. said Monday it is disappointed in the change of heart by bondholder Deutsche Bank AG (DB), which it said had supported a debt exchange before changing its mind on Friday, but Kellwood said it is still negotiating with the bank to try to get breathing room on a rapidly approaching debt maturity.

The company, one of the U.S.'s largest apparel manufacturers, could be forced to file for bankruptcy after it failed to reach an agreement with its bondholders, people familiar with the situation told The Wall Street Journal last week.

Kellwood, which employs about 2,000 people and owns such popular clothing brands as Phat Farm, Sag Harbor and Vince, was taken private in February 2008 by buyout firm Sun Capital Partners Inc. for $542 million. The effects of a heavy debt load and a sharp drop in consumer spending have slammed its financial results.

The company has a $140 million bond issue maturing Wednesday. Unable to refinance the bonds with the tight credit markets, Kellwood hired financial advisers to restructure its debt. It has tried to defer the payment through a so-called exchange offer, in which it would swap the bonds for ones with sweetened terms expiring in 2014. Deutsche Bank, the largest holder of the bonds, elected not to tender to the offer.

Kellwood Chief Executive Michael Kramer said Monday the company was "surprised and disappointed by Deutsche Bank's current position as they were on our bondholder steering committee, helped structure the deal and told us all along that they supported it."

Kramer added the proposed swap comes at a time when the company is performing well, is profitable and has positive cash flow. He said Kellwood is continuing to negotiate with Deutsche Bank and the rest of its bondholders and is looking at other alternatives, but didn't elaborate.

EU not ready to sign South Korea free trade pact

The European Union is not yet ready to sign a free-trade agreement with South Korea because there could still be "outstanding questions" from some EU members, Sweden's prime minister said Monday.

South Korea's President Lee Myung-bak had hoped to announce the conclusion of the free-trade talks during a visit to Sweden, which currently holds the rotating six-month EU presidency.

But Swedish Prime Minister Fredrik Reinfeldt suggested some EU capitals were not prepared to OK the agreement, despite a "breakthrough" in talks on Friday.

"When you finalize this kind of agreement with the European Union, we need to also finalize it with our different member countries," Reinfeldt said. "There might still be some outstanding questions, and we need to follow up on them before we could say that it's absolutely all clear and all ready to sign."

Reinfeldt said he had "good hope" to complete the agreement during Sweden's EU presidency.

South Korea and the EU began negotiating the accord to slash tariffs and other barriers to trade in May 2007.

Bilateral trade reached $98.4 billion in 2008. The EU is South Korea's second-largest trading partner after China and its largest foreign investor.

Lee said he was "happy with the results" of his visit to Europe but stopped short of declaring that talks on a free trade deal had been completed.

"I am very much aware that the European Union is composed of 27 individual countries. Dialogue, cooperation and also trying to convince and encourage those members with different views is very important," he said through a translator.

Earlier Monday, Lee had told South Koreans in a nationwide radio broadcast that he expected to "declare the conclusion of negotiations."

The talks have dragged out longer than both sides had hoped, however, amid difficulty bridging differences over refunds South Korea pays to local companies for tariffs incurred on imported parts used in exported goods.

Opposition by EU automakers to the deal has also been a sticking point. South Korea enjoys a big surplus in vehicle trade.

South Korea is aggressively pursuing free trade agreements. It reached one with the United States in April 2007, but the deal has since languished in political limbo in both countries and remains unratified.

UBS in Talks to Settle Case on 52,000 Accounts

UBS AG, the largest Swiss bank by assets, is in talks with the U.S. government to settle a lawsuit seeking the names of 52,000 American account holders suspected of using Swiss secrecy laws to evade taxes.

A judge in Miami today granted a postponement of an evidentiary hearing while the bank works with the U.S. and Swiss governments on a settlement. The U.S. sued UBS on Feb. 19, a day after the bank agreed to pay $780 million to defer prosecution for helping wealthy Americans evade taxes.

Under that agreement, UBS agreed to an unprecedented breach of Swiss secrecy laws by giving the Internal Revenue Service data on more than 250 accounts. Switzerland, which supports UBS in the case, said the U.S. push for data on 52,000 other accounts is a threat to its sovereignty and would force the bank to violate Swiss criminal laws protecting bank secrecy.

“Over the last week or so, there have been high-level officials from the two governments meeting, trying to narrow the issues and bring about a resolution,” Stuart Gibson, a Justice Department senior litigation counsel, told U.S. District Judge Alan Gold today at a hearing.

UBS attorney Eugene Stearns said the bank learned on July 11 about discussions between the Swiss and U.S. governments.

“We are anxious for the governments of these two democracies to resolve these issues,” said Stearns. “It’s a minefield trying to resolve these issues.”

Hearing Reset

Gold reset an evidentiary hearing from today to Aug. 3 and 4. He said he may extend the date if talks are unfinished.

“This adjournment gives people at very high levels of both governments time to get involved and consider the implications of this litigation,” said Bryan Skarlatos, a tax lawyer at Kostelanetz & Fink LLP in New York. “The symbolic value of this case is huge. It’s King Kong versus Godzilla. It’s the IRS versus bank secrecy jurisdictions.”

The Justice Department said in a statement yesterday that any settlement “would necessarily include a provision requiring UBS to provide the Internal Revenue Service information on a significant number of individuals with UBS accounts.”

UBS rose 40 centimes, or 3.1 percent, to 13.03 Swiss francs at 4:24 p.m. in Zurich trading.

“An out of court settlement in the near future would be positive for UBS,” Teresa Nielsen, an analyst at Vontobel in Zurich with a “hold” rating on UBS, said in a note to clients. “The terms of a possible settlement will be decisive.”

Confidential Negotiations

The postponement request by UBS and the U.S. was backed by the Swiss Federal Department of Justice and Federal Department for Foreign Affairs, according to a Swiss statement. The Swiss declined further comment, citing confidential “ongoing settlement negotiations” between the governments.

UBS called the postponement of the U.S. litigation a positive step.

“The governments will now engage in intensive discussions over the next two weeks and attempt to negotiate a resolution,” the bank said today in a statement.

Switzerland had hardened its public posture on the case, saying in a July 7 court filing it “will use its legal authority to ensure that the bank cannot be pressured to transmit the information illegally, including if necessary by issuing an order taking effective control of the data at UBS.”

On July 8, Gold directed the Justice Department to consult the government’s executive branch, including the State Department, before responding by yesterday to the Swiss threat.

U.S. Intentions

Gold directed the government to say by yesterday “how far it intends to proceed,” including the possibility of seizing UBS assets in the U.S. and imposing a receivership.

In a July 9 memo, UBS Chief Executive Officer Oswald Gruebel said: “The core of the dispute turns on a conflict between the Swiss banking confidentiality laws, to which we are bound, and the U.S. objective to collect taxes owed by its citizens. Honoring the IRS summons would require UBS to violate Swiss criminal law, and we simply cannot comply.”

In its response to Gold yesterday, the Justice Department said it was “premature” to respond to “the question of whether UBS will be able to comply” with any court order.

“To the best of our knowledge the Swiss government has not yet taken such action, nor has it made clear what it means when it suggests that it will issue an order ‘taking effective control’ of the UBS records,” according to the filing.

“The fact that UBS finds itself in a difficult position is completely the result of its own conduct,” according to the filing. It urged Judge Gold to rule on the merits of the case, not on whether “UBS may or may not comply.”

Higher Stakes

The Gold order directing the U.S. to comment on possible seizure of UBS assets in the U.S. raised the stakes in the case, according to Skarlatos, whose firm represents bank clients.

“The judge said, ‘If you think that’s going to carry the day or scare me off, I still have power and authority over all your assets in the United States and I’m still going to exercise it,’” Skarlatos said.

“The real problem is that UBS came to the United States and actively engaged in a business plan to violate the laws in the United States,” he said. “Swiss laws don’t apply when you actively violate the laws of the United States.”

Swiss law recognizes tax fraud and not tax evasion as a crime. Any settlement would probably require a revision to the current tax treaty between the U.S. and Switzerland, said Lawrence Horn, a tax attorney at Sills Cummis & Gross in Newark, New Jersey.

Saving Face

“Someone is going to have to come up with a new definition of tax fraud to be more expansive to allow the Swiss government to save face,” Horn said.

As part of its deferred-prosecution agreement, UBS admitted Feb. 18 that from 2000 to 2007 its Swiss private bankers helped Americans evade U.S. taxes through sham offshore companies in tax havens including Panama, Hong Kong and the British Virgin Islands. UBS said it created misleading forms saying those companies, not taxpayers, were the beneficial account owners.

UBS also said its private bankers marketed securities and banking services in the U.S., even though it didn’t have the required license from the U.S. Securities and Exchange Commission. Those bankers, UBS said, met with clients in the U.S. and communicated with them regularly as they traded securities in their accounts or transferred assets.

The case is U.S. v. UBS AG, 09-cv-20423, U.S. District Court, Southern District of Florida (Miami).

Russian Gas: Black Hats and White Hats in a World of Gray

The fellow on the horse, according to this scenario, is Joschka Fischer, the former German foreign minister, who’s just been hired by two of the members of the consortium backing the projected Nabucco natural gas pipeline. His job: to make the case that Nabucco is vitally needed to rescue Europe from a crippling dependency on Russia for its energy supply.

Lurking in a nearby saloon: Gerhard Schröder, the former Social Democratic chancellor and once Mr. Fischer’s boss, who now functions as point man in Germany for Gazprom, the Russian energy monopoly. Gazprom has spiced the script with a plan to build a pipeline called South Stream that’s clearly meant to thwart Nabucco, supported cautiously by the European Union and the United States.

In truth, the plot’s socko, big-star confrontation bears the weight of a back story about bringing gas from the Caspian region and the Middle East to Europe that is full of gray zones and caveats, nuance and private deals. Nothing dictates, of course, that a direct Fischer-Schröder matchup will take place.

But no matter, the editorial page of the left-of-center Süddeutsche Zeitung is presenting “Nabucco versus South Stream as something akin in the view of Europeans to the struggle between good and evil.”

(This much is sure: its potential actors make for a much more interesting face-off than the September election between Chancellor Angela Merkel and her foreign minister, Frank-Walter Steinmeier, both stuck with defending the same Grand Coalition economic policies that the International Monetary Fund projects will keep Germany in recession into 2011.)

While Mr. Schröder turned east in 2005 — he rushed through a Russia-to-Germany pipeline project called Nord Stream that detours around Poland a few weeks before his election defeat, and just afterward grabbed Vladimir V. Putin’s offer to run Gazprom’s German operation — Mr. Fischer, the former Greens party chief, headed for the United States to teach at Princeton.

Two weeks ago, Mr. Fischer signed a year’s contract as a political and diplomatic adviser with RWE of Germany and OMV of Austria, members of the Nabucco investor group that also includes firms from Turkey, Bulgaria, Romania and Hungary.

The easy assumption about Mr. Fischer’s job is that it involves smoothing relations with Turkey, whose full membership in the European Union has his backing, but which continues to maintain demanding terms for Nabucco to actually come on line in 2014.

In talking to him last week, I got the sense he feels his mission involves a lot more.

Very particularly, convincing his own country, with its very lukewarm feelings about Nabucco because of how it could affect relations with Russia, that Germany must not be perceived as protecting its sweetheart deals in a way that reinforces Europe’s dependent energy status.

Mr. Fischer said, “Nabucco is not against Russia. But the Russians give the impression that they think they have been given a monopoly. Nobody who’s concerned about our national interests can want this monopoly.”

In the context of German debate, numbed by the collusive fog of four years of the Grand Coalition and its in-house arrangements — Mrs. Merkel expressed reservations about Nord Stream during the 2005 election campaign then quickly approved it once chancellor — Mr. Fischer’s words represent strong, independent language.

This year, at the annual meeting on international security in Munich in February, Mrs. Merkel talked about energy without ever mentioning Nabucco.

In April, according to two U.S. officials, Germany (with France), apparently acting out of concern for sounding confrontational to Russian ears, went so far as to resist juxtaposing the words energy and security in a declaration coming out of the NATO summit meeting in Brussels.

One of the officials said that by way of an explanation he was offered “the convoluted logic that being dependent on Russia for energy actually made the Russians dependent on the West for cash.”

More: A former American diplomat, in a conversation, asserted recently that Russian officials have told Germans that Nabucco’s effect would be to cannibalize the Russian plans for supplying Germany with gas via Nord Stream.

He also said Germany brushed aside a discussion, backed by the European Commission, on whether the European Union should take Gazprom to court as a monopoly in the manner of its successful suit against Microsoft.

Although the Obama administration has assumed a softly-softly approach in its support of Nabucco, its concerns about Europe’s energy dependency hardly appear to have diminished.

Secretary of State Hillary Rodham Clinton has said Russia was “attempting to create a gas equivalent” of OPEC, and that this, alongside the pattern of Russian cutoffs of European gas supply “is certainly a significant security challenge that we ignore at our peril.” Senator Richard Lugar, a senior Republican member lof the Senate Foreign Relations Committee, refers to “Europeans who have not dealt very positively” with energy security.

The Americans, perish the thought, don’t name names, perhaps thinking Berlin’s position has become more flexible, now that Russia is again threatening Ukraine with cuts in its gas supply. Just perhaps, though, because in this capital you can’t miss the considerable sentiment to portray Ukraine as the ultimate culprit.

I asked Mr. Fischer, who’s amused about being cast as the man in the white hat, about his relations with Gazprom’s top gunslinger in Europe.

Referring to how the old chancellor landed in Mr. Putin’s lap in exchange for big bucks (and only limited opprobrium at home), he said of Mr. Schröder, “He’s not an evil guy, but I am unable to explain it to you. I didn’t understand it, and I don’t understand it now.

“We talk, but not about Russia.”

White House Searches for Ways to Help Small Businesses

The Obama administration is discussing ways to expand assistance to struggling small businesses, but there is some disagreement among top officials over the best approach, according to people familiar with the matter.

One idea floated by the Treasury would make more capital available to small businesses by having the government essentially underwrite loans used to fund their businesses. That idea was challenged by National Economic Council Chairman Lawrence Summers, who said such a move would expose the government and taxpayers to too much risk, these people said.

The Treasury and White House are considering other ideas, including using more money from the $700 billion financial-industry bailout to unlock credit for small business. That sector has been particularly hard hit by the financial crisis, because banks, worried about their own capital needs, have pulled credit lines and declined to make small-business loans. Unlike some other industries, small businesses look to banks for their primary source of funding.

"The economic team is very united in the understanding that we have to be constantly looking at creating a favorable job creation environment for small business in these very challenging economic times," said Gene Sperling, an adviser to Treasury Secretary Timothy Geithner. "The hard part is as always figuring out what will be most effective and most efficient."

The administration has already taken steps to aid small businesses, including committing $730 million in stimulus funds and devoting more money towards lending guarantees for Small Business Administration loans.

But a long-awaited $15 billion program to buy SBA-backed loans, funded by the Troubled Asset Relief Program, has struggled to get off the ground. The providers of SBA-backed loans initially resisted involvement over concerns about TARP-related executive-compensation restrictions and other rules they thought onerous. The program is expected to begin purchasing loans later this month.

The Treasury and the White House remain concerned about the health of the sector, which is credited with creating as much as 80% of new jobs, according to the SBA. At a time of rising unemployment, the administration is under pressure to create new jobs or at least prevent as many layoffs as possible.

The jobless rate, which hit 9.5% last month, has become a heated topic in recent days, with Republicans criticizing the Obama administration's $787 billion economic-stimulus plan as ineffective. With little political appetite for another stimulus, the administration is looking for other ways to bolster the economy.

Government officials say there are still many businesses that are struggling to fund their daily operations.

"We still have good businesses whose credit lines have been cut and need liquidity," said SBA Administrator Karen Mills. "We're engaged in discussions all the time about how to make sure there is capital for small businesses. I think there will be continuous discussions until we're out of this whole liquidity and bank crisis, because small businesses are going to be the engine that takes us out of this recession."

Mr. Geithner has tapped a small group to think about ways to aid that sector, people familiar with the matter said. Mr. Geithner is concerned about the risks that small businesses pose to the broader economy and wants to find a way to unlock credit.

Mr. Geithner hasn't settled on a particular approach, these people say, and had not signed off on the proposal that Mr. Summers challenged.

Feeder fund assets frozen in Petters Ponzi case

A federal judge froze the assets of a hedge fund manager accused of acting as a $2 billion feeder fund for a multibillion-dollar Ponzi scheme operated by Minnesota businessman Thomas Petters, federal regulators said on Friday.

The Securities and Exchange Commission said it obtained the court order in a lawsuit accusing Gregory Bell and his Lancelot Management LLC of fraud.

The lawsuit also accused Petters of fraud for a Ponzi scheme involving the sale of notes related to consumer electronics. When Petters' scheme began to unravel, the SEC said, Bell participated in a series of sham transactions to conceal that Petters owed more than $130 million in investor payments on the notes.

Bell and Lancelot Management have never been registered with the SEC or any other regulatory agency, the SEC said in a statement. Bell could not be immediately reached for comment.

"Bell lied to investors to induce them to hand over their money, and then hung them out to dry while millions of dollars in fees continued to flow into his own pockets," said Merri Jo Gillette, head of the SEC's regional office in Chicago.

Judge Ann Montgomery in federal district court in Minneapolis issued an order freezing all assets of Bell, his wife, and Lancelot Management, and requiring them to repatriate all overseas assets.

Petters, who was initially charged by the U.S. Justice Department last October, is in custody and awaiting trial.

Petters Group Worldwide, which has investments in Fingerhut, Polaroid Corp and Sun Country Airlines, filed for Chapter 11 bankruptcy protection last year.

The SEC's securities lawsuit against Petters accuses him of running a Ponzi scheme from 1995 through last September. In the scheme, Petters allegedly promised investors that proceeds from the notes they were sold would finance the purchase of consumer electronics by vendors, who then re-sold the merchandise to big retailers such as Wal-Mart Stores Inc and Costco Wholesale Corp.

Instead, the SEC said Petters' business "was a complete sham" and cheated investors of their money.

Unresolved Questions After Hearing With Geithner

The issues were arcane and technical, but the hearing drew an extraordinary turnout: 110 members of Congress, many of whom waited three hours to ask questions for five minutes.

All eyes were on Timothy F. Geithner, the Treasury secretary, who testified Friday about the Obama administration’s proposal to regulate the multitrillion-dollar market for financial derivatives, the hedging instruments that bankrupted the American International Group in September.

But after three hours, many of the hardest questions remained unanswered.

Mr. Geithner vowed that the administration would impose tougher regulations on the freewheeling market for derivatives like credit-default swaps, which insure investors from losses on bond defaults.

He told lawmakers that the plan would require that all “standardized” instruments be traded on a regulated exchange or through a central clearinghouse. Participants would have to disclose more information about their transactions, and they would have to meet strict new capital requirements.

The instruments that caused the greatest disruption last year, credit-default swaps tied to mortgage-backed securities, were traded “over the counter” rather than on exchanges and were almost entirely unregulated. Part of the problem was that many bond insurers, including A.I.G., sold credit-default swaps as a form of insurance with inadequate capital to cover their obligations.

Mr. Geithner said the government would demand higher capital requirements for all the participants. It would allow customized, one-of-a-kind derivatives, but those would be subject to reporting requirements and higher capital requirements than exchange-traded instruments.

But the Treasury secretary shed no new light on how the government would define “standardized” instruments. Supporters of over-the-counter derivatives say they come in infinite variations, because they are often meant to help companies hedge against specific risks.

Mr. Geithner vowed to devise a “broad definition” of standardized instruments, adding that regulators would be required to carefully police any attempts at “spurious customization.”

The Treasury secretary said he wanted to leave many of the details to the actual regulators, rather than spell them out in legislation, warning that an overly specific law could give market participants opportunities to evade the rules.

Mr. Geithner said he opposed banning all credit-default swaps, as proposed by Representative Maxine Waters, Democrat of California. He said such products “provide an important economic function in helping companies and businesses across the country better hedge against risk.”

Similarly, Mr. Geithner said he opposed a ban on holding “naked derivatives,” the practice of buying a derivative without owning the underlying securities. But he said the practices needed comprehensive oversight.

Mr. Geithner did not come close to answering the question at the top of many lawmakers’ minds: jurisdiction. At issue is which agency would oversee the new regulation, and which committees in Congress would draft the legislation.

Until those questions are settled, lawmakers said they could not even begin to write a bill.

The huge turnout reflected the battle over jurisdiction. The hearing was held by both the House Financial Services Committee, which writes legislation for banks and oversees the Securities and Exchange Commission; and the House Agriculture Committee, which has jurisdiction over commodity futures trading and oversees the Commodity Futures Trading Commission.

Lawmakers are pushing the Treasury Department to decide how to divide responsibilities. Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, has asked Mr. Geithner to come up with specific answers by the end of July, but the administration is not expected to produce a detailed proposal until September.

Mr. Geithner alluded to the subterranean wrestling match, describing the choices in Solomonic terms.

“We have been working with the S.E.C. and the C.F.T.C. over the past few months to develop a sensible allocation of duties,” Mr. Geithner told lawmakers. “We are striving to utilize each agency’s expertise.”

AIG bonuses: $235 million to go

Bailed-out insurer AIG again found itself in the crosshairs of bonus rage on Friday over its plans to pay $2.4 million in executive bonuses next week.

But the larger issue is how AIG will deal with its obligation to pay roughly $235 million still owed to employees of its crippled financial products division.

The contentious issue of the bonuses resurfaced late Thursday after TheWashington Post reported that AIG was seeking the government's consent to make a scheduled performance bonus payment of $2.4 million to 43 of its top-ranking executives.

But there's still the $235 million in retention bonuses owed to about 400 employees of AIG's Financial Products (FP) division that the company has to deal with. Public furor erupted in March when it was revealed that AIG had paid out $165 million of retention bonuses to those employees.

AIG put the issue before Kenneth Feinberg, the Obama administration's pay czar. Feinberg is tasked with reviewing bonuses and retirement packages for the 100 highest-paid executives at AIG (AIG, Fortune 500), Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500), General Motors, GMAC, Chrysler and the now defunct Chrysler Financial.

A source close to the matter said Feinberg will be reviewing both the $2.4 million, as well as the much more controversial $235 million that is scheduled to be paid out to AIG-FP employees next year.

AIG-FP is the division that wrote insurance contracts on shaky derivatives that were at the root of the company's near-collapse. In September, the government bailed out AIG with funds now worth up to $182 billion.

The $165 million of bonus payments in March was the second installment of a larger, $454 million retention plan for the FP employees. The first -- $50 million -- was made in 2008, before the company was bailed out by the government.

After the uproar in March, FP employees returned about a third of their bonuses, and a dozen workers resigned. The reaction from the public and Congress consumed AIG, Treasury and Federal Reserve officials, and called into question what to do with the last payment that is scheduled to go out in 2010.

Feinberg only has to review payments that were contracted beginning in 2009, so the $235 million in FP payments -- contracted in 2008 -- do not officially fall under his purview. Still, a source close to the matter said that AIG wants Feinberg to take a look at those bonuses to make sure the government is completely comfortable with the company's compensation plan.

Feinberg was also asked to review the $2.4 million in performance bonuses set to be paid out to 43 of AIG's top executives. That is part of a larger bonus pool of $121 million, the vast majority of which was paid out in March to the company's most senior executives.

But with pressure mounting from Congress and the Obama administration, AIG restructured its bonus payments for the top 50 executives. The top seven AIG executives opted to forgo their bonuses. The other 43, set to receive $9.6 million in March, took home only half -- $4.8 million -- in March, and are set to receive $2.4 million July 15 and another $2.4 million Sept. 15.

Experts say asking Feinberg to review the bonuses takes the pressure off of AIG and turns Feinberg into a punching bag for criticism. Outgoing AIG Chief Executive Edward Liddy has said on many occasions that the public outrage about the bonuses has limited the company's ability to move forward with its plan to repay the government.

"If you have the government OK the plan, it makes AIG look less like they're flushing taxpayer money down the toilet," said Julie Grandstaff, managing director of insurance consultant StanCorp Investment Advisers. "There's no way the poor guy who is reviewing all of this can win."

A Treasury spokesman would not comment directly on AIG's bonuses, but suggested Feinberg can review those payments and the FP bonuses if he chooses, even though they were contracted in 2008, saying, "Mr. Feinberg has broad authority to make sure that compensation at those [seven] firms strikes an appropriate balance."

"Companies will need to convince Mr. Feinberg that they have struck the right balance to discourage excessive risk taking and reward performance for their top executives," the spokesman added.

AIG declined to comment for this article.

Prof. Elizabeth Warren, chair of the Congressional Oversight Panel created to oversee the bailout, told CNNMoney.com that AIG's lack of comment spoke to a larger disconnect between the insurer and the American public.

"If they're not commenting, that makes me very nervous, because what I would like to hear is 'no, that report is a mistake,'" Warren said. "Taxpayers are under enormous stress. There's going to be trouble over this."

Delphi Receives No New Cash Bids for Assets

Delphi Corp. said no companies offered to top the auto-parts supplier's government-orchestrated deal with buyout firm Platinum Equity LLC by Friday's deadline, though lender J.P. Morgan Chase may make a credit bid by next week.

The deadline for credit bidding by J.P. Morgan or another lender is July 17. Friday was the deadline for cash bids.

Bankruptcy Judge Robert Drain, who has been overseeing Delphi's Chapter 11 case for nearly four years, told Delphi last month it needed to hold an auction for its assets in response to concerns from its bankruptcy lenders. They contended the plan to sell Delphi's assets to Platinum and former parent General Motors Corp. was a sweetheart deal that unfairly benefited the buyout firm and auto maker.

Delphi said if J.P. Morgan makes a credit bid, it will hold an auction for its assets July 17 and likely announce the outcome July 20.

Mark Barnhill, principal at Platinum Equity, said the firm is confident its offer will be validated as the best guarantee of Delphi's long-term health. He pointed to Platinum's "deep understanding of Delphi combined with our willingness to provide capital and our track record of success in turning around underperforming companies."

Delphi hopes to emerge from bankruptcy by selling four of its U.S. auto-parts plants and its steering business to GM, which remains Delphi's largest customer. Platinum, a private-equity firm based in Beverly Hills, Calif., and specializing in distressed companies, would pick up most of Delphi's other assets.

The U.S. Department of Treasury is providing Delphi with $250 million in emergency financing and has made that contingent on a sale being completed by July 23. The company is expected to run out of cash by the end of July.

Delphi filed for bankruptcy protection in 2005 and has been struggling to reorganize its business while also securing enough financing to exit the process.

Chrysler changes course, drops plan to sell Viper business

DETROIT -- Chrysler Group will continue making and selling Dodge Vipers after all.

The company, under new ownership, today removed the for-sale sign from its Viper business and will continue making the sports car through 2010 and beyond.

“Chrysler Group is no longer pursuing a sale of the Viper business assets,” the company said in a statement.

Michael Accavitti, CEO of the Dodge brand, said: “We’re extremely proud that the ultimate American-built sports car with its world-class performance will live on as the iconic image leader of the Dodge brand.”

The move to keep Viper marks a sharp departure for Chrysler under a Fiat-led management team. Under former owner Cerberus Capital Management, cash-strapped Chrysler had been trying to sell assets to stave off bankruptcy. The plan failed as Chrysler filed for Chapter 11 on April 30 and emerged June 10.

Chrysler had put the Viper business up for sale in August 2008. The company had sought $10 million for the Conner Avenue (Detroit) plant that produces the Viper, the company said in bankruptcy court filings.

On May 15, while Chrysler was still in bankruptcy, the company had received a $5.5 million offer from a company called Devon Motor Works, according to bankruptcy court documents. Chrysler also got an offer from a Polish group.

The Viper plant was the first to resume production after Chrysler emerged from bankruptcy. The plant produced vehicles during the weeks of June 15 and June 27 before shutting down again.

A Chrysler official who declined to be identified said Chrysler will make 2009 models for the remainder of this year, switching to a 2010 model in January. The plant will produce cars when there is a demand.

Chrysler built 1,545 Vipers in 2008 and has built just 118 so far this year. Conner Avenue, which employs about 100, did not make any cars in January, February, March or May.

The Viper sells for a sticker price of $90,000 or more. Chrysler began producing the Viper in 1992 and has made about 25,000 of the cars since.

The 2009 Viper SRT10 is powered by an 8.4-liter, V-10 engine that cranks out 600 hp. Chrysler claims the Viper can go 0 to 60 mph in fewer than four seconds.

Swiss bar UBS from turning info over to Americans

The Swiss Federal Department of Justice and Police said it was illegal for UBS to do so and that, "if circumstances require, the FDJP will issue a corresponding order. The order prohibits UBS explicitly from handing over client information."

Switzerland and U.S. authorities have clashed over the demand for information that could show Americans attempting to dodge tax.

UBS has already paid a $780 million fine and disclosed hundreds of client names to prevent criminal charges.

And the Swiss government has agreed to redraft its tax treaties. See full story.

But the case has now moved to a Miami court, which is hearing the demand for the additional client information.

The U.S. has said that Swiss banking secrecy isn't an excuse for UBS to intentionally help Americans evade tax.

UBS has been hit by billions of dollars in net outflows on a combination of nervous investors unwilling to hold their money and the inability to bring in new cash.

Many analysts say the court battle is a prelude to a settlement. A Swiss newspaper estimated that UBS could pay as much as $4.6 billion to settle the dispute.

Swiss-listed UBS shares dropped 1.6% on Wednesday and have dropped 36% over the last 12 months.

Google launches OS - calls out Microsoft

Google Inc. is planning to hit Microsoft Corp. where it hurts by challenging the software giant's dominance in the world of computer operating systems.

The search firm said late Tuesday that it will begin offering its own operating system, called Chrome, in the second half of 2010.

While Google (GOOG, Fortune 500) already offers a host of products that compete with Microsoft (MSFT, Fortune 500), the new operating system is a direct challenge to Microsoft Windows, which is the most widely used operating system in the world.

"Google really can challenge Microsoft, because the proliferation of Web-based applications makes the operating system much less important," said Zeus Kerravala, analyst at Yankee Group. "As we pave the way towards real Web 2.0, there will be less of a real tie-in to Windows."

The new system will initially be targeted at netbooks, the company said. Netbooks are small, inexpensive laptop computers used mostly for Internet access.

Google said the new operating system will make use of open source programming, which allows third-party developers to design compatible add-ons. (Think of the applications created for the iPhone or Facebook.)

"We hear a lot from our users, and their message is clear: computers need to get better," Google said in a statement. Chrome is "our attempt to re-think what operating systems should be."

The new operating system comes after Google launched its Chrome Internet browser late last year.

BASF to cut 3,700 jobs as part of Ciba takover

* To close or sell up to 23 of 55 Ciba sites

* Aims for 400 mln eur in annual synergies

* Sees 500 mln eur in total cash expenses from integration

* Shares up 0.1 percent

(Adds details, background)

FRANKFURT, July 6 (Reuters) - BASF (BASF.DE: Quote, Profile, Research, Stock Buzz) plans to cut 3,700 jobs as part of the integration of Swiss rival Ciba and may sell or close as many as 23 of Ciba's 55 sites, it said on Monday.

That is the equivalent of around 28 percent of Ciba's 13,000-strong headcount, but some cuts will affect BASF staff, a spokeswoman said.

In its first detailed statement on the repercussions of the takeover, BASF said it aimed to generate synergies of at least 400 million euros ($559.1 million) per year from 2012 and that by the end of next year savings should amount to approximately 300 million euros.

"The combined businesses can be successful in the long term only if we optimise them and exploit the full potential for synergies," Chief Executive Juergen Hambrecht said.

The integration will cost 550 million euros in cash, about 150 million euros of which will be incurred in 2009, the world's largest chemical maker added.

BASF said it would disclose details of further non-cash integration costs along with second-quarter results on July 30.

The company, which agreed to buy Ciba for 3.4 billion Swiss francs ($3.13 billion) a few months before global chemical demand collapsed last year, aims to carry out most of the job cut by 2013 and decide on which sites to shutter or sell by the end of the first quarter of 2010.

BASF has started talks with employee representatives on the cutbacks, it added.

Its shares were little changed after the statement and traded up 0.1 percent at 27.7 euros.

(Reporting by Ludwig Burger and Frank Siebelt)

Chinese visit brings Italian deals worth $2 bln

* Italy, China sign 38 deals worth $2 bln

* Fiat JV to produce cars, engines in China

* Mediobanca, China development bank sign MOU

(Recasts, adds total value, other deals)

ROME, July 6 (Reuters) - Chinese President Hu Jintao's visit to Italy generated over $2 billion worth of deals between the two countries on Monday, including a Fiat SpA (FIA.MI: Quote, Profile, Research, Stock Buzz) joint venture to produce cars and engines in China.

Italian Prime Minister Silvio Berlusconi said Italy aimed to become the third-largest foreign investor in China within three years as the two countries signed 38 business agreements.

Among the biggest of those is carmaker Fiat's 50-50 venture with China's Guangzhou Automobile Industry Group to produce cars and engines in China from the second half of 2011, with a total investment of 400 million euros ($560 million). [ID:nMAT009726]

Fiat, which has just taken a 20 percent stake in U.S. auto maker Chrysler, said the plant would produce 140,000 cars a year and around 220,000 motors after a first phase of development.

Other agreements include a Finmeccanica (SIFI.MI: Quote, Profile, Research, Stock Buzz) memorandum of understanding (MOU) with Chinese company Chongqing on sales in the Chinese market of electronics and components in a deal worth $42 million and an MOU between Italian bank Mediobanca (MDBI.MI: Quote, Profile, Research, Stock Buzz) and the China development bank to support cross-border investments.

Fiat also signed an additional seven deals worth $225 million with Chinese companies.

Fiat has long sought a strong partner in China, where car sales are booming in contrast to slack demand in Europe and the United States. China's car sales soared 47 percent year-on-year in May to 829,100 units. [ID:nRON004699]

Fiat and Chrysler combined have production of about 4.2 million cars a year and together rank fifth equal to Korea's Hyundai Motor Co (005380.KS: Quote, Profile, Research, Stock Buzz) among world car makers.

Fiat said the new plant would be built in Changsha, capital of Hunan province. The project is eligible for support from the Chinese government.

Facebook revenue to be "billions" in 5 years: board member

Facebook will likely be posting billions of dollars in revenue in five years, up from about $500 million this year, according to Silicon Valley entrepreneur Mark Andreessen who sits on Facebook's board.

Andreessen told Reuters that the world's most popular online social network could pile up $1 billion in revenue this year if it pushed harder on selling advertising.

But he added that it was more important at this stage for social sites like Facebook and Twitter to retain and grow their user base and capture market share, rather than worry too much about making lots of money right away.

"This calendar year they'll do over $500 million," Andreessen said in an interview, noting that Facebook has more than 225 million users, so revenue per user is still small.

"If they pushed the throttle forward on monetization they would be doing more than a billion this year," said Andreessen, who made the cover of Time Magazine as founder of the world's first Web browser company, Netscape.

Privately held Facebook -- which counts venture capitalist Peter Thiel, Accel Partners, Microsoft Corp (MSFT.O: Quote, Profile, Research, Stock Buzz) and Russian Internet investment firm Digital Sky Technologies among its investors -- has never disclosed its revenue except to say it expects 70 percent growth this year.

"There's every reason to expect in my view that the thing can be doing billions in revenue five years from now," Andreessen said.

Andreessen, who is starting his own venture capital fund with Netscape executive Ben Horowitz, regrets not investing in Facebook. "I probably could have if I had tried hard but I didn't," he said, recalling that he has known the founders of Facebook from the beginning.

Andreessen has invested in Twitter, the fast-growing micro-blogging site that lets users share 140-character messages known as tweets.

Twitter famously makes no money, and Horowitz and Andreessen think that that is OK for now because the site needs to focus on increasing its number of users and improve the features it offers so that no rival can swoop in.

"They have to take the market," said Horowitz. "There is no investor in Twitter who will tell you: 'Boy, those guys are screwing up, there's no revenue yet.'"

Horowitz and Andreessen point to the once-leading social network MySpace, which has fallen behind since it was acquired by Rupert Murdoch's News Corp (NWSA.O: Quote, Profile, Research, Stock Buzz).

MySpace focused too much on selling advertisements -- to contribute to News Corp's bottom line -- and not enough on developing the platform, leaving room for Facebook to come in and take market share, they said.

"If the revenue degraded the user experience then that was a very dangerous thing to do," Horowitz said.

Andreessen said it will be difficult, but not impossible, for MySpace to rebound now that Facebook has such a big following. Both he and Horowitz say they do not expect Twitter to make the same kinds of mistakes that MySpace did.

Twitter was a high profile Web start-up even before it shot into the headlines during the Iran election crisis, when the U.S. State Department called on it to reschedule planned maintenance because it considered Twitter a vital communications channel for protesters.

As for Facebook, Chief Executive Mark Zuckerberg told Reuters in May that an initial public offering was not in the cards for at least a few years. Instead, the company is allowing some shareholders to sell their shares to Digital Sky.

"Generally speaking, people who are selling their stock in Facebook now are making a mistake," Andreessen said.