Economix Blog: Bernanke Defends Stimulus as Necessary and Effective

The Federal Reserve’s chairman, Ben S. Bernanke, picked an unusual time to offer his most recent defense of the Fed’s campaign to stimulate the economy: 7 p.m. on a Friday night in San Francisco, 10 p.m. back home on the East Coast.

The basic message was the same as Mr. Bernanke delivered to Congress earlier this week: The Fed regards its current efforts as necessary and effective, and the risks, while real, are under control.

“Commentators have raised two broad concerns surrounding the outlook for long-term rates,” Mr. Bernanke told a conference at the Federal Reserve Bank of San Francisco. “To oversimplify, the first risk is that rates will remain low, and the second is that they will not.”

If rates remain low, it may drive investors to take excessive risks. If rates jump, investors could lose money – not least the Fed.

Regarding the first possibility, Mr. Bernanke said that the Fed was keeping a careful eye on financial markets. But he noted that rates were low in large part because the economy was weak, and that keeping rates low was the best way to encourage stronger growth. “Premature rate increases would carry a high risk of short-circuiting the recovery, possibly leading — ironically enough — to an even longer period of low long- term rates,” he said.

At the other extreme, Mr. Bernanke said the Fed could “mitigate” any jump in rates by prolonging its efforts to hold rates down, for example by keeping some of its investments in Treasury and mortgage-backed securities.

Three more highlights from the question-and-answer session after the speech.

1. Mr. Bernanke, asked about the outlook for the Washington Nationals, responded by accurately quoting the “Las Vegas odds” of a World Series appearance: 8/1.

2. Although the decision may be made under a future chairman, Mr. Bernanke said the Fed should continue to offer “forward guidance” — predicting its policies — even after it concludes its long effort to revive the economy.

“Providing information about the future path of policy could be useful, probably would be useful, under even normal circumstances,” he said in response to a question. “I think we need to keep providing information.”

3. Not surprisingly, Mr. Bernanke often is asked to reflect on the financial crisis. He offered something a little different than his normal response on Friday night.

“In many ways, in retrospect, the crisis was a normal crisis,” he said. “It’s just that the intuitional framework in which it occurred was much more complex.”

In other words, there was a panic, and a run, and a collapse – but rather than a run on bank deposits, the run was in the money markets. Improving the stability of those markets is something regulators have yet to accomplish.

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Americans Spend More and Make Less, Data Shows

WASHINGTON — Consumer spending rose in January as Americans spent more on services, with savings providing a cushion after income recorded its biggest drop in 20 years.

The Commerce Department said Friday that consumer spending increased 0.2 percent in January after a revised 0.1 percent rise the prior month. Spending had previously been estimated to have increased 0.2 percent in December.

January’s increase was in line with economists’ expectations. Spending accounts for about 70 percent of American economic activity. When adjusted for inflation, it gained 0.1 percent after a similar increase in December.

Though spending rose in January, it was supported by a rise in services, probably related to utilities consumption. Spending on goods fell, suggesting some hit from the expiration at the end of 2012 of a 2 percent payroll tax cut. Tax rates for wealthy Americans also increased.

The impact is expected to be larger in February’s spending data and possibly extend through the first half of the year as households adjust to smaller paychecks, which are also being strained by rising gasoline prices.

Income tumbled 3.6 percent, the largest drop since January 1993. Part of the decline was payback for a 2.6 percent surge in December as businesses, anxious about higher taxes, rushed to pay dividends and bonuses before the new year.

A portion of the drop in January also reflected the tax increases. The income at the disposal of households after inflation and taxes plunged a 4.0 percent in January after advancing 2.7 percent in December.

With income dropping sharply and spending rising, the saving rate — the percentage of disposable income households are socking away — fell to 2.4 percent, the lowest level since November 2007. The rate had jumped to 6.4 percent in December.

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U.S. Economy Barely Grew in Fourth Quarter, Revision Shows

Breathe a tiny sigh of relief, if not contentment: the American economy grew a tiny bit in the last quarter of 2012.

Output expanded at an annual rate of just 0.1 percent, below the country’s long-term average, not to mention way below the growth needed to get unemployment back to normal. But at least the economy did not shrink, as the Commerce Department had originally estimated last month.

The department’s latest estimate for economic output, released Thursday, showed that growth was depressed by declines in military spending (possibly in anticipation of the across-the-board spending cuts set to begin Friday) and the amount that companies restored their stockroom shelves.

The output growth number was revised upward from the original estimate partly thanks to updated, and better, figures on net trade and nonresidential fixed investment.

Economists expect that government spending will continue to drag on the economy this year, especially if Congress does not avert the spending cuts, which would shave around 0.6 percentage point off growth. They also expect though, that the private sector will offset most of this drag, thanks to the housing recovery and other sources of strength. Forecasts for the first quarter are for annual growth around 2.4 percent to 3 percent.

Monetary stimulus from the Federal Reserve, while under fire from some Republicans, is also helping offset the fiscal contraction.

“With monetary policy working with a lag and still being eased, the boost to the economy is probably still growing,” said Jim O’Sullivan, chief United States economist at High Frequency Economics.

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British Media to Challenge Secrecy Bid in Litvinenko Case

The British Broadcasting Corporation said it and other news organizations would oppose an effort on Tuesday by the British government to limit information disclosed to the planned inquest into the death of Alexander V. Litvinenko, a former officer in the KGB who died of radiation poisoning in London more than six years ago.

The BBC reported that the government had planned to apply for a so-called Public Interest Immunity certificate, usually issued on the grounds of national security that would prevent the inquest from hearing information on topics which have not been made public.

The authorities’ resistance to full disclosure may force a postponement in the scheduled May 1 start date for the inquest, which would be the first — and likely the only — forum for sworn testimony about the killing, according to a lawyer for Mr. Litvinenko’s widow, Marina Litvinenko.

The lawyer, Ben Emmerson, complained on Tuesday that the preparations for the inquest were becoming “bogged down” by “the government’s attempt to keep a lid on the truth.”

“It is the government’s secret files that are delaying this inquest,” he said, according to the Press Association news agency, which also quoted the coroner, Sir Robert Owen, as saying on Tuesday that “due to the complexity of the investigation which necessarily precedes the hearings” the schedule for the inquest to begin on May 1 “may be a timetable to which it may not be possible to adhere.”

The Guardian newspaper, which is also opposing the government’s effort to restrict evidence, said that it would argue that “the public and media are faced with a situation where a public inquest into a death may have large amounts of highly relevant evidence excluded from consideration by the inquest. Such a prospect is deeply troubling.”

But the Foreign Office said the authorities had made their application in line with their “duty to protect national security and the coroner would rule according to “the overall public interest.”

The case has strained ties between Britain and Russia, reviving memories of the cold war.

Mr. Litvinenko, who styled himself a whistle-blower and foe of the Kremlin, died in November, 2006, weeks after he secured British citizenship. He had fled from Russia to Britain in 2000.

Britain’s Crown Prosecution is seeking the extradition from Russia of Andrei K. Lugovoi, another former KGB officer, to face trial on murder charges. Mr. Lugovoi denies the accusation and Russia says its constitution forbids it from sending its citizens to other countries to face trial.

At a hearing in December in advance of the inquest, which is to start on May 1, Mr. Emmerson, the lawyer representing Marina Litvinenko, said that Mr. Litvinenko was a “registered and paid agent and employee of MI6, with a dedicated handler whose pseudonym was Martin.”

Mr. Litvinenko also worked for the Spanish intelligence service, Mr. Emmerson said, and both the British and Spanish spy agencies made payments into a joint account with his wife. The lawyer added that the inquest should consider whether MI6 failed in its duty to protect him against a “real and immediate risk to life.”

The BBC said Marina Litvinenko would also oppose the British government’s effort to limit information about its knowledge of her husband’s death.

The coroner has said in previous hearings that he will examine what was known about threats to Mr. Litvinenko and would also seek to determine whether the Russian state bore responsibility. In a deathbed statement, Mr. Litvinenko directly blamed President Vladimir V. Putin, who dismissed the accusation.

Russian state prosecutors are expected to be represented at the inquest. Moscow has denied British suggestions that it may have been involved in killing Mr. Litvinenko, who died after ingesting polonium 210 — a rare radioactive isotope — at the Pine Bar of the Millennium Hotel in central London.

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DealBook: Barnes & Noble Founder Leonard Riggio to Bid for Bookstore's Retail Business

Correction Appended

The chairman of Barnes & Noble plans to bid for the retail business of the bookstore chain he started 40 years ago, as the company struggles with a changing competitive landscape.

On Monday, Leonard Riggio told the company’s board that he would make an offer for Barnes & Noble Booksellers, barnesandnoble.com and other retail assets. The proposal would not include the e-book division, Nook Media.

Like many retailers, Barnes & Nobles is confronted by waning profit in its core business, as online retailers and other competitors gain market share. The company recently warned that earnings would be weak in the latest quarter, with losses rising in its Nook Media division.

Conceived as a serious competitor to Amazon.com’s Kindle, the Nook has instead become an also-ran in the race for digital book supremacy. The Kindle remains the top-selling dedicated e-reader, while the iPad consistently leads the competition among tablets. Amazon’s Kindle app has also maintained a huge lead in popularity, limiting Barnes & Noble’s reach across the broader digital bookselling landscape.

It is the boldest move yet by Mr. Riggio, the company’s largest shareholder who owns nearly 30 percent of Barnes & Noble, to try and save the company.

After building a small chain of college bookstores, Mr. Riggio in the 1970s bought the Barnes & Noble name and the flagship location in Manhattan, which had run into trouble. Over the next several decades, he built the company into the nation’s biggest brick-and-mortar bookseller.

In recent years, Mr. Riggio has fended off challenges from the likes of the billionaire Ronald W. Burkle. As part of that effort, Mr. Riggio argued, in large part, that the company was well-positioned in the future by betting on the Nook and digital books.

Others believed in the promise of the e-reader as well.

Microsoft paid $300 million in April for a 17.6 percent stake in the Nook business, valuing it then at $1.7 billion. Microsoft also secured Barnes & Noble’s commitment to produce an e-reader app for its Windows 8 operating system. And in December, the British publisher Pearson agreed to buy a 5 percent stake for $89.5 million.

Mr. Riggio, plans to negotiate the price with the board, according to a regulatory filing. The proposal is expected to be mainly in cash. The retailer’s board had already been weighing whether to spin off its Nook unit.

Barnes & Noble said in a statement that it had formed a special board committee of three directors – David G. Golden, David A. Wilson and Patricia L. Higgins – to consider Mr. Riggio’s proposal. The committee will be advised by Evercore Partners and the law firm Paul, Weiss, Rifkind, Wharton & Garrison.

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Correction: February 25, 2013

An earlier version of this article referred imprecisely to the role of its largest shareholder, Leonard Riggio, in the company’s history. While Mr. Riggio founded the modern company that acquired the name in the 1970s, William Barnes and G. Clifford Noble opened the original Barnes & Noble bookstore, in 1917.

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Major Banks Aid in Payday Loans Banned by States

Major banks have quickly become behind-the-scenes allies of Internet-based payday lenders that offer short-term loans with interest rates sometimes exceeding 500 percent.

With 15 states banning payday loans, a growing number of the lenders have set up online operations in more hospitable states or far-flung locales like Belize, Malta and the West Indies to more easily evade statewide caps on interest rates.

While the banks, which include giants like JPMorgan Chase, Bank of America and Wells Fargo, do not make the loans, they are a critical link for the lenders, enabling the lenders to withdraw payments automatically from borrowers’ bank accounts, even in states where the loans are banned entirely. In some cases, the banks allow lenders to tap checking accounts even after the customers have begged them to stop the withdrawals.

“Without the assistance of the banks in processing and sending electronic funds, these lenders simply couldn’t operate,” said Josh Zinner, co-director of the Neighborhood Economic Development Advocacy Project, which works with community groups in New York.

The banking industry says it is simply serving customers who have authorized the lenders to withdraw money from their accounts. “The industry is not in a position to monitor customer accounts to see where their payments are going,” said Virginia O’Neill, senior counsel with the American Bankers Association.

But state and federal officials are taking aim at the banks’ role at a time when authorities are increasing their efforts to clamp down on payday lending and its practice of providing quick money to borrowers who need cash.

The Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau are examining banks’ roles in the online loans, according to several people with direct knowledge of the matter. Benjamin M. Lawsky, who heads New York State’s Department of Financial Services, is investigating how banks enable the online lenders to skirt New York law and make loans to residents of the state, where interest rates are capped at 25 percent.

For the banks, it can be a lucrative partnership. At first blush, processing automatic withdrawals hardly seems like a source of profit. But many customers are already on shaky financial footing. The withdrawals often set off a cascade of fees from problems like overdrafts. Roughly 27 percent of payday loan borrowers say that the loans caused them to overdraw their accounts, according to a report released this month by the Pew Charitable Trusts. That fee income is coveted, given that financial regulations limiting fees on debit and credit cards have cost banks billions of dollars.

Some state and federal authorities say the banks’ role in enabling the lenders has frustrated government efforts to shield people from predatory loans — an issue that gained urgency after reckless mortgage lending helped precipitate the 2008 financial crisis.

Lawmakers, led by Senator Jeff Merkley, Democrat of Oregon, introduced a bill in July aimed at reining in the lenders, in part, by forcing them to abide by the laws of the state where the borrower lives, rather than where the lender is. The legislation, pending in Congress, would also allow borrowers to cancel automatic withdrawals more easily. “Technology has taken a lot of these scams online, and it’s time to crack down,” Mr. Merkley said in a statement when the bill was introduced.

While the loans are simple to obtain — some online lenders promise approval in minutes with no credit check — they are tough to get rid of. Customers who want to repay their loan in full typically must contact the online lender at least three days before the next withdrawal. Otherwise, the lender automatically renews the loans at least monthly and withdraws only the interest owed. Under federal law, customers are allowed to stop authorized withdrawals from their account. Still, some borrowers say their banks do not heed requests to stop the loans.

Ivy Brodsky, 37, thought she had figured out a way to stop six payday lenders from taking money from her account when she visited her Chase branch in Brighton Beach in Brooklyn in March to close it. But Chase kept the account open and between April and May, the six Internet lenders tried to withdraw money from Ms. Brodsky’s account 55 times, according to bank records reviewed by The New York Times. Chase charged her $1,523 in fees — a combination of 44 insufficient fund fees, extended overdraft fees and service fees.

For Subrina Baptiste, 33, an educational assistant in Brooklyn, the overdraft fees levied by Chase cannibalized her child support income. She said she applied for a $400 loan from Loanshoponline.com and a $700 loan from Advancemetoday.com in 2011. The loans, with annual interest rates of 730 percent and 584 percent respectively, skirt New York law.

Ms. Baptiste said she asked Chase to revoke the automatic withdrawals in October 2011, but was told that she had to ask the lenders instead. In one month, her bank records show, the lenders tried to take money from her account at least six times. Chase charged her $812 in fees and deducted over $600 from her child-support payments to cover them.

“I don’t understand why my own bank just wouldn’t listen to me,” Ms. Baptiste said, adding that Chase ultimately closed her account last January, three months after she asked.

A spokeswoman for Bank of America said the bank always honored requests to stop automatic withdrawals. Wells Fargo declined to comment. Kristin Lemkau, a spokeswoman for Chase, said: “We are working with the customers to resolve these cases.” Online lenders say they work to abide by state laws.

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Many States Say Cuts Would Burden Fragile Recovery

States are increasingly alarmed that they could become collateral damage in Washington’s latest fiscal battle, fearing that the impasse could saddle them with across-the-board spending cuts that threaten to slow their fragile recoveries or thrust them back into recession.

Some states, like Maryland and Virginia, are vulnerable because their economies are heavily dependent on federal workers, federal contracts and military spending, which will face steep reductions if Congress allows the automatic cuts, known as sequestration, to begin next Friday. Others, including Illinois and South Dakota, are at risk because of their reliance on the types of federal grants that are scheduled to be cut. And many states simply fear that a heavy dose of federal austerity could weaken their economies, costing them jobs and much-needed tax revenue.

So as state officials begin to draw up their budgets for next year, some say that the biggest risk they see is not the weak housing market or the troubled European economy but the federal government. While the threat of big federal cuts to states has become something of a semiannual occurrence in recent years, state officials said in interviews that they fear that this time the federal government might not be crying wolf — and their hopes are dimming that a deal will be struck in Washington in time to avert the cuts.

The impact would be widespread as the cuts ripple across the nation over the next year.

Texas expects to see its education aid slashed hundreds of millions of dollars, which could force local school districts to fire teachers, if the cuts are not averted. Michigan officials say they are in no position to replace the lost federal dollars with state dollars, but worry about cuts to federal programs like the one that helps people heat their homes. Maryland is bracing not only for a blow to its economy, which depends on federal workers and contractors and the many private businesses that support them, but also for cuts in federal aid for schools, Head Start programs, a nutrition program for pregnant women, mothers and children, and job training programs, among others.

Gov. Bob McDonnell of Virginia, a Republican, warned in a letter to President Obama on Monday that the automatic spending cuts would have a “potentially devastating impact” and could force Virginia and other states into a recession, noting that the planned cuts to military spending would be especially damaging to areas like Hampton Roads that have a big Navy presence. And he noted that the whole idea of the proposed cuts was that they were supposed to be so unpalatable that they would force officials in Washington to come up with a compromise.

“As we all know, the defense, and other, cuts in the sequester were designed to be a hammer, not a real policy,” Mr. McDonnell wrote. “Unfortunately, inaction by you and Congress now leaves states and localities to adjust to the looming threat of this haphazard idea.”

The looming cuts come just as many states feel they are turning the corner after the prolonged slump caused by the recession. Gov. Martin O’Malley of Maryland, a Democrat, said he was moving to increase the state’s cash reserves and rainy day funds as a hedge against federal cuts.

“I’d rather be spending those dollars on things that improve our business climate, that accelerate our recovery, that get more people back to work, or on needed infrastructure — transportation, roads, bridges and the like,” he said, adding that Maryland has eliminated 5,600 positions in recent years and that its government was smaller, on a per capita basis, than it had been in four decades. “But I can’t do that. I can’t responsibly do that as long as I have this hara-kiri Congress threatening to drive a long knife through our recovery.”

Federal spending on salaries, wages and procurement makes up close to 20 percent of the economies of Maryland and Virginia, according to an analysis by the Pew Center on the States.

But states are in a delicate position. While they fear the impact of the automatic cuts, they also fear that any deal to avert them might be even worse for their bottom lines. That is because many of the planned cuts would go to military spending and not just domestic programs, and some of the most important federal programs for states, including Medicaid and federal highway funds, would be exempt from the cuts.

States will see a reduction of $5.8 billion this year in the federal grant programs subject to the automatic cuts, according to an analysis by Federal Funds Information for States, a group created by the National Governors Association and the National Conference of State Legislatures that tracks the impact of federal actions on states. California, New York and Texas stand to lose the most money from the automatic cuts, and Puerto Rico, which is already facing serious fiscal distress, is threatened with the loss of more than $126 million in federal grant money, the analysis found.

Even with the automatic cuts, the analysis found, states are still expected to get more federal aid over all this year than they did last year, because of growth in some of the biggest programs that are exempt from the cuts, including Medicaid.

But the cuts still pose a real risk to states, officials said. State budget officials from around the country held a conference call last week to discuss the threatened cuts. “In almost every case the folks at the state level, the budget offices, are pretty much telling the agencies and departments that they’re not going to backfill — they’re not going to make up for the budget cuts,” said Scott D. Pattison, the executive director of the National Association of State Budget Officers, which arranged the call. “They don’t have enough state funds to make up for federal cuts.”

The cuts would not hit all states equally, the Pew Center on the States found. While the federal grants subject to the cuts make up more than 10 percent of South Dakota’s revenue, it found, they make up less than 5 percent of Delaware’s revenue.

Many state officials find themselves frustrated year after year by the uncertainty of what they can expect from Washington, which provides states with roughly a third of their revenues. There were threats of cuts when Congress balked at raising the debt limit in 2011, when a so-called super-committee tried and failed to reach a budget deal, and late last year when the nation faced the “fiscal cliff.”

John E. Nixon, the director of Michigan’s budget office, said that all the uncertainty made the state’s planning more difficult. “If it’s going to happen,” he said, “at some point we need to rip off the Band-Aid.”

Fernanda Santos contributed reporting.

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DealBook: In Dell’s Waning Cash Flows, Signs of Concern

The proposed Dell buyout may be motivated more by fear than greed.

Dell’s founder, Michael S. Dell, and the investment firm Silver Lake are offering to take the company private in a $24.4 billion deal. One interpretation of the offer is that savvy investors, using cheap loans, see a nice opportunity to unlock the value from a company that has fallen out of favor with stock investors. The fact that large shareholders are opposed to the deal, thinking it is priced too low, supports the idea that Dell is a diamond in the rough.

But there is an opposite interpretation: The buyout is a last-ditch effort to revive the company. To some, taking Dell private is what’s necessary to implement the sort of bold measures that could prevent the steady decline of a company that has been left behind in many of its markets. And like many acts of desperation, the risks are high that going private will fail.

This viewpoint starts with Dell’s cash flows. How much actual money a company makes each quarter is always an important metric. It’s especially critical at firms that go private in leveraged buyout deals. Once private, Dell would have a lot more debt – and it would need divert more cash to service it.

Going private may allow the company to slash costs, which preserves cash. But management may also feel liberated to spend more on initiatives it feels enthusiastic about, which would use up cash initially. In a botched buyout, management’s plans fail to produce results and a dangerous cash crunch occurs.

And there are some signs that Dell’s cash flows are weakening going into the deal.

The cash flow metric that matters is called free cash flow, which takes the money generated by Dell’s operations and then subtracts what the company spends on capital expenditures. Through the end of its latest fiscal year, which ended in February, Dell’s free cash flows were $2.77 billion. That is well below the $4.85 billion reported in the prior fiscal year. And the recent cash flows may have gotten a boost from financial moves that might be hard to repeat. In the most recent quarter, Dell generated a lot of cash from taking longer to pay its suppliers.

It’s easy to paint a grim picture from these numbers. A privately held Dell might have an extra $700 million to $1 billion of extra interest a year, which could in theory take annual free cash flows below $2 billion. That provides little margin for safety if Dell’s operations run into serious trouble, even if the company does decide to dip into its large pool of overseas cash.

But there are some reasons to believe this analysis is overly pessimistic.

First, the cash flow numbers probably don’t fully factor in how much cash can be generated by Dell’s recent acquisitions. Just as a couple of items helped bolster cash flows in recent quarters, others used up a lot cash, and may not do so in the future. For instance, Dell had a $450 million cash drain in the last fiscal year just from the “deferred income taxes” line. That could be the result of a one-off action rather than a recurring trend.

With all its acquisitions contributing, optimists might contend that Dell can produce $3.5 billion of free cash flow a year. If investors paid seven times that, the company would be valued at the $24 billion, which is where it is valued today on the stock market. Other shareholders think Dell is worth a lot more than $24 billion, and has the cash flows to justify it.

But right now, Dell’s cash flows are weakening. And if they continue to wane, Mr. Dell may soon have a tough job ahead of him. He may already know that — looking at those cash flows.

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DealBook: Linn Energy to Buy Berry Petroleum for $2.5 Billion

Deal-making in the oil patch continued on Thursday, as Linn Energy agreed to buy the Berry Petroleum Company for about $2.5 billion, expanding its presence in oil-rich shale formations.

Under the terms of the deal, an affiliate of Linn, LinnCo L.L.C., will issue 1.25 million new common shares for each Berry share. That amounts to $46.24 a share, a premium of roughly 20 percent to Berry’s closing price on Wednesday.

LinnCo will then transfer Berry’s assets to Linn in exchange for additional ownership units in its sibling, which is structured as a master limited partnership. Including the assumption of debt, the deal is valued at $4.3 billion.

By purchasing Berry, Linn will significantly bolster its oil production and increase its holdings in California and the Permian Basin in western Texas. The company estimates that its newest acquisition will increase its proven reserves by 34 percent and its production capabilities by 30 percent. And Berry’s reserves are estimated to be about 75 percent oil and liquids, considered to be significantly more valuable than natural gas, given current prices.

Linn cited the growth promised by the deal in announcing an increase in its quarterly distributions to unit holders, to 77 cents a unit from 72.5 cents.

“Berry’s assets are an excellent fit for Linn, and we believe this transaction generates significant accretion to our distributable cash flow per unit,” Mark E. Ellis, Linn’s chief executive, said in a statement. “We have great respect for what the Berry management team has accomplished and consider the Berry employees to be an important part of this transaction.”

To help defray the tax consequences LinnCo will take on in the deal, Linn will pay its affiliate $6 million a year through 2015.

LinnCo was advised by Citigroup, while a conflicts committee of its board was advised by Evercore Partners and the law firm Locke Lord. A conflicts committee of Linn’s board was advised by Greenhill & Company and Akin Gump Strauss Hauer & Feld.

Latham & Watkins served as legal counsel to both Linn and LinnCo. Berry was advised by Credit Suisse and the law firm Wachtell, Lipton, Rosen & Katz.

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DealBook: Office Depot's Deal for OfficeMax Said to Have Been Announced Prematurely

A merger between Office Depot and OfficeMax has been years in the making. But it appears the deal may have been announced too hastily.

A press release announcing the merger of the two office supply retailers briefly surfaced Wednesday on Office Depot’s Web site. Since then, the announcement has disappeared.

The deal negotiations are ongoing, according to two people with knowledge of the matter. As of Wednesday morning, the company’s bankers and lawyers were still attempting to finalize an agreement.

Several news organizations quickly reported the terms disclosed in the apparently errant press release for Office Depot’s earnings. Buried on page four of the release, the company outlined details of the merger.

The release noted that Office Depot would issue $2.69 new shares of common stock for each share of OfficeMax. That would value OfficeMax at $13.50, or roughly $1.19 billion, a more than 25 percent premium to the company’s closing price last week.

The two people said that the press release — that was published and then taken down — was a draft. The described terms were not final, they added.

As the details filtered through the market, shares of the companies jumped. In pre-market trading, Office Depot’s stock rose more than 7 percent. OfficeMax was up more than 8 percent.

Representatives for Office Depot and OfficeMax were not immediately available for comment.

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Bits Blog: Tech Predictions for 2013: It's All About Mobile

If there is one theme that will be the topic of digital business this year, it is mobile.

ComScore, which tracks Web and mobile usage, published a report about what happened in 2012, and what to expect in 2013.

It shows that the effects of a movement toward mobile are everywhere, from shopping to media to search. According to the report, “2013 could spell a very rocky economic transition,” and businesses will have to scramble to stay ahead of consumers’ changing behavior.

Here are a few interesting tidbits from the 48-page report.

The mobile transition is happening astonishingly quickly. Last year, smartphone penetration crossed 50 percent for the first time, led by Android phones. People spend 63 percent of their time online on desktop computers and 37 percent on mobile devices, including smartphones and tablets, according to comScore.

Just as they compete on computers, Facebook and Google are dominant and at each other’s throats on phones.

Google’s map app for the iPhone, which had been the most used mobile app, lost its No. 1 spot to Facebook after Apple kicked Google’s maps off the iPhone in October. Now, Facebook reaches 76 percent of the smartphone market and accounts for 23 percent of total time spent using apps each month. The next five most used apps are Google’s, which account for 10 percent of time on apps.

As mobile continues to take share from desktop, some industries have been particularly affected, and they are seeing significant declines in desktop use of their products as a result. They are newspapers, search engines, maps, weather, comparison shopping, directories and instant messenger services.

The most visited Web sites are not so surprising: Google, Yahoo, Microsoft, Facebook and Amazon. Facebook continues to take up most of our time online.

But there were a few surprises from younger, smaller Web companies. Tumblr was No. 8 on the list of sites, ordered by time spent on them. And several Web sites were breakout hits last year, as measured by growth and visitor numbers: Spotify (music), Dropbox (online storage), Etsy (shopping), BuzzFeed (news), JustFab (shopping), SoundCloud (music) and BusinessInsider (news).

Search, one of the biggest and most reliable Web industries, is at a crossroads, comScore said. Even though the search market continues to be extraordinarily profitable, there is a desire for it to evolve and offer new services to users.

Here is some evidence: Searches on traditional search engines, dominated by Google, declined 3 percent last year, and the number of searches per searcher declined 7 percent. Yet searches on specialty sites, known as vertical search engines, like Amazon.com or Whitepages.com, climbed 8 percent.

Social search, based on what users’ friends like, has put Facebook and Google on a “collision course,” comScore said, particularly in searches for local businesses like restaurants.

In social networking, the visual Web, as comScore calls it, has transformed the landscape. Pinterest, Tumblr and Instagram, all of which emphasize images, each gained more than 10 million visitors last year.

Last year was also pivotal for online video, comScore said, as viewers increasingly seek the ability to watch video when and where they want. Watching TV shows online helped last year break viewing records, especially during the Olympics.

In the United States, 75 million people a day watch online video and stream 40 billion videos a month, and viewing is driven by YouTube.

There has also been a turning point for video ads. They cost more than typical ads, and have always lagged behind viewership. But in 2012, 23 percent of videos were accompanied by an ad, up from 14 percent the year before. More TV ad dollars are coming to online video, comScore concluded.

Though e-commerce spending grew 13 percent last year, it was a disappointing holiday season online, largely because of economic pressures. Purchasing on mobile phones is beginning to make a dent in e-commerce, comScore said, with mobile shopping accounting for 11 percent of e-commerce in the fourth quarter of 2012, up from 3 percent in the period two years earlier.

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Tech Industry Sets Its Sights on Gambling

Jim Wilson/The New York Times

Cesar Miranda, left, and his brother, Edgar, working on their claw crane game in San Jose, Calif.

SAN FRANCISCO — Look out Las Vegas, here comes FarmVille.

Silicon Valley is betting that online gambling is its next billion-dollar business, with developers across the industry turning casual games into occasions for adults to wager.

At the moment these games are aimed overseas, where attitudes toward gambling are more relaxed and online betting is generally legal, and extremely lucrative. But game companies, from small teams to Facebook and Zynga, have their eye on the ultimate prize: the rich American market, where most types of real-money online wagers have been cleared by the Justice Department.

Two states, Nevada and Delaware, are already laying the groundwork for virtual gambling. Within months they will most likely be joined by New Jersey.

Bills have also been introduced in Mississippi, Iowa, California and other states, driven by the realization that online gambling could bring in streams of tax revenue. In Iowa alone, online gambling proponents estimated that 150,000 residents were playing poker illegally.

Legislative progress, though, is slow. Opponents include an influential casino industry wary of competition and the traditional antigambling factions, who oppose it on moral grounds.

Silicon Valley is hardly discouraged. Companies here believe that online gambling will soon become as simple as buying an e-book or streaming a movie, and that the convenience of being able to bet from your couch, surrounded by virtual friends, will offset the lack of glittering ambience found in a real-world casino. Think you can get a field of corn in FarmVille, the popular Facebook game, to grow faster than your brother-in-law’s? Five bucks says you cannot.

“Gambling in the U.S. is controlled by a few land-based casinos and some powerful Indian casinos,” said Chris Griffin, chief executive of Betable, a London gambling start-up that handles the gaming licenses and betting mechanics of the business for developers. “What potentially becomes an interesting counterweight is all of a sudden thousands of developers in Silicon Valley making money overseas and wanting to turn their efforts inward and make money in the U.S.”

Betable has set up shop in San Francisco, where 15 studios are now using its back-end platform. “This is the next evolution in games, and kind of ground zero for the developer community,” Mr. Griffin said.

Overseas, online betting is generating an estimated $32 billion in annual revenue — nearly the size of the United States casino market. Juniper Research estimates that betting on mobile devices alone will be a $100 billion worldwide industry by 2017.

“Everyone is really anticipating this becoming a huge business,” said Chris DeWolfe, a co-founder of the pioneering social site Myspace, who is throwing his energies into a gaming studio with a gambling component backed by, among others, the personal investment funds of Jeff Bezos, Amazon’s founder, and Eric E. Schmidt, Google’s executive chairman.

As companies eagerly wait for the American market to open up, they are introducing betting games in Britain, where Apple has tweaked the iPhone software to accommodate them. Facebook began allowing online gambling for British users last summer with Jackpotjoy, a bingo site; deals with other developers followed in December and this month.

Zynga, the company that developed FarmVille, Mafia Wars, Words With Friends and many other popular casual games, is advertising the imminent release of its first betting games in Britain. “All your favorite Zynga game characters will be there, except this time they’ll have real money prizes to offer you,” an ad says. “Play online casino games for pennies and live the dream!”

Mr. DeWolfe’s studio, SGN, is also on the verge of starting its first real-money games in Britain. “Those companies that have a critical mass of users that are interested in playing real-money games are going to be incredibly valuable,” he said.

Mark Pincus, the chief executive of Zynga, said the company was just following the market. “There is no question there is great interest from all kinds of people in games of chance, whether it is for real money or virtual rewards,” he said. Zynga, which has missed revenue expectations in the last year, is making gambling a centerpiece of its new strategy. It has just applied to Nevada for a gambling license.

Casual gaming first blossomed on Facebook’s Web site, where players could readily corral friends into their games. It is now being rethought for mobile devices, so people can play in brief snippets as they wait for a bus or a sandwich.

Some games mimic the slots and poker found in casinos; others emphasize considerably more creativity. The vast majority of casual game players play at no charge. A small number buy virtual objects in the game to speed their play or increase their status.

Tech executives expect an equally small number to play for real money but believe they will bet heavily, making them much more valuable to the gaming companies. By Betable’s estimate, the lifetime value of a casual player is $2 versus $1,800 for a real-money player.

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A First Step on Continent for Google on Use of Content

PARIS — Publishers in France say they have struck an innovative agreement with Google on the use of their content online. Their counterparts elsewhere in Europe, however, say the French gave in too easily to the Internet giant.

The deal was signed this month by President François Hollande of France and Eric E. Schmidt, the executive chairman of Google, who called it a breakthrough in the tense relationship between publishers and Google, and as a possible model for other countries to follow.

Under the deal, Google agreed to set up a fund, worth €60 million, or $80 million, over three years, to help publishers develop their digital units. The two sides also pledged to deepen business ties, using Google’s online tools, in an effort to generate more online revenue for the publishers, who have struggled to counteract dwindling print revenue.

But the French group, representing newspaper and magazine publishers with an online presence, as well as a variety of other news-oriented Web sites, yielded on its most important demand: that Google and other search engines and “aggregators” of news should start paying for links to their content.

Google, which insists that its links provide a service to publishers by directing traffic to their sites, had fiercely resisted any change in the principle of free linking.

The agreement dismayed members of the European Publishers Council, a lobbying group in Brussels, which has been pushing for a fundamental change in the relationship between publishers and Google. The group criticized the French publishers for breaking ranks and striking a separate business agreement that has no statutory standing.

The deal “does not address the continuing problem of unauthorized reuse and monetization of content, and so does not provide the online press with the financial certainty or mechanisms for legal redress which it needs to build sustainable business models and ensure its continued investment in high-quality content,” Angela Mills Wade, executive director of the publishers council, said in a statement.

German publishers were also scornful, with Anja Pasquay, a spokeswoman for the German Newspaper Publishers’ Association, saying: “Obviously the French position isn’t one that we would favor. This is not the solution for Germany.”

Germany has been in the forefront of the push to get Google to share with online news publishers some of the billions of euros that the company earns from the sale of advertising. A proposed law, endorsed by the government of Chancellor Angela Merkel and working its way through the federal legislature, would grant a new form of copyright to digital publishers. If enacted, it could allow publishers to charge search engines or aggregators for displaying even snippets of news articles alongside links to other Web sites.

Mr. Hollande had vowed to introduce similar legislation this winter if Google and the publishers did not come to terms. It appears that Google, which had threatened to stop indexing French Web sites’ content if it had to pay for links, has sidelined the threat of legislation, at least for now; the agreement will be reviewed after three years, Mr. Hollande has said.

Under the deal, Google says it will help the publishers use several of its digital advertising services, including AdSense, AdMob and Ad Exchange, more effectively.

Publishers are already free to use these services, and it was not immediately clear how they would be able to generate more revenue from them; this part of the accord remains confidential, both sides say, because they are still negotiating the fine print.

“This agreement can help accelerate the move toward greater advertising revenues in the digital world,” said Marc Schwartz of Mazars, a consulting firm, who is serving as an independent mediator in the talks. “I’m not saying we have done everything, but it’s a first step in the right direction.”

More has been said about the planned innovation fund. Publishers will submit proposals to the fund, which will select ideas to finance and develop, with the involvement of Google engineers.

“The idea is that it would inject innovation into the sector in France,” said Simon Morrison, copyright policy manager at Google.

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Common Sense: High Taxes Are Not a Prime Reason for Relocation, Studies Say

Pool photo by Mikhail Klimentyev

Gerard Depardieu with Vladimir Putin in January. Russia granted Mr. Depardieu a passport after his spat with France over taxes.

Last month, Vladimir V. Putin hugged his newly minted fellow Russian citizen, the actor Gerard Depardieu, posing for cameras at the Black Sea port of Sochi. “I adore your country,” Mr. Depardieu gushed — especially its 13 percent flat tax on personal income.

Sochi may not be St. Tropez, but it does have winter temperatures in the 60s and even palm trees. Mr. Putin’s deputy prime minister confidently predicted a “mass migration of wealthy Europeans to Russia.”

Here in the United States, the three-time Masters champion Phil Mickelson recently walked off the 18th hole at Humana Challenge and said he might move from California because the state increased its top income tax rate to 13.3 percent from 10.3 percent.

“Hey Phil,” Gov. Rick Perry of Texas wrote in a Twitter message, “Texas is home to liberty and low taxes ... we would love to have you as well!!” Tiger Woods later said that he had left California for Florida for just that reason years ago. Mr. Mickelson can “vote with his Gulfstream,” a Wall Street Journal editorial noted, and warned California to “expect a continued migration.”

It’s an article of faith among low-tax advocates that income tax increases aimed at the rich simply drive them away. As Stuart Varney put it on Fox News: “Look at what happened in Britain. They raised the top tax rate to 50 percent, and two-thirds of the millionaires disappeared in the next tax year. Same things are happening in France. People are leaving where the top tax rate is 75 percent. Same thing happened in Maryland a few years ago. New millionaire’s tax, the millionaires disappeared. You’ve got exactly the same thing in California.”

That, at least, is what low-tax advocates want us to think, and on its face, it seems to make sense. But it’s not the case. It turns out that a large majority of people move for far more compelling reasons, like jobs, the cost of housing, family ties or a warmer climate. At least three recent academic studies have demonstrated that the number of people who move for tax reasons is negligible, even among the wealthy.

Cristobal Young, an assistant professor of sociology at Stanford, studied the effects of recent tax increases in New Jersey and California.

“It’s very clear that, over all, modest changes in top tax rates do not affect millionaire migration,” he told me this week. “Neither tax increases nor tax cuts on the rich have affected their migration rates.”

The notion of tax flight “is almost entirely bogus — it’s a myth,” said Jon Shure, director of state fiscal studies at the Center on Budget and Policy Priorities, a nonprofit research group in Washington. “The anecdotal coverage makes it seem like people are leaving in droves because of high taxes. They’re not. There are a lot of low-tax states, and you don’t see millionaires flocking there.”

Despite the allure of low taxes, Mr. Depardieu hasn’t been seen in Russia since picking up his passport and seems to be hedging his bets by maintaining a residence in Belgium. Meanwhile, Russian billionaires are snapping up trophy properties in high-tax London, New York and Beverly Hills, Calif.

“I don’t hear about many billionaires moving to Moscow,” said Robert Tannenwald, a lecturer in economic policy at Brandeis University and former Federal Reserve economist. Along with Nicholas Johnson, he and Mr. Shure are co-authors of “Tax Flight Is a Myth,” a 2011 research paper.

Of course, some people do move for tax reasons, especially wealthy retirees, athletes and other celebrities without strong ties to high-tax locations, like jobs and families. In renouncing his French citizenship, Mr. Depardieu follows other French celebrities, the chef Alain Ducasse, the singer Johnny Hallyday and Yannick Noah, a former tennis star. Several Paris hedge fund managers have decamped to London and the fashion mogul Bernard Arnault applied for Belgian citizenship, though not, he has said, for tax reasons.

Stars like Mr. Depardieu and Mr. Mickelson certainly have incentives to move. Mr. Depardieu complained that he paid 85 percent of his income in taxes in France last year and has paid 145 million euros over 45 years. France has a top rate of 41 percent as well as a wealth tax, and the Socialist president, François Hollande, is trying to impose a temporary surcharge of 75 percent on incomes over 1 million euros. Mr. Mickelson earned more than $60 million last year, Sports Illustrated estimates, which means the three-percentage-point California tax increase could add up to an additional $1.8 million in tax.

This article has been revised to reflect the following correction:

Correction: February 15, 2013

An earlier version of this column misstated Mr. Depardieu’s citizenship. He has applied for residency in Belgium; he is not a citizen of that nation. The earlier version also misidentified the golf tournament at which the golfer Phil Mickelson said he might move from California to escape its taxes. It was the Humana Challenge, not Pebble Beach.

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It's Scotch, but the Owners Live Elsewhere

Kieran Dodds for the International Herald Tribune

George Grant's family business, the Glenfarclas whisky distillery, is one of only a handful of locally owned plants in Scotland. Copper distillation stills, above, are used in the refining process.

BALLINDALLOCH, SCOTLAND — George S. Grant markets malt whisky made in the shadow of the snow-capped Ben Rinnes mountains, from the same spot where, five generations ago, his family bought a distillery in 1865 for £511.

Kieran Dodds for the International Herald Tribune

Empty bourbon barrels, bought from the United States, are filled with grain spirit and left to mature for many years at the Glenfarclas distillery.

Nowadays the family’s Glenfarclas malt is produced in a modern, highly automated plant that exports it to the United States, Taiwan and other countries. But the profit returns here to the valley of the River Spey in the heart of Scotland’s whisky country. And that repatriated money is what makes Glenfarclas such a rarity.

“Within a 20-mile radius of where we are now, there are 35 distilleries,” said Mr. Grant, the director of sales at Glenfarclas. But only a handful of the operations within that 30-kilometer radius remain in Scottish hands. The rest are owned by big multinationals — most notably Diageo, based in London, and the French company Pernod Ricard — which book their profits and employ many of their staff members elsewhere.

In fact Mr. Grant, 36, says he knows of no other whisky maker apart from Glenfarclas that has its sales and marketing operation based at the distillery in this scenic part of Scotland. Though he says relations with the big non-Scottish players are good — they buy some of Glenfarclas’s output for their blended whiskies, after all — Mr. Grant notes that what sets his family’s company apart is its place in the community and the fact that “we’ve been here forever.”

To be sold as Scotch whisky, liquor must be produced in Scotland. The rest of the business can be elsewhere, though, and it often is.

Non-Scottish companies control about four-fifths of the £4.2 billion, or $5.6 billion, global market for Scotch, which is being driven by growth from emerging economies. The United States is still the biggest export market, by value, at £600 million in 2011. But Scotch whisky exports to Brazil grew 48 percent that same year, those to Taiwan 45 percent and to Venezuela 33 per cent, according to the Scotch Whisky Association.

John Kay, a prominent economist and former economic adviser to the Scottish government, says that too little of the money from those exports ends up in the Scottish economy.

He has proposed a £1 “bottle tax,” levied on all Scotch production, which would be paid by the distillers. The precise value of such a tax is hard to predict, but the Scotch Whisky Association says that about 1.3 billion bottles were exported in 2011 and it estimates that foreign sales make up 95 percent of the market.

But much of the monetary benefit goes to governments that slap duties on the product wherever it is sold.

“A lot of money is being made out of this product by foreign governments and foreign companies,” Mr. Kay said. The bottle tax, he said, would be a way to keep some of that money in Scotland.

With a referendum looming next year on Scottish independence, the idea has prompted a new debate about the country’s economic assets. It has even prompted comparisons between the North Sea natural gas and oil extracted from Scotland’s coastal waters and the Scotch spirit distilled on its heather-covered moorlands and windswept islands.

Whisky supports about 10,000 jobs in Scotland, including those of people working in bottling plants, and in total about 36,000 in Britain across the whole of the economy, including haulers and packaging companies, the Scotch Whisky Association says. But the distilleries themselves are not big job creators. Although the most modern ones operate 24 hours a day, they tend to employ no more than a dozen people.

Patrick Harvie, member of the Scottish Parliament for Glasgow responsible for enterprise for the Scottish Green party said it was “good to see others starting to question the benefits to Scotland of allowing our national assets to be controlled by global corporations.”

Mr. Harvie drew a parallel with a debate over the tax liability of corporations, including Starbucks, that use their multinational status to reduce corporate tax bills. Diageo says that it pays about 18 percent of tax on its profit on average but does not say where it does so.

“Our most famous whisky brands are registered abroad and the owners’ tax arrangements are less than clear,” Mr. Harvie said.

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G.M., Hurt by Europe, Still Increases Profit

DETROIT – General Motors said its profit in the fourth quarter increased slightly as continued losses in Europe offset positive results in North America.

G.M., the nation’s biggest carmaker, said it had net income of $900 million in the quarter, compared to $500 million in the same period a year earlier. Revenue increased to $39.3 billion, up from $38 billion.

The company said strong sales in the surging United States market helped it post a $1.4 billion pretax profit in North America.

But in Europe, General Motors, like many other automakers, is continuing to absorb big losses from the worst sales environment in nearly 20 years. The company said it lost $700 million in the quarter.

The company had modest success in its other international operations, reporting a $500 million profit in Asia and a net income of $100 million in South America.

The fourth quarter capped a transitional 2012 for G.M., its third full year of operations since its bankruptcy and $49.5 billion government bailout in 2009.

While it is struggling to restructure in Europe, the company is in the process of introducing several new models in the United States, including revamped versions of its highly profitable pickup trucks.

G.M. also negotiated a sale of the Treasury Department’s ownership stake in the company.

For the full year, G.M. said it had net income of $4.9 billion compared with $7.6 billion in 2011. Executives said the 2011 profit included $1.2 billion in one-time gains on asset sales.

For the year, revenue grew to $152.3 billion, up from $150.3 billion in 2011.

G.M.'s chief executive, Daniel Akerson, said the company had a solid year in 2012, and said its future performance would depend on growing sales with new models.

“This year our priorities will be executing flawless new vehicle launches, controlling costs and delivering more vehicles to our customers at outstanding value,” Mr. Akerson said in a statement.

G.M.'s big profits in North America will directly benefit its 49,000 hourly workers in the United States, each of whom will receive profit-sharing checks of up to $6,750 for their work in 2012.

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Deere Net Income Jumps 22 Percent

MOLINE, Ill. (AP) — Farm and construction equipment maker Deere & Co. said Wednesday that its first-quarter net income leaped 22 percent on growing sales of farm machinery at higher prices.

The Moline, Ill., company's earnings soundly beat Wall Street expectations.

In the quarter ending Jan. 31, Deere said it earned $649.7 million, or $1.65 per share, compared with $532.9 million, or $1.30 per share, a year earlier. Revenue rose almost 10 percent to $7.42 billion.

Analysts surveyed by FactSet expected earnings of $1.39 per share on revenue of $6.73 billion.

Deere is executing its marketing plans, expanding its global presence and keeping a tight grip on costs, Chairman and CEO Samuel Allen said in a statement.

The company predicted that sales would rise about 4 percent in the second quarter and 6 percent for the full year. It expects 2013 net income of about $3.3 billion, slightly more than its earlier forecasts and the predictions of analysts.

But Allen cautioned that although Deere sees strong future results on growing need for food, shelter and infrastructure, "the near-term outlook is being tempered by uncertainties over fiscal, economic and trade issues that are undermining business confidence and restraining growth."

After rising initially as high as $98.71, Deere shares turned lower and were down 33 cents to $93.64 in trading about 45 minutes before Wednesday's opening bell.

Deere is the world's largest maker of agricultural equipment, like the bright green tractors and combines that roll on farm fields during planting and harvest seasons. Its fortunes rise and fall with those of farmers. The company said farm business should be good this year, predicting that agriculture and turf equipment sales would rise by about 6 percent, with a 5 percent increase over last year's strong numbers in the U.S. and Canada.

"Relatively high commodity prices and strong farm incomes are expected to continue supporting a favorable level of demand for farm machinery during the year," the company's statement said.

It also predicted that European agricultural and turf sales would fall 5 percent due to economic weakness and a poor harvest last year in the United Kingdom. But South American agricultural sales are expected to rise 10 percent to 15 percent on strong conditions in Brazil. Asian sales are projected to be only slightly higher than last year.

In addition to farm equipment, Deere makes construction and forestry equipment such as backhoes, excavators, riding mowers and leaf blowers, making the company sensitive to movements in the global economy. But Deere predicted that worldwide construction and forestry equipment sales would rise 3 percent this year on higher international sales of construction equipment.

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Finmeccanica Chief Is Arrested in Bribery Case

Italy awoke Tuesday to yet another corporate scandal with political overtones, as Milan prosecutors arrested the head of the state-controlled aerospace company Finmeccanica in an investigation related to the sale of 12 helicopters to India in 2010.

The Finmeccanica chairman and chief executive, Giuseppe Orsi, was taken in for questioning by prosecutors, as was Bruno Spagnolini, head of Finmeccanica’s Augusta Westland helicopter unit. Prosecutors also raided the Augusta Westland corporate offices in Milan.

The investigation is focused on whether company executives violated bribery and corruption laws in seeking the helicopter deal with the Indian military.

Prime Minister Mario Monti said Tuesday that the government — owner of a 30 percent stake in Finmeccanica – was prepared to do whatever necessary to clean up the company, the second-largest industrial group in Italy after Fiat.

“There is a problem with the governance of Finmeccanica at the moment and we will face up to it," Reuters quoted Mr. Monti as saying on RAI television.

Finmeccanica said Tuesday that “the operating activities and ongoing projects of the company will continue as usual.” In addition, the company expressed “support for its chairman and C.E.O., with the hope that clarity is established quickly,” while “reaffirming its confidence in the judges.”

The Indian Defense Ministry said in a statement that in “view of media reports” linking it with Finmeccanica’s Augusta Westland unit in Britain, it “had sought information” from the Italian and British governments, but that “no specific inputs” were received substantiating the allegations. The ministry said it was referring the case to the Central Bureau of Investigation, the Indian agency responsible for investigating corruption cases.

Italian press reports said two others, residents of Switzerland, were being sought by Milan prosecutors on suspicion that they had acted as middlemen.

A spokeswoman for Finmeccanica in London, Clare Roberts, declined to comment beyond the company’s official statement.

Prosecutors could not immediately be reached for comment.

Consob, the Italian stock market regulator, banned short selling of Finmeccanica shares for Tuesday and Wednesday, after the company's shares fell more than 10 percent in early trading.

The news was first reported by the Italian newspaper Corriere della Sera.

With national elections just two weeks away, the Italian establishment has been unnerved recently by a series of high-profile corporate investigations.

In one, Banca Monte dei Paschi di Siena, a Tuscan bank, has acknowledged using secret derivatives deals to mask hundreds of millions of euros in losses.

That investigation has focused attention on the role played by the Bank of Italy and its then-chairman, Mario Draghi, who is now president of the European Central Bank.

It has also given the former prime minister, Silvio Berlusconi, an issue with which to attack his political enemies as he angles for a comeback. The bank is based in Siena, in a part of northern Italy that is a stronghold of the leftist Democratic Party. Mr. Berlusconi, the conservative former prime minister who hopes to be a spoiler in the elections this month, has been trying to lay blame for the scandal at the Democratic Party’s doorstep.

Mr. Draghi asserted last week that the Bank of Italy had “done everything it should” with respect to the bank, adding that much of the criticism was “part of the regular noise that elections produce.”

In another case, Eni, the country’s biggest oil company, said last week that Milan prosecutors had expanded an investigation of alleged corruption at one of its subsidiries, Saipem, to include the parent company and its chief executive, Paolo Scaroni.

In a country that is rarely held up as a technological leader, Finmeccanica’s trendsetting AgustaWestland helicopter division and Alenia Aermacchi aeronautics unit are sources of national pride. Finmeccanica is among the world’s largest aerospace, defense and security companies, employing 70,000 people worldwide and reporting first-half 2012 revenue of about €8 billion, or about $10.7 billion.

Since taking over in May 2011, Mr. Orsi has sought to restore investor confidence by cutting debt and selling off nonstrategic operations, but the restructuring has lagged behind market hopes. On Jan. 18, Standard & Poor’s cut Finmeccanica’s credit rating to junk status and said the outlook was negative, citing the company’s failure to reduce its debt more quickly.

Mr. Orsi’s problems mark just the latest troubling chapter for Finmeccanica. He took over in May 2011 after his predecessor, Pier Francesco Guarguaglini, was himself felled by allegations involving the role of his wife, Marina Grossi, while she was chief executive of Finmeccanica’s Selex unit.

Reporting was contributed by Hari Kumar in New Delhi, Elisabetta Povoledo in Rome and Jack Ewing in Frankfurt.

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Euro in the Spotlight Ahead of Meetings

LONDON — The euro rose on Monday, but its value was vulnerable to political and fiscal uncertainty in the euro zone and growing unease among some European leaders worried about currency’s recent gains.

The Group of 7 nations were considering issuing a statement this week that reaffirmed their commitment to “market-determined” exchange rates in response to heating rhetoric about a currency war, two Group of 20 officials said on Monday.

Some analysts said the euro could edge lower before a meeting of euro zone finance ministers later Monday and a G-20 meeting later in the week, given tensions over whether some countries are deliberately trying to weaken their currencies to improve export competitiveness.

Pierre Moscovici, the French finance minister, said on Monday that euro zone countries need closer cooperation on exchange rate policy and the bloc’s finance ministers would discuss the issue when they meet.

The euro recovered from a session low of $1.3358, which was close to a two-week low, at around $1.3385. Morgan Stanley strategists said the euro could pull back toward $1.3260, its 50-day moving average.

Against the yen, the euro rose 1 percent to 125.39 yen, pulling away from Friday’s one-week low of 123.43, but still some way off the 34-month high of 127.71 yen hit on Feb. 6.

“While the speed of the euro recovery was probably overdone, this correction down is also likely running out of steam,” said Ulrich Leuchtmann, head of foreign exchange research at Commerzbank. “There are however risks with the Italian elections (and) Cyprus and we could see some pullback today” with the finance ministers’ meeting.

Concerns about the terms of a bailout for Cyprus, which will be high on the finance ministers’ agenda, would cap the euro’s gains, analysts said.

The euro sold off last week after Mario Draghi, the European Central Bank president, kept alive expectations of rate cuts and said the bank would monitor the economic impact of the strengthening currency.

The euro had gained around 5.5 percent against the dollar since the beginning of January to its peak of $1.3711 on Feb. 1. Since then. it has shed about 2.5 percent.

Much of Asia was shut for the Lunar New Year holidays, keeping volumes on the lower side.

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Boeing 787 Completes Test Flight

A Boeing 787 test plane flew for more than two hours on Saturday to gather information about the problems with the batteries that led to a worldwide grounding of the new jets more than three weeks ago.

The flight was the first since the Federal Aviation Administration gave Boeing permission on Thursday to conduct in-flight tests. Federal investigators and the company are trying to determine what caused one of the new lithium-ion batteries to catch fire and how to fix the problems.

The plane took off from Boeing Field in Seattle heading mostly east and then looped around to the south before flying back past the airport to the west. It covered about 900 miles and landed at 2:51 p.m. Pacific time.

Marc R. Birtel, a Boeing spokesman, said the flight was conducted to monitor the performance of the plane’s batteries. He said the crew, which included 13 pilots and test personnel, said the flight was uneventful.

He said special equipment let the crew check status messages involving the batteries and their chargers, as well as data about battery temperature and voltage.

FlightAware, an aviation data provider, said the jet reached 36,000 feet. Its speed ranged from 435 to 626 miles per hour.

All 50 of the 787s delivered so far were grounded after a battery on one of the jets caught fire at a Boston airport on Jan. 7 and another made an emergency landing in Japan with smoke coming from the battery.

The new 787s are the most technically advanced commercial airplanes, and Boeing has a lot riding on their success. Half of the planes’ structural parts are made of lightweight carbon composites to save fuel.

Boeing also decided to switch from conventional nickel cadmium batteries to the lighter lithium-ion ones. But they are more volatile, and federal investigators said Thursday that Boeing had underestimated the risks.

The F.A.A. has set strict operating conditions on the test flights. The flights are expected to resume early this week, Mr. Birtel said.

Battery experts have said it could take weeks for Boeing to fix the problems.

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