Frustrated Americans cheer Obama's tough auto moves--By Daniel Trotta

Some frustrated U.S. taxpayers cheered President Barack Obama's tough steps to shore up the reeling auto industry on Monday but critics called his decision to fire General Motors' chief a heavy-handed power grab.

Obama forced out General Motors chief executive Rick Wagoner, pushed Chrysler LLC toward a merger with Italy's Fiat SpA, and threatened bankruptcy for both, marking an escalation in Washington's involvement in rescuing the faltering economy.

Skeptics asked whether it was an early sign of a more activist administration or an isolated example. GM shares tumbled 30 percent on the news and the Dow Jones Industrial average sank nearly 4 percent.

Experts called it potentially the most significant presidential intervention in the private sector since Harry Truman tried to seize the steel industry during the Korean War in 1952, only to be rebuffed by the Supreme Court.

"I don't think the president should be running the economy. They should have let the company go bankrupt. The guy would have lost his job anyway," said Edward Prescott, a 2004 Nobel laureate in economic sciences.

As a candidate last year, Obama supported rescuing the financial sector, and since then he has shifted to attacking the bonuses and corporate jets for companies taking taxpayer money to pushing out a CEO and replacing members of the board of directors.

"Politics is certainly entering the process. GM should have gone into bankruptcy in the fall. We would be much further along with the workout by now," added Randall Filer, a professor of economics at Hunter College in New York.

Stephen Schork, editor of an industry report on the energy and shipping markets, feared Obama was trying to engineer a hasty conversion to green energy. "They are expressing abject hostility toward the hydrocarbon industry," Schork said.

WILL POPULAR SUPPORT HOLD?
At the same time, Obama's approval ratings have held firm above 60 percent in most public opinion polls. In a Cincinnati coffee shop, retiree Sharon Schmidt, 74, said she supported the decision to push Wagoner out.

"If GM is going to take a big bailout from the federal government, the people who brought it to this state should probably go," Schmidt said. "These bankers and so on are making million dollar bonuses? They should be gone, too."

In a Dallas suburb, accountant John Shaffer, 47, also approved. "I feel he was fired to force the unions and bond holders to seriously negotiate with the company. So I think it was good," he said.

Stephen Hess, a presidential scholar at the Brookings Institution, said Obama's action lacked any historical parallel because the circumstances of the financial crisis were unique and he could succeed because he seemed to have a good "internal gyroscope" on reading the mood of the public.

"So far people are with him," Hess said. "There will be a lot of people who say: At last somebody is doing something."

Opposition from Republicans in Congress was fast and fierce.

"With sweeping new power the White House will be deciding which plants will survive and which won't, so in essence, this administration has decided they know better than our courts and our free market process how to deal with these companies," said Republican Senator Bob Corker of Tennessee.

But in a sign Obama may find some support from the Republican minority, Representative Darrell Issa of California said Obama has "struck the right chord in seeking balance between supporting the American auto industry and calling for a much-needed restructuring."

(Additional reporting by Thomas Ferraro in Washington, Andrea Hopkins in Cincinnati, Ed Stoddard in Dallas and Pedro Nicolaci da Costa in New York; Editing by Vicki Allen)

Bank Execs Pleased With Tone Of Meeting With Obama--By Henry J. Pulizzi and Jessica Holzer Of DOW JONES NEWSWIRES

Chief executives of the nation's biggest financial institutions emerged from a meeting with U.S. President Barack Obama Friday pledging to cooperate with the White House's effort to steer the economy out of its mess.

Executives said the tone of the more-than-90-minute session was open and cordial, with both sides looking to move beyond recent divisive rhetoric.

"We're just in this together. There's still some hard work to do, but [it was] a pleasant meeting," said Bank of America Corp. (BAC) CEO Ken Lewis.

White House spokesman Robert Gibbs called the get-together a "good, productive and frank conversation."

One participant said the meeting was free of drama. Obama acknowledged that the past few weeks have been rough for banks, but made clear that the general public is angry over excessive compensation. He asked the industry to help rein in the issue.

The CEOs agreed they had to make clear that they understood the public's concern over taxpayer-funded bailouts, according Freddie Mac (FRE) CEO John Koskinen. The executives, however, said government programs need firm rules that don't change with the political winds.

"Whatever the rules are going to be, we need to know them sooner rather than later because we are prepared to play by the new requirements but we need to know what they're going to be," he said.

The bankers said they support the proposal unveiled this week by Treasury Secretary Timothy Geithner to cleanse their balance sheets of toxic assets, though they are waiting for more specifics of the plan.

"We don't know all the details...but we think it's a really encouraging first step to get the plan out there," said Robert Kelly, CEO of Bank of New York Mellon Corp. (BK). "We need to hear the details. I think there's going to be a lot of interest in it."

Richard Davis, CEO of U.S. Bancorp (USB), said a proposal to tax bonuses paid to employees of companies that accept government aid wasn't discussed at the meeting, despite widespread public outrage - and administration rhetoric - over the bonuses doled out to executives at American International Group Inc. (AIG).

"We understand there have been some optics that have been very negative. We apologize for that because it's not something that this industry supports or wants," Davis said.

Gibbs said the session touched on the toxic-asset plan, executive-compensation issues, and a revamp of the U.S. regulatory system. He said Obama was "very pleased" with the meeting and hopes to keep the lines of communications open with Wall Street.

"He had no agenda beyond working to get a solution, the right solution for our financial system, and to get it stabilized and working again for the American people," Gibbs said.

Yet the furor over AIG's bonuses has sparked concerns that banks, worried about government interference in their compensation schemes, may stop participating in the Troubled Asset Relief Program, or TARP, and other government programs. The White House is eager to keep financial institutions involved, but is sensitive to anti-Wall Street sentiment.

The president appealed to the bankers' patriotism, urging them to help the country by boosting lending and helping people get into more affordable mortgages, the executives said. There was little talk of the details of the federal rescue funds received by the industry and whether some banks would seek to return the funds early, they said.

Asked whether the large financial-services companies owed the public an apology for their role in creating the financial mess, Lewis said, "I think there are very few financial institutions who would not say we've made mistakes and that we feel awful bad about the mistakes we have made."

However, he argued it was time to stop dwelling on the errors and work to fix the economy: "At some point you have to stop focusing on the past, and focus on the present." Lewis disputed that he favored reinstating a law that separated commercial-banking operations from that of investment-banking work. He had made remarks coming into the meeting to a reporter that he said were misconstrued. "I think a bank that brings all things to bear is the right way to go," he said.

The thrust of the president's message to the bank executives, Koskinen said, was that the government and the financial industry needed to work together to steer the economy to recovery.

"No one in that room gave any indication at all that they were anything other than enthusiastic about supporting the president and this program," Koskinen said.

Bank of America's Lewis, when asked if his company planned to return government funds it received under TARP, said it was premature to make that decision because banks are still undergoing government-administered stress tests.

JPMorgan Chase & Co. (JPM) CEO Jamie Dimon told CNBC that his bank doesn't have a timetable for returning funds it took under TARP.

One participant said Obama conceded that paying the government back could be a positive event, but said it shouldn't get in the way of lending. The president neither encouraged nor discouraged returning government funds, the person said.

The meeting included JP Morgan's Jamie Dimon, Bank of America's Lewis, American Express Corp. (AXP) CEO Ken Chenault, Freddie Mac's Koskinen, State Street Corp. (STT) CEO Ronald Logue, BONY-Mellon's Kelly, Northern Trust Corp. (NTRS) CEO Rick Waddell, PNC Financial Services Group Inc. (PNC) CEO James Rohr, Goldman Sachs Group Inc. (GS) CEO Lloyd Blankfein, Morgan Stanley (MS) CEO John Mack, Citigroup Inc. (C) CEO Vikram Pandit, Wells Fargo & Co. (WFC) CEO John Stumpf, and U.S. Bancorp's Davis.

Cam Fine of the Independent Community Bankers, Michael Paese of the Securities Industry and Financial Markets Association, and Edward Yingling of the American Bankers Association also attended the session.

-By Henry J. Pulizzi and Jessica Holzer, Dow Jones Newswires; 202-862-9256; henry.pulizzi@dowjones.com

Obama Strategy Makes Long-Term Commitment to Afghanistan, Pakistan--By Al Pessin

The strategy for Afghanistan and Pakistan that President Obama announced Friday changes some of the Bush Administration's goals, but also recommits the United States to an extensive and long-term military and civilian effort to establish security and help Afghans create a stable society.

The eagerly awaited strategy makes the top priority defeating al-Qaida and related terrorist groups in Afghanistan and Pakistan. "We are in Afghanistan to confront a common enemy that threatens the United States, our friends and allies, and the people of Afghanistan and Pakistan who have suffered the most at the hands of violent extremists," he said.

But the president also said the United States will lead an international effort to bring more civilian assistance to Afghanistan, to train the country's new security forces and to improve security for the Afghan people, partly by sending more U.S. troops. He also pledged one-point-five billion dollars in aid to Pakistan, each year for the next five years, to improve its security forces and economy.

Senior officials had said the Obama strategy would be more limited than the approach taken by former-President George W. Bush. But most elements of the Obama plan were also part of the Bush approach. One of the leaders of the Obama strategy review team, Under Secretary of Defense Michele Flournoy, says expectations of a more limited strategy were based on a misunderstanding. "I don't think we've lowered our sights or lowered expectations. What we've done is refocused. We are refocused on 'why are we there?' And we've rearticulated our core objectives and our core interests in a more defined strategy for how do we actually turn the tide and begin to make progress. And how do we build Afghan capacity to move toward a more self-reliant state," she said.

When Flournoy speaks of changing the focus of U.S. efforts, she is partly referring to the drawdown of U.S. troops from Iraq, the troop buildup in Afghanistan and efforts through the budget process to provide more civilian assistance for Afghanistan.

President Obama put it this way. "For six years, Afghanistan has been denied the resources that it demands because of the war in Iraq. Now, we must make a commitment that can accomplish our goals," he said.

That would end the situation in which Afghanistan was what the top U.S. military officer has called an "economy of force" operation, in which the United States did what it could, after doing everything that was needed in Iraq. On Friday, that officer, Admiral Mike Mullen, who was deeply involved in the Afghanistan and Pakistan strategy review during both the Bush and Obama Administrations, declined to characterize the old strategy, but told reporters the new one is very different.

"The strength of this strategy is that it covers the entire ground, if you will, of the strategic requirements for Afghanistan and Pakistan. It's the regional approach. It's the focus on the civilian piece of this. It's the rapid increase in growth of the Afghan security forces to take care of their own. It's the focus on the five-year program in Pakistan. So in that regard, to me, it is dramatically different from the strategy we had in the past," he said.

One analyst who has been critical of U.S. policy toward Afghanistan agrees, at least up to a point. "Yes, I do think it's new. And I think it represents an improvement over what the Bush Administration was doing," said Professor Andrew Bacevich, a retired U.S. Army colonel who teaches at Boston University. He has criticized what he sees as the excessive American penchant for foreign military intervention and over-ambitious efforts to re-make other countries as western-style democracies. Bacevich says the Obama approach is more pragmatic than the Bush plan was, but he is not entirely convinced that it is different enough to work.

"I wonder if, even so, those objectives are beyond our ability to achieve. And I wonder even more why we need to achieve them. Our interests in Afghanistan are quite limited. The president emphasized that the core interest is to prevent Afghanistan from once again becoming a platform for the launching of terrorist attacks. I, myself, am very skeptical that achieving that limited objective requires the kind of presence and investment that the Obama plan foresees," he said.

Professor Bacevich says the key U.S. goal could be achieved without the nation-building aspect of the plan. President Obama has scaled that back but says some aspects are needed.

Former-President Bush spoke of wanting a democratic society to emerge in Afghanistan as an example for people all across the region. President Obama did not use the word "democracy" when speaking about Afghanistan on Friday, although he spoke of such democratic principles as elections and human rights.

And he said in order to keep terrorist groups out of Afghanistan for the long term, the United States must help the country establish what he called "a more capable and accountable" government.

Former Miss. Gov. is choice for Navy secretary

President Obama will nominate former Mississippi Governor Ray Mabus to be secretary of the Navy and has tapped six other officials for key positions at the Department of Defense and elsewhere in his administration, the White House announced this afternoon.

Mabus, 60, is a Democrat who served as governor from 1988 to 1992 and was President Bill Clinton's ambassador to Saudi Arabia. A Democrat, Mabus endorsed Obama before the 2008 primary season and campaigned extensively on his behalf. Mabus has spent the last several years in business, serving as chairman and chief executive of Foamex International Inc. and helping lead the manufacturer out of Chapter 11 bankruptcy.

As an undergraduate at the University of Mississippi, Mabus served in the Naval ROTC, and he later joined the Navy as a surface warfare officer on the Rhode Island-based USS Little Rock. If confirmed by the Senate, Mabus would become the Navy's civilian leader.

Obama also announced his intent to nominate several other officials to top administration posts. Donad Remy, a lawyer who served as deputy assistant attorney general for civil rights during the Clinton Administration, will become general counsel of the Army. Jose D. Riojas, a 30-year veteran of the military who has served in Asia and around the world, is Obama's nominee for assistant secretary for operations, security and preparedness at the Department of Veterans Affairs.

Obama is nominating J. Randolph Babbitt, a partner at the aviation consultancy of Oliver Wyman, as administrator of the Federal Aviation Administration. Babbitt began his career as a pilot for Eastern Airlines and flew for more than 25 years. At the Department of Commerce, meanwhile, Lawrence E. Strickling was announced as Obama's nominee for assistant secretary for communications and information. Strickling coordinated technology and telecommunications policy for Obama's campaign and previously was chief regulatory and chief compliance officer at Broadwing Communications.

John Trasviña, a veteran of the Clinton Administration with decades of experience in civil rights and immigration policy who most recently was president and general counsel of the Mexican American Legal Defense and Educational Fund, was announced as Obama's nominee for assistant secretary for fair housing and equal opportunity at the Department of Housing and Urban Development.

Lastly, at the Department of Energy, Cathy Zoi is Obama's pick for assistant secretary for energy efficiency and renewable energy. Zoi, an environmental adviser in the Clinton White House, is the founding chief executive of the Alliance for Climate Protection, the organization established and chaired by former Vice President Al Gore.

"At this critical moment in our nation's history, I am grateful that these exceptional public servants have chosen to help my administration bring the change our country needs today," Obama said.

Below are the nominees' full biographies, provided by the White House:

Ray Mabus, Nominee for Secretary of the Navy, Department of Defense
Ray Mabus has served as Governor of Mississippi, Ambassador to the Kingdom of Saudi Arabia, and Chairman and CEO of Foamex, a large manufacturing company. As the youngest governor of Mississippi in more than 100 years at the time of his election, he stressed education and job creation. He passed B.E.S.T. (Better Education for Success Tomorrow), one of the most comprehensive education reform programs in America and was named one or Fortune Magazine's top ten education governors. During his tenure as Ambassador, a crisis with Iraq was successfully deterred and Saudi Arabia officially abandoned the boycott of United States businesses that trade with Israel. He was chosen CEO of Foamex to help lead it out of bankruptcy. Less than nine months after his appointment, Foamex successfully emerged from Chapter 11. Governor Mabus has been awarded the U.S. Department of Defense Distinguished Public Service Award, the U.S. Army's Distinguished Civilian Service Award, the Martin Luther King Social Responsibility Award from the King Center in Atlanta, the National Wildlife Federation Conservation Achievement Award, the King Abdul Aziz Award from the Kingdom of Saudi Arabia, and the Mississippi Association of Educators' Friend of Education Award.

Donald Remy, Nominee for General Counsel of the Army, Department of Defense
Donald Remy is a partner in the Washington, D.C. office of Latham & Watkins. From 1997-2000, Remy served as Deputy Assistant Attorney General for the Civil Division of the United States Department of Justice, where he handled numerous cases, including those arising out of the events at Waco and Ruby Ridge. In addition to Mr. Remy's practice experience, he currently serves in a management role at the firm as a member of the Global Training and Career Enhancement Committee. During his legal career, Remy also served as Judicial Clerk for the Honorable Nathaniel R. Jones on the United States Court of Appeals for the Sixth Circuit and Assistant to the General Counsel for the Department of the Army. Remy has published, lectured and testified before Congress on legal topics relating to Torts, Constitutional Law, Employment Law, Diversity, Government Contracts, Litigation and Compliance. In 2005, Mr. Remy was recognized by Black Enterprise as one of America's most powerful executives under 40.

J. Randolph Babbitt, Nominee for Administrator, Federal Aviation Administration
J. Randolph Babbitt, known as Randy, is a partner in the worldwide aviation consultancy of Oliver Wyman. He was the former Chairman and CEO of Eclat Consulting until they were acquired by Oliver Wyman in 2007. Babbitt is internationally recognized as a leader in the field of aviation safety and policy, and labor relations with almost 40 years of experience in the industry. Babbitt began his aviation career as a pilot for Eastern Airlines and flew for more than 25 years. He served as President and CEO for US ALPA, the world's largest professional organization of airline pilots. In 1993 he served as a Presidential appointee on the National Commission to Ensure a Strong Competitive Airline Industry. In 2008 Babbitt was named by the Secretary of Transportation to an independent review team of aviation and safety experts tasked with evaluating and crafting recommendations to improve the FAA's implementation of the aviation safety system and its culture of safety. Babbitt attended both the University of Georgia and the University of Miami.

Jose D. Riojas, Nominee for Assistant Secretary for Operations, Security and Preparedness, Department of Veterans Affairs
Jose D. Riojas, began his military career after graduating from the U.S. Military Academy at West Point as a second lieutenant in the Field Artillery in 1976. He is also a 1997 graduate of the U.S. Army War College completing studies in National Security Strategy. His 30 year military career encompassed numerous and significant operational assignments throughout the world to include, Korea, Germany and Southwest Asia (Operations Desert Shield and Desert Storm). His assignments include: service with the U.S. Department of State, service as the Army's representative on the Joint Requirements Oversight Panel, and Executive Officer to the Chief of Staff of the Army. He served in 5 different Army Divisions: the 2nd Infantry, 7th Infantry (Light), 2nd Armored, 25th Infantry (Light), and the 3rd Infantry (Mechanized). He commanded for over 10 years at the battery, battalion, division artillery and task force levels. His last military assignment was as the Commanding General of Joint Task Force North (JTF-N). The mission of JTF-N was to provide Department of Defense resources throughout the continental U.S. in support of law enforcement agencies so that they could more effectively interdict Transnational Threats including: terrorists, weapons of mass destruction, aliens from special interest countries and narco-terrorism. His responsibilities at UTEP include strategic initiatives in support of Homeland Security/Border Security, Homeland Defense and economic development. Riojas serves as the Director of the DHS Center of Excellence for Border Security and Immigration. He also serves as the Executive Director for the Center for Defense Systems Research, a DOD research center headquartered at UTEP. Additionally, Riojas serves as Chairman of the UTEP National Security Advisory Board, is a member of the Border Biomedical Research Center advisory committee, serves on the El Paso Regional Economic Development Corporation Board of Directors and is serving, by appointment, on the Texas Governor's Emerging Technology Fund Advisory Committee.

John Trasviña, Nominee for Assistant Secretary for Fair Housing and Equal Opportunity, Department of Housing and Urban Development
John Trasviña has devoted his legal career to public service in civil rights and immigration policy. In the 1980s and 90s, he served as Chairman Paul Simon's General Counsel & Staff Director for the U.S. Senate Judiciary Subcommittee on the Constitution. Thereafter, he was appointed Deputy Assistant Attorney General for Legislative Affairs in 1993. In 1997, President Clinton appointed Trasviña as Special Counsel for Immigration Related Unfair Employment Practices. As Special Counsel, he led the only federal government office devoted solely to immigrant workplace rights and was the highest ranking Latino attorney at the U.S. Department of Justice. After returning to California, he taught immigration law at Stanford Law School. In 2006, he was named President & General Counsel of the Mexican American Legal Defense & Educational Fund (MALDEF). A native of San Francisco, Trasviña is a graduate of Harvard University and Stanford Law School. In recent years, he was a member of the San Francisco Elections Commission, president of the Harvard Club of San Francisco, and a board member of the La Raza Lawyers Association, CORO of Northern California, Lowell High School Alumni Association, League of Women Voters and Pacific Coast Immigration Museum. He serves on the boards of the Latino Issues Forum and Campaign for College Opportunity and recently served as Chair of the National Hispanic Leadership Agenda.

Lawrence E. Strickling, Nominee for Assistant Secretary for Communications and Information, Department of Commerce
Lawrence E. Strickling is a technology policy expert with more than two decades of experience in the public and private sectors. As Policy Coordinator for Obama for America, Strickling oversaw two dozen domestic policy committees and was responsible for technology and telecommunications issues. Prior to joining the campaign, Strickling was Chief Regulatory and Chief Compliance Officer at Broadwing Communications for three years. His private sector experience also includes serving in senior roles at Allegiance Telecom and CoreExpress, Inc. and as a member of the Board of Directors of Network Plus. In government, Strickling served at the Federal Communications Commission as Chief of the Common Carrier Bureau from 1998 to 2000. Prior to that, Strickling was Associate General Counsel and Chief of the FCC's Competition Division. During his tenure at the FCC, Strickling developed and enforced rules to foster competition and protect consumers in the telecommunications marketplace. Prior to joining the FCC, Strickling was Vice President, Public Policy at Ameritech. Before Ameritech, he was a litigation partner at the Chicago law firm of Kirkland & Ellis. Strickling earned his J.D. from Harvard Law School and is a Phi Beta Kappa graduate of the University of Maryland with a degree in economics. He serves on the Board of Visitors at the University of Maryland School of Public Policy, as Chairman of the Board of Trustees at the University of Chicago's Court Theatre, and on the Board of Directors of Music of the Baroque in Chicago.

Cathy Zoi, Nominee for Assistant Secretary for Energy Efficiency and Renewable Energy, Department of Energy
In January 2007, Cathy Zoi joined the Alliance for Climate Protection as its founding CEO. Established and chaired by former Vice President Al Gore, the Alliance is a non-profit organization spearheading a multi-year, multimillion dollar effort aimed at persuading Americans of both the urgency and solvability of global warming. From 2003 until joining the Alliance, Zoi served as Group Executive Director at the Bayard Group. The firm, recently renamed Landis+Gyr Holdings, is a world leader in energy measurement technologies and systems, with operations in 30 countries and revenues in excess of $1.2 billion. Her work focused on the key role of smart metering to improving energy efficiency in markets in North America, Europe, India, China , Brazil and Australia. Prior to joining Bayard, Cathy was Assistant Director General of the New South Wales EPA in Sydney, Australia. She was also the founding CEO of the NSW Sustainable Energy Development Authority, a $50 million fund to commercialize greenhouse-friendly technology, from 1996-1999. Under her leadership, SEDA launched the world's first nationwide Green Power program (1997) and the world¹s largest solar-powered suburb (1998). Cathy has served on boards and advisory committees of a variety of companies in the clean technology sector. Cathy was Chief of Staff in the White House Office on Environmental Policy in the Clinton-Gore administration, where she managed the team working on environmental and energy issues (1993-95). She was also a manager at the U.S. Environmental Protection Agency where she pioneered the Energy Star Program. Ms. Zoi earned a B.S. in Geology from Duke University and an M.S. in Engineering from Dartmouth College.

New York eases 1970s drug laws--By Joan Gralla

New York state officials agreed on Friday to relax harsh 1970s drug laws that required prison sentences for nonviolent drug crimes in favor of laws that will let judges send addicts to treatment programs.

The new regulations will save the state about "a quarter of a billion dollars" a year in costs for housing prisoners, Senate Majority Leader Malcolm Smith said at a news conference in Albany, the state capital.

The existing laws -- known as the Rockefeller drug laws for Republican Governor Nelson Rockefeller who in 1973 said they were needed to fight a heroin epidemic -- were considered among the nation's stiffest because they required prison terms for offenders and gave judges no discretion in sentencing.

They had been the target of Democrats for years but previous legislative efforts had produced only limited softening.

A joint release from Paterson, the state Senate and Assembly said the agreement eliminates mandatory prison sentences for many first- and second-time offenders and makes them eligible for probation that could include drug treatment.

"This will probably be part of the budget because it does involve some funding," Paterson told reporters.

The Drug Policy Alliance, which has long campaigned against the state's tough drug laws, said New York's prisons hold approximately 12,000 drug offenders, representing nearly 21 percent of the prison population and costing New Yorkers hundreds of millions of dollars every year.

The new laws would create a drug "kingpin" offense for "organized drug traffickers who profit from and prey on drug users." They also would create new crimes for adults who sell drugs to children.

Paterson, saying that as a state legislator from New York City's Harlem neighborhood he saw "first-hand the devastating effects" of drugs, defended spending tens of millions of dollars of federal economic stimulus money to pay for new treatment programs.

He cited the example of a female drug addict who was arrested 60 times over 25 years. After being successfully treated for her addiction, she became a drug counselor.

"Rather than using public dollars while she was in prison, she is spending public dollars to conduct her life," he said.

Judges who preside over specialized drug courts will be able to decide whether to send first and second time offenders to these programs -- even if prosecutors object.

Judge Jonathan Lippman, chief judge of the Court of Appeals, called drug courts "a tough-love regime."

"(Drug courts) not only produce dramatic reductions in recidivism and great savings in social services costs but also serve to reunite families, and most critically (increase) public safety," he said.

Each prisoner costs the state about $45,000 a year and the recession has given the state ever-widening budget deficits.

Drug court judges, who will run the treatment programs, also will be able to dismiss all charges or seal all records if addicts successfully finish treatment. They also can order extra monitoring and tests or penalties for those who fail. So-called "shock" incarcerations are another option.

In addition to fights over whether judges should have to heed prosecutors' objections, there have been clashes over whether people serving sentences handed down under the old laws should now be offered the new treatment options.

Paterson estimated about 1,500 prisoners can apply, adding few would qualify because they either sold drugs for profit or have been violent.

The Board of Parole will now have to consider the new law's reduced sentences in deciding whether to grant parole.

Republicans Try to Adjust to Opposition Role--By Jim Malone

As President Barack Obama makes his way through his first 100 days in office, Republicans are still trying to find their voice as the loyal opposition as they adjust to a new Democratic president and Democratic control of Congress.

Americans wanted change last November and elected Barack Obama president.

After several years of calling the shots in Washington, Republicans now find themselves in the uncomfortable position of being the minority party.

Georgetown University expert Stephen Wayne says the Republicans are in for a time of soul-searching and internal debate.

"It is going to be pretty ugly," he said. "It is going to be very disjointed and it won't be until we have the next presidential election cycle that a leader will emerge to articulate this policy. So, the Republicans are in the wilderness right now and it is no fun to be in the wilderness."

For the time being, the Republicans find themselves opposing a popular new president during a time of economic crisis.

Republican Ken Duberstein served as President Ronald Reagan's chief of staff in the late 1980's, but he broke with the party last year and endorsed Barack Obama for president.

"President Obama right now is usually popular with the American people," he said. "And like Ronald Reagan, they are rooting for him, they are rooting for him to succeed because then America succeeds."

Duberstein told VOA's Press Conference USA program that Mr. Obama is proving to be an effective communicator, much like the man Duberstein once worked for, Ronald Reagan.

But Duberstein also says the president needs to get some good news on the economy soon before the public begins to lose patience.

"The problem is that you have to translate popularity into credibility, and the American people are looking for results," he said. "That will take time."

Duberstein says he first began to follow then-candidate Obama's presidential campaign early in 2007. An Obama pollster told Duberstein that the Obama campaign had closely studied the Reagan presidential campaign and his style of governing, which focused on hope and an optimistic message.

It's a style that Mr. Obama has continued as president as he repeatedly urges the country to be patient while his economic policies take effect.

"So let's look towards the future with a renewed sense of common purpose, a renewed determination and most importantly, a renewed confidence that a better day will come," said the president.

Republicans were not able to block the president's economic stimulus plan, but they do see a political opening in the congressional debate over the president's massive $3.55 trillion budget.

Younger, less well known Republicans are taking the lead on the budget debate, like Congressman Jeb Hensarling of Texas. "It is a budget that spends too much, taxes too much, borrows too much, and yet the worst is to come," he said.

George Mason University scholar Jeremy Mayer says it will take some time for the Republican Party to find a consistent message, and the leaders to deliver that message.

"If the Republicans can find a leader by this summer, can find a message by this summer, things will go much worse for Obama," he said.

Republicans have developed their own budget plan to counter the president, mindful that they were criticized for merely opposing the stimulus plan without offering a detailed alternative of their own.

Ken Duberstein says the party has some work to do to adjust to their new role as the loyal opposition.

"The Republican Party cannot just be the party of 'no'. They need to be seen as helping govern as well. I think it is incumbent on the Republican Party not to sacrifice its principles, but to meet the president halfway. That is what the American people are looking for," he said.

Republicans will be trying out messages and auditioning future party leaders in the months ahead with an eye toward the 2010 congressional elections. Historically, the party that holds the White House often loses seats in congressional mid-term elections.

Health Groups Fail to Find Consensus on Ways to Expand Coverage--By Aliza Marcus

A consensus on divisive issues in the debate over health-care reform, including whether to require Americans to purchase insurance, failed to emerge from six months of private meetings among insurers, consumer advocates, hospitals and other health-interest groups.

The 18 groups said in a report released today that all Americans should be covered by health insurance and urged the government to use its powers to meet the goal, Ron Pollack, executive director of the consumer advocacy group Families USA and a participant in the talks, said in a telephone interview. Tax incentives for low-income individuals and an expansion of the Medicaid health program for the poor were among the ways the group suggested the U.S. may boost medical coverage.

President Barack Obama’s pledge to overhaul the U.S. health system to provide coverage for everyone has spurred lawmakers, insurers and advocates to develop plans to accomplish it. Today’s report avoids some of the most divisive questions, such as whether the government should create a new public plan to compete with insurers or require a mandate forcing Americans to buy health insurance. Still, the groups’ agreement on some health-care changes is an important step, participants said.

“We didn’t use the ‘m’ word,” Pollack said, referring to mandate. “But we are clear that we have to have a system that brings everyone in.”

Baucus Plan
The conclusions mirror some of what was proposed last November by Senate Finance Committee Chairman Max Baucus, a Montana Democrat, who is working with Massachusetts Democratic Senator Edward Kennedy, on legislation to get everyone covered.

Medicaid, the health insurance plan funded jointly by the states and the federal government, should be expanded to cover everyone at the federal poverty level, which is $22,050 for a family of four, or $10,380 for an individual, the groups said. The proposal is similar to the plan offered by Baucus. Many states now exclude single men and women or provide coverage to those whose annual income is less than the poverty level.

Baucus didn’t propose a new government-run plan to compete with private insurers, which Democrats in the U.S. House of Representative will include in their legislation, House Speaker Nancy Pelosi, a California Democrat, said yesterday.

This effort by the Health Reform Dialogue, as the groups call themselves, will help Congress figure out what to do, Baucus said today in an e-mail.

“You can bet I’ll be working closely with these groups, and everyone who brings ideas to the table, as we put pen to paper on health care reform in the coming weeks and months,” Baucus said.

No Recommendation on Mandate
The groups sidestepped whether the government should require that people have health insurance. Instead, the report says “reforms” are needed so that everyone gets quality coverage. It didn’t define this further. About 46 million people in the U.S., or 15 percent of the population, don’t have medical coverage.

Insurers support a mandate, warning that otherwise people will wait until they’re sick to buy coverage, driving up costs. Republicans generally don’t like forcing people to buy something, while consumer advocates say they want to ensure that coverage is affordable if people must purchase it.

“Employers, consumers and providers are united about the need for reform, and we’re committed to unite on solutions,” said an e-mail from John Rother, executive vice president of AARP, a Washington-based advocacy group for people 50 and older, which took part in the talks. “Several significant questions remain, but this progress should encourage everybody with a stake in fixing the health-care system.”

Mediator Used
The meetings were held with the help of a mediator, the Keystone Center, of Keystone, Colorado, to keep outside pressure to a minimum. The groups, which have long disagreed publicly on the issue, decided last summer they needed to work to see if they could reach consensus, participants said.

The Keystone Center, according to its Web site, “works with a broad array of stakeholders to develop consensus solutions to complex health and social policy challenges.”

Using a mediator didn’t solve all conflicts. The American Federation of State, County and Municipal Employees, pulled out of the talks last month. Steve Kreisberg, director of collective bargaining and health-care policy for the 1.4 million-member union, said it left for a “variety of reasons” that won’t be made public.

The Service Employees International Union, whose members include health-care workers and janitors, didn’t sign on to the report. The union didn’t want to tie Congress’s hands in any way, said spokeswoman Lori Lodes.

The participants include America’s Health Insurance Plans, a trade group for the publicly traded insurance companies; the Pharmaceutical Research and Manufacturers of America, the drugmakers lobbying group in Washington; and the Chicago-based American Medical Association, the largest trade group for U.S. doctors.

To contact the reporter on this story: Aliza Marcus in Washington at amarcus8@bloomberg.net

NRCC HITS MURPHY OVER DEATH PENALTY--by Mark Murray

Finding their candidate in a tight contest -- even trailing by four points in a new poll -- the National Republican Congressional Committee has unveiled a provocative new Web ad that hits Democratic candidate for opposing the death penalty, even for terrorists.

N.Y. Special Election Is Too Close to Call--By Keith B. Richburg, Washington Post Staff Writer

Just Days Before Vote, Murphy and Tedisco in Dead Heat

The only competitive House race in the nation entered its final weekend as a virtual dead heat, with Democratic newcomer Scott Murphy taking a slight lead in the traditionally conservative Republican district, according to a new poll released today.

According to the poll of 917 likely voters, conducted by the Siena Research Institute of Siena College, Murphy now leads Republican Jim Tedisco, the minority leader in the state assembly, by a margin of 47 to 43 percent. The poll's margin of error is 3.2 percent, meaning Murphy's slight lead is just outside the margin.

The result was striking considering Murphy, a businessman and venture capitalist making his first run for office, was down by 12 points when the campaign began in earnest one month ago. The March 31 election is to fill the seat vacated by Democrat Kirsten Gillibrand, who was appointed to the Senate to replace Hillary Rodham Clinton.

When Gillibrand won the upstate, largely rural gun-loving district in 2006, it was considered a major upset for a Democrat, with the Republican Party enjoying a 15-point edge in voter registration. The popular Gillibrand easily won her first reelection last year on the ballot with President Obama, who narrowly edged out John McCain.

The Republican National Committee has made taking back the seat a top priority that could begin to reverse its nationwide decline over the past two election cycles. Democrats have hoped to hold the seat to show that even voters in conservative areas support Obama's economic agenda and spending plans. Both sides have saturated the area, which includes most of the Albany suburbs, with a barrage of television and radio ads.

Obama this week endorsed Murphy and sent a message to his volunteers asking them to pitch in and help. The Democratic National Committee released a new television ad today highlighting the Obama endorsement. Vice President Biden, a graduate of Syracuse Law School, made a radio ad this week backing Murphy.

The pollster and political operatives on both sides cautioned that special elections, with generally low turnout, are notoriously difficult to predict. The outcome, they said, will depend on who does the best job of getting its supporters to the polls, and the outcome could be determined by a few hundred votes.

Game on: Ky. governor endorses Bunning rival in 2010 race--By Jack Brammer and Beth Musgrave, Lexington Herald-Leader

Gov. Steve Beshear threw his weight behind Lt. Gov. Daniel Mongiardo's run for the U.S. Senate on Friday, delivering a preemptive blow to would-be Democratic competitors for the seat now held by Republican Sen. Jim Bunning.

Beshear endorsed Mongiardo’s run for the 2010 Democratic U.S. Senate primary in a statement released Friday afternoon, saying "more than ever, we need strong representatives in Washington D.C. to give voice to Kentucky priorities and values."

Bunning, R-Southgate, has so far resisted intense pressure from within his own party to drop his re-election bid.

Mongiardo, a former state senator from eastern Kentucky who lost to Bunning by only 1.4 percentage points in 2004, welcomed Beshear’s endorsement, calling his boss "a trusted mentor and partner."

Kim Geveden, a spokesman for Mongiardo’s campaign, said Mongiardo will stay on as lieutenant governor "until he wins the November 2010 election."

He said Beshear's endorsement is "expected to help unify Democrats around Mongiardo in the coming months as he begins to launch a more vigorous campaign."

Brazil president stirs up G20 summit early

LONDON, March 27 (UPI) -- Brazil's president says his fiery remarks implying the United States and Europe were responsible for the global economic downturn were meant to be provocative.

Brazilian President Luiz Inacio Lula da Silva raised eyebrows in London when he mockingly told reporters that "white and blue-eyed" financiers and economists had caused the collapse and that Europe and North America bore the responsibility of making things right.

The Times of London Friday said Lula's statements in the run-up to next week's Group of 20 summit in Britain were apparently a calculated counterpoint to British Prime Minister Gordon Brown's repeated calls for calm.

"Our meeting in London has to be spicy, it has to have a bit of heat," the Brazilian president said.
Brown declined to be drawn into a debate with Lula, although he did promise that nations engaging in so-called covert protectionism would be named at the summit because, he said, truly free trade was vital to the recovery of the global economic recovery.

Rep. Armey Says Pres. Obama "Scares" Him

While speaking about Obama administration spending proposals and health care, Representative Armey said that President Obama "scares" him.

Online Town Hall

President Obama hosts an Open for Questions town hall on the economy on March 26, 2009. At this first ever online town hall from the White House, the President answers questions about the economy submitted and voted on by the public through WhiteHouse.gov. Jared Bernstein, chief economist for Vice President Biden, facilitates.

Venezuela's Chavez bashes bonuses, lavish spending

CARACAS, Venezuela: No more new cars, flush salaries or fat bonuses for government officials in Venezuela.

President Hugo Chavez signed a decree Wednesday to end government spending on luxuries as Venezuela's oil earnings shrink dramatically.

"We must put and end to mega-salaries, mega-bonuses," Chavez said. "He who wants to be rich, go elsewhere."

Chavez first announced the decree as part of an economic package proposed Saturday to combat falling oil prices. Venezuela, which relies on oil for 93 percent of exports and nearly half the government's budget, has seen world crude prices erode 64 percent since July, to $52.77 a barrel on Wednesday.

The leftist president called not only for an end to fancy cell phone services but also for a shift away from a culture of excess spending.

"We're tirelessly fighting against this — this old culture of waste," he said in a televised address.

Critics said the measures — which included a sales tax hike to 12 percent from 9 percent and an increase in local debt sales — fail to address Venezuela's soaring inflation and slowing economic growth.

The belt tightening under the spending decree could include everything from whisky-fueled parties to unnecessary furnishings and office remodeling. Even excessive publicity, promotional material and publications will be off limits, said Chavez — whose own image is displayed widely on billboards and subway stations posters.

The decree, which will take effect upon its publication in the government's Official Gazette, prohibits the payment of bonuses to top officials.

Venezuela's Chavez calls Obama "ignoramus"

CARACAS (Reuters) - Venezuela's President Hugo Chavez said on Sunday his U.S. counterpart Barack Obama was at best an "ignoramus" for saying the socialist leader exported terrorism and obstructed progress in Latin America.

"He goes and accuses me of exporting terrorism: the least I can say is that he's a poor ignoramus; he should read and study a little to understand reality," said Chavez, who heads a group of left-wing Latin American leaders opposed to the U.S. influence in the region.

Chavez said Obama's comments had made him change his mind about sending a new ambassador to Washington, after he withdrew the previous envoy in a dispute last year with the Bush administration in which he also expelled the U.S. ambassador to Venezuela.

"When I saw Obama saying what he said, I put the decision back in the drawer; let's wait and see," Chavez said on his weekly television show, adding he had wanted to send a new ambassador to improve relations with the United States after the departure of George W. Bush as president.

In a January interview with Spanish-language U.S. network Univision, Obama said Chavez had hindered progress in Latin America, accusing him of exporting terrorist activities and supporting Colombian guerrillas.

"My, what ignorance; the real obstacle to development in Latin America has been the empire that you today preside over," said Chavez, who is a fierce critic of U.S. foreign policy.

In the 20th century the United States supported several armed movements and coups in Latin America. Chavez says Washington had a hand in a short-lived putsch against him in 2002, which was initially welcomed by U.S. officials.

Chavez and Obama will both attend the Summit of the Americas in Trinidad and Tobago next month. It is not known whether they will meet.

Most of OPEC nation Venezuela's export income comes from oil it sells to the United States, but Chavez has built stronger ties with countries like China in an attempt to reduce dependence on his northern neighbor.

Chavez expelled its U.S. ambassador in September in a dispute over U.S. activities in his ally Bolivia, which also expelled its U.S. ambassador. Ecuador's left-wing President Rafael Correa this year kicked out a mid-ranking U.S. diplomat.

(Reporting by Frank Jack Daniel; Editing by Eric Walsh)

China tells U.S. to drop "Cold War" mindset on military

China on Thursday slammed a Pentagon report on its growing military might, saying criticism of China's lack of transparency betrayed Washington's "Cold War" mindset and risked damaging ties.
China had complained to Washington about the annual report, which was released on Wednesday, because it distorted the truth and amounted to meddling in China's affairs, Foreign Ministry spokesman Qin Gang told a scheduled news conference.
"We suggest the United States respect the fundamental facts, drop the Cold War thinking and prejudices, stop releasing such China military reports and stop the groundless accusations over China, to prevent further damage to the relationship between the two countries and two armies," Qin said.
The report, the first under the Obama administration, came weeks after Chinese boats jostled with a U.S. Navy surveillance ship in the South China Sea in a confrontation that heightened tensions over Chinese military activities near its coasts.
In the report, the Pentagon said China was making advances in denying outsiders access to offshore areas and was improving its nuclear, space and cyber warfare.
But it also warned that Beijing's failure to be transparent about its rapidly growing military capabilities had created uncertainty and risks of miscalculation. The emerging Asian superpower could allay concerns and boost transparency through military-to-military discussions with the United States and by publishing better defense papers and other documents, a senior U.S. defense official said.

China says it seeks only peace and self-defense, and argues that other nations have overstated the "China threat" for their own political ends.

"China has constantly taken the path of peaceful development and pursued a defensive national defense policy, to maintain world peace and stability," Qin said.

The U.S. report said China was building up an arsenal of short-range missiles opposite Taiwan, even as political ties warm with the self-ruled island which Beijing views as a renegade province to be brought back into the fold by force if necessary.

Taiwan's Ministry of National Defense spokesman, Martin Yu, said Taipei was hoping, like Washington, for clarity on its heavyweight neighbor's plans.

"We basically hope China can sustain a transparent outlook and be positive toward safety ... Military trust is something we need time to discuss."

(Additional reporting by Ralph Jennings in Taipei; Editing by Nick Macfie and Dean Yates)

Pentagon questions growing Chinese military power--By PAULINE JELINEK

China's rapidly growing military strength is shifting the military balance in the region and could be used to force its claims in disputed territories, a Pentagon report said Wednesday.

Beijing continues to develop weapons that threaten longtime rival Taiwan, even though tensions between the two have been reduced significantly, the report said. It added that China is also developing longer range capabilities that could have an affect beyond the Asia-Pacific region.

The latest in a series of annual assessments for Congress of China's military power, the report says the U.S. "welcomes the rise of a stable, peaceful and prosperous China and encourages China to participate responsibly" in world affairs.

"However, much uncertainty surrounds China's future course, particularly regarding how its expanding military power might be used," the report said.

It comes in the wake of heightened tensions between the U.S. and China. Chinese vessels this month harassed the Navy surveillance ship USNS Impeccable in international waters in the South China Sea; and U.S.-China military-to-military talks had just been resumed a week earlier after a five-month suspension over U.S. arms sales to Taiwan.

During meetings with China officials after the Navy incident, Secretary of State Hillary Rodham Clinton said both sides have agreed on the need to reduce tensions and avoid a repeat of the confrontation.

The new report notes that the People's Liberation Army is remaking itself into a force that can fight and win short, intense conflicts against high-tech adversaries.

"The pace and scope of China's military transformation have increased in recent years," fueled by the purchase of advanced foreign weapons, continued high rates of spending on new technologies and far-reaching reforms in the armed forces, the report said.

"It's armed forces continue to develop and field disruptive military technologies," it said, referring to anti-satellite weapons like one tested in 2007, satellite communications jammers and others.

Taiwan and China split amid civil war in 1949 and Beijing says it is intent on eventual unification, by persuasion if possible but by force if considered necessary. The report said China's growing muscle could be used to pressure Taiwan toward a settlement on the issue "while simultaneously attempting to deter, delay or deny any possible U.S. support for the island in case of conflict," the report said.

At this point, the U.S. still is able to defend against a Beijing attack on Taiwan, it said.

It said some of Beijing's new capabilities could allow China to "project power to ensure access to resources or enforce claims to disputed territories."

Among its disputes, for instance, China claims sovereignty over the Spratly and Paracel islands — claims challenged in part or whole by Brunei, the Philippines, Malaysia, Indonesia and Vietnam. While China and India have improved relations, tensions continue along their shared border.

House Armed Services Chairman Rep. Ike Skelton, D-Mo. said he was concerned that China's military budget continues a trend of double-digit increases and that "questions remain about China's strategic intentions." The report estimated 2008 China's military-related spending at between $105 billion to $150 billion, roughly double that of a decade ago.

The report noted China has also used its new powers for good, such as in relief missions.

"I am also encouraged by China's recent involvement in counter-piracy operations in the Gulf of Aden," Skelton said in a statement. "This demonstrates a responsible use of China's military power, in line with its international responsibilities, of which I hope to see more."

Associated Press writer Lolita C. Baldor contributed to this report.

On the Net:
The report can be viewed at: http://www.defenselink.mil/news/China%20Military%20Power%20Report%202009.pdf

Tough financial rules proposed--Martin Crutsinger, AP Economics Writer

Stricter financial rules proposed, but will Wall Street find a way to get around them?

The Obama administration's aggressive plan for strict scrutiny of hedge funds and other freewheeling investors, part of the biggest expansion of financial restraints since the Great Depression, is drawing instant opposition from Republican lawmakers and the rules' targets. And skeptics are questioning whether the new rulebook would work anyway.

Wall Street wizards have proved adept at designing complex financial products to sidestep existing regulations. And Vincent Reinhart, former director of monetary affairs at the Federal Reserve, says, "You're going to see firms try to figure out how to be under the radar."

For example, private equity investors might try to buy large hedge funds and chop them into funds that would be small enough to operate unregulated, Reinhart said.

Treasury Secretary Timothy Geithner, unveiling the plan Thursday, said the nation's economic crisis demands bold action.

"We need much stronger standards for openness, transparency and plain commonsense language throughout the financial system," he told the House Financial Services Committee.

The administration's proposals, which require congressional approval, include:
-- Imposing tougher standards on financial institutions that are judged to be so big that their failure would threaten the entire system.

-- Extending federal regulation for the first time to all trading in financial derivatives -- exotic instruments such as credit default swaps that are blamed for much of the economic carnage.

-- Requiring larger hedge funds and other private pools of capital, including private equity and venture capital funds, to register with the Securities and Exchange Commission.

-- Creating a regulator to monitor the biggest institutions. Geithner did not say which agency should wield such authority, but the administration is expected to favor the Federal Reserve.

-- Empowering the government to take over major nonbank financial firms such as insurers and hedge funds if deemed necessary.

Committee Chairman Barney Frank, D-Mass., and many Democrats on the panel backed the proposals, while Republicans assailed them as too far-reaching.

Private analysts also questioned whether Geithner's plan would succeed in safeguarding the financial system.

"We're not in this mess because we need new rules," said Bill Fleckenstein, a Seattle-based hedge fund manager who accurately predicted the housing bubble. "We need to enforce the rules we already have," he said. "What we had was a complete breakdown by all our regulators. They simply didn't do their jobs."

And Fleckenstein said he didn't think requiring big hedge funds to register with the government would prevent devastating frauds like Bernard Madoff's Ponzi scheme.

"You could register all 10,000 hedge funds, and it probably would just overwhelm the regulator," he said.

Timothy Brog, portfolio manager of New York-based hedge fund Locksmith Capital Management, said stricter rules won't work properly if regulators become bogged down in policing individual funds rather than monitoring the investment products they trade. These include derivatives and mortgage-backed securities.

"It's not hedge funds that are a problem," Brog said. "The problem is the instruments they are trading. A $100 million hedge fund is not going to have a material effect on the overall market."

The outline of the regulatory plan was announced a week before President Barack Obama was to meet for talks with the Group of 20 major industrialized and developing countries to discuss solutions to the global crisis. European countries have said the U.S., where the financial problems began, must toughen its regulatory system.

The administration's plan also includes a provision that Geithner and Federal Reserve Chairman Ben Bernanke discussed before the committee on Tuesday: to give the administration expanded powers to take over major nonbank financial institutions, such as insurance companies and hedge funds.

That power is aimed at preventing a repeat of the problems surrounding insurance giant American International Group Inc. AIG sparked a furor with news that it had distributed $165 million in bonuses to its financial products group. That unit specialized in trading credit default swaps, the derivatives that drove the company to near-collapse last fall.

The administration sent Congress a bill calling for the expanded powers to seize control of nonbank institutions late Wednesday. Frank has said this measure could win approval within weeks. And he said the administration's broader regulatory overhaul could win House approval by summer.

But Republicans wondered whether the overhaul would give federal regulators too much power.

"Forgive me if I am a skeptic ... when I hear that if we only have a systemic regulator it will never happen again," Rep. Scott Garrett, R-N.J., told Geithner.

Sen. Charles Schumer, D-N.Y., a member of the Senate Banking Committee, praised Geithner's proposal as a "good first outline." But he said it would probably require "some major consolidating and rearranging" of regulatory agencies. Four separate agencies now regulate banks -- a system critics say produces overlapping lines of authority.

At a Senate Banking Committee hearing, SEC Chairman Mary Schapiro and key senators agreed it could be harmful for any one regulator to become too powerful.

"The devil is in the details," Schapiro said, adding she was concerned that "we don't create a monolithic entity."

To try to build support for the proposal, Obama is to meet Friday with major bank executives.

The proposal on credit default swaps and other derivatives would regulate the trading far more extensively. Some derivatives, such as stock options, already are regulated because they are traded on exchanges. The administration would expand regulation to derivatives that now trade mainly in the over-the-counter market, outside regulatory scrutiny.

Credit default swaps are contracts to insure against the default of certain debt. They played a key role in the downfall of investment banking giant Lehman Brothers Holdings Inc. last fall and nearly destroyed AIG.

Larger hedge funds, private equity funds and venture capital funds above a certain level in assets would have to register with the SEC. Regulators would examine their books to determine if they should face greater scrutiny.

Hedge funds have grown explosively in recent years while operating secretively. They have lured an increasing number of ordinary investors, pension funds and university endowments -- meaning millions of people now unwittingly invest in hedge funds indirectly.

AP Business Writers Marcy Gordon and Daniel Wagner in Washington, and Stevenson Jacobs in New York contributed to this report.

Jobless rolls swell again as recession persists—By Jeannine Aversa and Christopher S. Rugaber, AP Economics Writers

Unemployment rolls grow for the 10th week in a row; glimmers of economic hope fade a bit

Hopes that the economy may be poised for a recovery got a splash of reality Thursday: The unemployment rolls are still getting bigger as the recession maintains its grip.

For the 10th week in a row, the number of people receiving jobless benefits grew. It now stands at nearly 5.6 million, the government said -- an indication that the labor market is still grim.

New claims for unemployment benefits rose again as well, to a seasonally adjusted 652,000, up from 644,000 the week before. The government also said the economy shrank at a 6.3 percent annual clip in the fourth quarter, slightly faster than its previous estimate.

"There is no sign of recovery here, and claims are usually one of the very first numbers to turn," Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a client note.

The total number of people claiming benefits jumped to 5.56 million, worse than economists' projections of 5.48 million, and setting a record for the ninth week in a row.

The stock market shook off the bleak unemployment news and continued its remarkable bounce off lows set earlier this month. The Dow Jones industrials gained almost 175 points to close just under 7,925.

Some economists believe the economy is contracting this quarter, which ends next week, even faster than it did late last year, while others think the shrinking may have slowed. No one disputes that the recession persists.

Many economists expect the gross domestic product will contract again in the April-June period, but by a much smaller amount, in the 2 to 3 percent range, and maybe turn back toward growth later in the year.

Nariman Behravesh, chief economist at IHS Global Insight, expects an economic contraction at an annual pace of as high as 8 percent this quarter. "On the other hand," he added, "the worst of the worst is probably behind us."

President Barack Obama said Thursday that it will take some time -- perhaps through the rest of the year -- before vigorous hiring resumes, and that might not happen until businesses see evidence the economy is rebounding.

There have been recent glimmers of hope that Americans' appetites to spend might be stirring again. Orders for costly manufactured goods and new-home sales both logged unexpected gains in February, and retail sales dipped less than expected.

On the other hand, the huge number of people continuing to collect unemployment insurance shows laid-off workers are staying on the jobless rolls longer as they struggle to land a new job.

As a proportion of the work force, the number of people receiving benefits is at its highest level since May 1983, when the economy was recovering from a deep recession. The total of nearly 5.6 million is almost double what it was a year ago.

On top of that, about 1.5 million Americans are getting benefits under an extended unemployment pay program approved by Congress last year.

The main culprit for the downgrade in the GDP figure was that businesses turned out to have cut their inventories even more than had been thought. Builders also cut back on commercial construction.

Still, economists were expecting the final reading of the fourth quarter GDP figure to be even worse, calling for a 6.5 percent pace of contraction.

In the fourth quarter, Americans cut their spending at an annual clip of 4.3 percent, and businesses cut their spending on equipment and software by a whopping 28 percent. Both declines are the worst in decades.

Of course, the recession is hurting corporate profits. One measure tied to the GDP report showed after-tax profits of U.S. companies dropped more than 10 percent in the fourth quarter.

The steep drop in profits "will mean further belt-tightening by a lot of companies," meaning less spending on business equipment and software, Behravesh said.

Meanwhile, job losses keep mounting. IBM is making plans for a round of 5,000 job cuts, about 4 percent of its work force, The Associated Press learned. Drugmaker Hospira Inc. said it would cut 1,450 jobs, or about 10 percent of its work force.

The government is counting on injections of hundreds of billions of dollars into the financial system, plus the enormous economic stimulus plan, to help turn the economy around.

For all of last year, the economy grew a meager 1.1 percent, the slowest growth since 2001.

Seychelles: Paradise goes bankrupt—By Sheridan Prasso, contributor

The Seychelles, the idyllic archipelago in the Indian Ocean off the coast of Africa, is best known as an island paradise playground for celebrities, royalty and the ultra-wealthy. These days, it's better known for something else: bankruptcy.

The tiny country's debt burden may be tiny compared to Iceland, which needed a $2.1 billion bailout from the International Monetary Fund last fall, but the Seychelles' problems illustrate the degree to which the global economic crisis has leveled some economies altogether.

And because of its small size, with just 87,000 people, the Seychelles now has the unenviable stature of being perhaps the most indebted country in the world. Public and private debt totals $800 million - roughly the size of the country's entire economy.

Last year, as tourism and fishing revenue began slowing, the Seychelles defaulted on a $230 million, euro-denominated bond that had been arranged by Lehman Brothers before its own bankruptcy. The IMF came in in November with a two-year, $26 million rescue package, and the country has since taken a series of emergency steps: It laid off 12.5% of government workers (1,800 people), floated its currency (the Seychelles rupee, which has fallen from eight to the U.S. dollar to 16, effectively doubling the prices of imports), lifted foreign exchange controls and agreed to sell state assets.

The IMF has given a thumbs-up to the initial progress, but it warned that the economy would contract 9.5% this year. The government of Australia is sending tax experts to help overhaul the revenue collection system and audit local companies.

Now the Seychelles is negotiating with the governments of Britain, France and other Western countries including the U.S. - the so-called Paris Club - to reschedule $250 million in debt it owes them. It is asking for 50% of it to be forgiven - a rate it hopes its commercial creditors will then apply to its remaining $550 million outstanding.

"We borrowed more than we can repay," complains Ralph Volcere, the editor of Le Nouveau Seychelles Weekly and a vocal government critic. "This was wholly irresponsible."

Heavily reliant on tourism, the Seychelles is desperately searching for ways to raise capital - at a time when tourism is forecast to drop precipitously this year. In early March, Seychelles Vice President Joseph Belmont told a meeting of local tourism industry business owners that the country has already seen a drop of 15% in visitor arrivals from the start of 2009; tourism revenue for the year, he said, could drop by some 25% more as a result of the global recession.

Seychelles officials have another idea though: to promote the country's longstanding virtue of being an off-shore business haven, with no corporate tax, no minimum capital requirements, only one shareholder or director required, and an annual licensing fee of just $100.

It also hopes to grow revenue from fishing licenses in its territorial waters, and on March 26 it will present a proposal to the United Nations to expand its exclusive rights to the surrounding seabed, potentially increasing prospects of revenue from underwater minerals, oil and gas.

And hopes for expanding tourism remain high. In addition to the usual roster of luxury-seeking royals and high-spending celebs, the middle-tier traveler is now being heartily courted, too. The government in early March announced an "Affordable Seychelles" campaign - what would have until recently been an oxymoron - with the motto: "Once-in-a-lifetime vacation at a once-in-a-lifetime price," based on lower prices caused by the halving in value of the currency.

Most hotels and meals in restaurants frequented by foreigners, however, remain priced in euros - like the new Four Seasons Seychelles, which opened its five-star resort, more than two years in the works, in February. Rates start at 1,000 euros ($1,345) per night, although current packages include stay-an-extra-day offers. Free-standing, multi-room houses with private swimming pools, billed as "Presidential" and "Royal" suites, are also available (from 4,500 euros, or $6,055).

The company claims it's seeing interest from travelers: "We have extremely strong demand; a lot of people are calling and asking for information," says General Manager Markus Iseli, surveying the property of 67 private, luxury villas perched on a hillside overlooking a stunning powdery-sand beach. But while normal luxury hotel occupancy averages 70-to-75%, he says he expects perhaps 30-to-35% occupancy this year.

"That's still good in a recession," Iseli says. "When you look around the world, everybody is suffering."