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Trichet Talks Exit Strategies; Lamy Talks Trade; U.S. Markets Up on Optimism

Aired September 28, 2009 - 14:00:00   ET


MAX FOSTER, CNN INTERNATIONAL ANCHOR: Triple-digit gains, the Dow pushes towards 10,000.

Banning the undeserved bonus, Britain's finance minister promises an end to automatic rewards.

And the head of the WTO tells lawmakers if you really want a global trade deal, now is the time to prove it. Pascal Lamy joins me in just a few moments.

I'm Max Foster, in for Richard Quest, and this is QUEST MEANS BUSINESS.

Good evening to you. Markets in the U.S. and Europe start the week with a bang, making up for a string of losses just last week. Wall Street's gains are broad-based, which -- most sectors pretty much doing well. As you can see, up 1.43, heading towards 10,000 steadily.

And more reassurance for investors, the president of the European Central Bank speaking to CNN says he is urging governments not to reserve course -- reverse course on economic stimulus measures just yet. A Jean- Claude Trichet interview coming up in a couple of moments.

But let's begin on Wall Street and Susan Lisovicz is standing by at the New York Stock Exchange. What's going on out there? Everyone is very good moods?

SUSAN LISOVICZ, CNN FINANCIAL CORRESPONDENT: Very nice moves, indeed, Max. And welcome moves, I might add, because it's a big rebound from what we saw last week. The Dow ended lower in four of five sessions. It was the worst week, actually, we've seen in nearly three months.

Today, you know, it's kind of light trading today. No action on the economic calendar to speak of. We do have two mergers and the rally is holding with less than two hours to go in the session. Check it out for yourself. The Dow is once again inching closer to 10,000, up 1.5 percent at just over 9,800. The Nasdaq is up 2 percent. The broader S&P 500 is 1.75 percent.

But I should mention that these gains come in extremely light volume due to the Yom Kippur holiday. We're seeing trading volume right now just over half a billion. We should be closer to 1 billion right about this stage in the game, or even over it.

Shares of Abbott Labs are moving higher by 3 percent. The company buying the pharmaceutical unit of Belgian Solvay for about $7 billion. Abbott says the move will help it take advantage of emerging markets in Eastern Europe and Asia. And one thing of note about Solvay, it has a small flu vaccine business, which has begun producing a vaccine for the H1N1 virus. So that is very interesting, good timing there.

Another merger helping to boost sentiment, Xerox buying Affiliated Computer Services for nearly $6.5 billion. The copier giant says the deal will triple its revenue and significantly expand its business. Xerox paid a more than 30 percent premium for the outsourcing and IT company. Xerox says the deal is a game-changer. ACS shares right now are flying up 11.5 percent. Shares of Xerox are down by, right now, 18.5 percent.

One other thing to mention, Max, real quickly, is that Tuesday marks the one-year anniversary of the Dow's biggest one-day point loss ever, 777 points. I won't forget that easily. That was when congressional lawmakers rejected the $787 billion bailout plan -- Max.

FOSTER: Yes, Susan, I'm wondering if there is a sense of treading water here, because we've got the new earnings season coming up. And I know you're all going to be poring over the details on that, aren't you? Are all of the investors and analysts of the same view?

LISOVICZ: Well, that's right. I mean, and I think that's one of the reasons why, Max, you know, there is some nervousness in the marketplace, you know, whether it is just a one-week wonder or not. We are on the cusp of a lot of information. We get a lot of reports this week, consumer confidence, consumer spending.

We've had some things on homes. Of course, we have the big jobs report. But earnings are very important too, because one thing we've seen, Max, in the first and second quarters was that the earnings numbers were better than Wall Street's very low expectations. But the revenue growth was abysmal.

And the reason why is because these earnings gains came through massive cost-cutting. So at some point you've got to stop it and you've got to see revenue growth. And that's something that is going to be all the talk in the next few weeks.

FOSTER: We will see, Susan. Thank you so much for that.

Well, stock markets in Europe and Asia were singing from different hymn sheets as the new week got under way in that region. Frankfurt's DAX showed strong gains after Angela Merkel won a new term as chancellor in Germany's general election there. Markets in London and Paris climbed back strongly after losing ground last week as well.

But it was a different picture in Asia. Hong Kong's Hang Seng Index was down more than 2 percent, with financials and telecom stocks falling the most. And Tokyo's Nikkei 225 lost around 2.5 percent. A strong yen has come -- has some investors worried about the outlook for Japanese exports there. And markets in South Korea and Australia also closed lower.

Now the president of the European Central Bank says he wants more global cooperation. Jean-Claude Trichet is calling for the Group of 20 rich nations to work together to tackle economic imbalances. He spoke to CNN's Jim Boulden about their recent meeting in Pittsburgh.


JEAN-CLAUDE TRICHET, PRESIDENT, EUROPEAN CENTRAL BANK: I think that the accord on the methodology, the accord on the main avenues that we have to work upon very, very actively, is very important. And it was the case, of course.

I was also pleased to see that there was the mention that the preparation of the exit strategies was part of the improving confidence today, because, of course, it is something which we have to be fully aware of.

And I was also pleased to see that the cooperative effort that is being done in particular in Basel, through the Basel committee, the work of the financial stability board, were backed, if I may. And this is good, because it permits to continue the work very, very actively.

JIM BOULDEN, CNN INTERNATIONAL CORRESPONDENT: You mentioned the exit strategy. Obviously that's what a lot of people want to know, when will the banks -- the central banks and when will government start to take their foot off the pedal? And if they do it too soon, then we could see a double dip recession.

What is your guess on when you're going to take the foot off the pedal here in Europe?

TRICHET: As you know, we said, and I can say on behalf of the governing council of the ECB, that we consider that it is not the time to start the exit. And that it is not the time to say that the crisis is over. But it is absolutely clear that we will have to continue to deliver price stability to solidly anchor expectations, to reassure fully our fellow citizens on the fact that they can count on us to deliver price stability.

And so at the time we will have to do, and everybody knows that we have an exit strategy, which is good. To oppose exit strategy and recovery is plain wrong, in my opinion, because if you have credible exit strategy that you would implement when time comes, then you reinforce confidence, and by reinforcing confidence, you have the recovery.

BOULDEN: Do you think there should be coordinated exit strategy or do you think Europe might go alone and might do it first?

TRICHET: (INAUDIBLE) the central banks, we have a unity of purpose, a very, very important unity of purpose. We want to deliver price stability. Of course, we are in a different universe. We have different economies, different flexibility of the economies, different shocks to cope with, and different expectations -- inflation expectations.

So we do not do the same because we are in different situations. But the unity of purpose is really strong.

BOULDEN: Analysts think that the European Commission -- sorry, the European Central Bank, will raise rates before we see the rates raised here in the U.K. or in the U.S. I know you won't tell me when, but do you think that's a likelihood that ECB will move first when that happens?

TRICHET: You know that we never pre-commit ourselves. And I would certainly not comment on that question. We will do -- but I trust that it will be done also on the other side of the Atlantic, on the other side of the Channel. We will do what is necessary to be credible in delivering price stability.

If we did not do that, whether it would be in the Euro area or everywhere else in the world, including on the other side of the Atlantic, it would not help, because it would un-anchor (ph) inflation expectations. The inflation expectations are priced in the medium and long term interest rates.

BOULDEN: And of course, we see a very strong euro and the euro could go stronger when that happens, when the ECB raises rates. Are you concerned how strong the euro is, that it may not help recovery here as much as it would.

TRICHET: You know -- you know what I say to such a question. I say it is extremely important that we can have a strong dollar. The United States of America, by the voice of Ben Bernanke, of Tim Geithner, of the president -- President Obama said that a strong dollar is in the interests of the United States of America.

I trust that. And I trust it is true.


FOSTER: Well, we've have more from Jean-Claude Trichet later on QUEST MEANS BUSINESS.

But right now, G-20 leaders are getting another talking to today. Pascal Lamy, the head of the World Trade Organization, is increasing the pressure for them to stop just talking about a global trade agreement, and start doing something about it.

But amid a new spat between the U.S. and China, will his appeal fall on deaf ears? Well, Pascal Lamy joins me now.

Thank you so much for joining us. A lot of people suggesting that the G-20 is all talk. And some of the comments you've made recently back that view. Do you think they're all talk and no action?

PASCAL LAMY, DIRECTOR-GENERAL, WORLD TRADE ORGANIZATION: Well, what I'm telling them -- what I told them in Pittsburgh last week was that talking about keeping trade open, talking about opening trade was great. And that's certainly the right direction. But it has to be followed up by concrete actions.

And if we take the example of this Doha Round, this big trade negotiation which we started eight years ago, we've done 80 percent of the job. There remains 20 percent to be done. And what we need is these big bosses to instruct their negotiators to close a deal.

This is what we need in the present circumstances and this is what developing countries for whom exiting the crisis has a lot to do with trade, because they usually don't have the zillions of dollars for bailout or for cars-buying, they need trade to be open.

So it's what we need for the moment, and I think the time has come now to wrap up this deal, which -- most of which is now on the table.

FOSTER: In the meantime, we have a situation where America slaps on very large tariffs on Chinese imported tires. A classic example, some people would say, the growing trend towards protectionism. And that is completely in the opposite direction of the way you want America and other countries to go.

LAMY: You are correct. There has been, as could be expected in times of downturn, an increase of what we call in our jargon, trade defense mechanisms, anti-dumping safeguards, countervailing duties.

Now these tools are available to our members. There are within WTO disciplines a number of margins of flexibilities which they are, as could be expected, using more in bad times than in good times.

Now whether in this specific case the conditions for using these tools -- which are disciplined by WTO, whether or not is not for me to appreciate. If China believes that U.S. did it wrong, there is a litigation process in WTO that will adjudicate who is right and who is wrong.

FOSTER: OK. Well, just answer this as quickly as possible for me if you can. How much more within this flexibility you're talking about, can tariffs rise around the world within the current rules? It's double, isn't it?

LAMY: Within the current.

FOSTER: Tariffs could double.

LAMY: Within the current rules -- that's absolutely correct. Within the current rules.

FOSTER: Which is frightening.

LAMY: . tariffs could double, which is why, which is why we need to reduce this space, what we call in our jargon, this water (ph), and go further, which is cutting existing tariffs.

Now you're right. This risk is there. And what we are trying, together with the G-20 leaders and with other WTO members, is to contain this. For the moment, for the moment, there has been no high intensity protectionism, no tsunami, no tit-for-tat trade wars.

But we have to remain very vigilant, not least (ph) because we all know that the jobs market will not improve before.


LAMY: . some time ahead. And that's where the risk lies.

FOSTER: Pascal Lamy, thank you so much for joining us on the program.

Now Germans hand Chancellor Angela Merkel a second term after an election dominated by the economy.


ANGELA MERKEL, GERMAN CHANCELLOR (through translator): But I also want to tell the people of this country, it was and it is my understanding that I want to be a chancellor of all Germans so that our country fares better, especially in this crisis.


FOSTER: We're going to Berlin in just a moment to hear about the economic challenges for her new government. Stay with us.


FOSTER: We're back. I'm Max Foster in London. Let's get the headlines for you. Fionnuala is in the news room -- Fionnuala.


Russia is urging calm in the political dust-up over Iran's test-firing of long- and short-range missiles. French officials call the tests provocative and destabilizing. The missiles fired Monday have a range of up to 2,000 kilometers, putting Israel, parts of Europe, and Russia within range. Iran insists the tests were planned and aren't connected to talks later this week on regional peace and stability.

Weekend flooding in the Philippines has killed at least 140 people. Tropical Storm Ketsana churned across the country's north on Saturday, dumping a month's worth of rain in just six hours. The homes of nearly half a million people were inundated, and more bad weather may be on the way. Another storm is forming east of the Philippines and could roar ashore as early as Friday.

Roman Polanski's lawyer says the film director will fight attempts to extradite him to the United States. Polanski is in provisional detention in Switzerland. He was arrested Saturday in Zurich on a U.S. warrant for having sex in 1977 with a 13-year-old girl. Polanski pleaded guilty at the time, but fled to France before he could be sentenced. Whether the 76- year-old will be sent to the U.S. depends on the outcome of judicial proceedings in Switzerland.

Victorious at the polls, German Chancellor Angela Merkel is moving quickly to establish a new government with the pro-business Free Democrats. She warns of challenging economic times ahead, but is optimistic about promised tax cuts for the middle class.

And those are the headlines. Join me for more on all of these stories tonight on "WORLD ONE," that's at 8:30 p.m. in London time, 9:30 p.m. in Central Europe.

In the meantime, back to you, Max, in the studio.

FOSTER: Fionnuala, thank you so much.

Now in Germany the attention now turns to who will be in the new government. Ms. Merkel says she wants a coalition in place within weeks. CNN's Frederik Pleitgen is in Berlin.

Is that realistic, Fred?

FREDERIK PLEITGEN, CNN INTERNATIONAL CORRESPONDENT: Well, it certainly is -- seems to be realistic. One thing that she said today at a press conference is she hopes that that coalition agreement possibly with the Liberal Democratic FDP party, could be hammered out by early November. So she does seem to think that it could be possible to get that done very, very quickly.

And certainly these two sides seem to be very fairly close as the issues are concerned. And of course, we're talking a lot about business these days. And the economy, of course, is issue number one here in Germany.

And at that rate, both of them, both Angela Merkel and the Liberal Democrats said before the election that after the election they would cut taxes if, indeed, they are elected. So certainly there is a platform there.

They seem to be fairly close to each other on a lot of the issues. Now it comes down to these negotiations and both sides have said that they are fairly confident they could have a coalition agreement in place very, very quickly -- Max.

FOSTER: Have we got any indication about how economic business policy will change under this new coalition yet?

PLEITGEN: Well, they could potentially change radically. You know, the interesting thing about this election is that today we have the same chancellor as yesterday, however, the potential coalition that could come out of this could be very, very different that what we had before. And certainly its economic policies could be very different as well.

You saw what I just said about tax breaks. Both of them want to implement tax breaks. Now the big question is, how quickly and how deep can those tax breaks be? Certainly Angela Merkel says she wants some tax breaks for the middle class, as Fionnuala just said a minute ago.

The Liberal Democrats want much, much deeper-ranging tax cuts, and they want them much faster. And there is not many people here in Berlin who believe that that is really sustainable with the public finances here in Germany as they are.

But all of this, of course, extends to further areas of the German economy. The Liberal Democrats want far-ranging deregulation. They want much smaller government. And it could also see them downsizing social benefits in this country.

And of course, those are very, very important. The main issue I think this year and the coming year will be the employment figures and whether or not this new government that it looks like will be formed, will be able to keep workers here employed and will be able to keep the unemployment numbers as low as possible -- Max.

FOSTER: OK. Fred, thank you for joining us from Berlin.

Well, the results from there in Germany suggest voters trusted Angela Merkel, more than any of her rivals, to steer Germany into calmer economic waters. But what of the challenges ahead for her and her new center-right government?

Well, I asked Hans Redeker, head of global forex strategy at BNP Paribas.


HANS REDEKER, HEAD OF FOREX STRATEGY, BNP PARIBAS: What we need to sort out is definitely on the health insurance, the impact in terms of (INAUDIBLE) health sector reform on the budget. We need to talk about the labor market reform.

What this government is very likely to be is, is going to be much more market-oriented. It's going to be a government which is going to support the corporate sector, and of course, the challenge is then going to be how to bind in the labor unions in this process.

The risk that this country is facing on the back of that, if you will, have division in two blocks. And that would be the liberal, market- oriented block, and again, that -- the employees, the labor unions (INAUDIBLE).

FOSTER: And the heart of that debate is the minimum wage. And they're going to have to have a look -- few arguments, aren't they, within this coalition, to try to sort this key issue out? Because it's highly contentious right now.

Just give us the background to that and how they're going to move forward from it.

REDEKER: Well, I assume that the existing agreement will not be touched. So what had been agreed on under the old coalition government is not going to be discussed again. But then when it comes to newer minimum wage agreements, (INAUDIBLE) that the FDP and the CDU both do not have the appetite for that.

And I guess that is going to be a very important signal to the corporate sector in Germany because the corporate sector had been moaning about this minimum wage agreement because it was reducing their flexibility to some degree.

FOSTER: That's going to be a huge problem for the labor unions, who, you say, they need to have on-side though.

REDEKER: That is true. The labor unions will not like this government. And what -- we need to see what -- and one of the advantages of the past government was that there had been the labor unions interconnections within the SPD made sure that there was always some sort of agreement.

And when you look at what had been the main achievement of the old government, it had been the pension reform. And with this new government with the CDU-FDP, I guess that it's going to be very, very difficult to get the labor unions integrated and to have a dialogue with them.

The risk is that we divide in two (ph) blocks.

FOSTER: So the headline here, is this new government more friendly to business than the old one, or less friendly to business?

REDEKER: Well, the new one is definitely going to be more friendly to business. Both parties are for the (INAUDIBLE) the way out of the fiscal issue is by growth and that you have to create the pie (ph) before you distribute it. And in this sense it is going to be a very pro-business government.


FOSTER: Hans Redeker there, speaking to me earlier.

Well, how do you measure recovery from an economic meltdown? Well, in some places, you count it one job at a time. We'll take you to a place where they say the economic rebound is passing them by.


FOSTER: Now it isn't official yet, but if you ask Ben Bernanke, the head of the U.S. Federal Reserve, he will tell you the U.S. recession is probably over. That doesn't mean the whole country is enjoying the revival though, as John King found out when he visited a rural corner of the U.S. Deep South.


JOHN KING, CNN CHIEF NATIONAL CORRESPONDENT (voice-over): Jefferson County hugs the mighty Mississippi. It is rural, remote, and dotted with tiny churches. Fayette is the county seat. Its monument to Confederate soldiers, a tribute to the past that seems very much at odds with this community's present. Nine in 10 residents are black, the highest percentage of African-Americans of any county in the United States.

The shuttered store fronts are a sign of a less desirable distinction, 18.6 percent unemployment, the highest jobless rate of Mississippi's 82 counties.

ANGELA SHELVY, UNEMPLOYED SINGLE MOTHER OF THREE: It has not always been this bleak. It has not always been this way.

KING: Angela Shelvy has been looking for six months.

(on camera): And there's nothing out there.

SHELVY: Nothing.

KING (voice-over): Shelvy is a single mother of three who quit a job as a teacher's assistant to join a union that provides workers for nuclear power plants. Twice the pay, but the work was sometimes as far away as Arizona. And while her parents took care of the children, the strain became too much, especially for her 4-year-old.

SHELVY: I'm like, you have granny. He's like, no, I don't want granny, I want you to hold me. And I just decided I couldn't go back.

KING: But since March, no luck, despite searching as far as 90 minutes away.

SHELVY: And they're not hiring. They're either saying they're not hiring or I'm not qualified, I don't have enough years of experience, we'll call you later, get back with us. And it has been stressful for me.

BRENDA BUCK, JEFFERSON COUNTY, MISS., ADMINISTRATOR: It becomes very depressing to some people who are trying to struggle. And it is a struggle day to day.

KING: Finding jobs is County Administrator Brenda Buck's obsession. She knows the struggle firsthand. With no jobs around here, her husband works, at the moment, 900 miles away in Indiana.

BUCK: Right now he's employed with a company that has been going into a lot of the car plants doing re-fabrications. We have four kids, but he's here, basically, maybe two months out of the year.

KING: Most of Buck's time with county supervisors is spent on economic development. No luck, so far, winning federal stimulus money to improve the roads.

This work site is also part of the county's Washington wish list, at the moment, 10 employees each making $100 a day, cutting and packaging firewood.

General Manager Paul Southerland says the noise often attracts others down on their luck.

PAUL SOUTHERLAND, GENERAL MANAGER, RELIABLE MAT: I see a lot of people come by, you know, looking for jobs there.

KING: Southerland's main product is these giant wood mats used in oil and gas fields. Orders are suddenly hard to come by.

SOUTHERLAND: Mississippi is always last to feel the effects of a recession, and most of the time it's always the last to pick back up. It hit us about June. It really hit us hard, too.

KING: Still, Southerland hopes to expand if the county secures a federal grant to buy a bigger saw mill.

SOUTHERLAND: You know, that's what it's all about. If we have that saw mill, we would be able to add eight or 10 more folks.

KING: Eight or 10 jobs might not sound like much, but in a place so remote and so poor, progress is measured a little differently.

BUCK: If you can just imagine eight men making $10 to $11 an hour, can actually come home and be at home at night with their families, the impact that it would make, not just from the economical standpoint, but from the social standpoint of that father's presence there in that household and not having to travel so far, I mean, you have a double whammy. It's a win-win situation for any family.

KING: John King, CNN, Fayette, Mississippi.


FOSTER: Well, at the other end of the scale, fatcats beware, life may never be the same again. Britain's finance minister says the party is over for greedy bankers. The crackdown on big bonuses, in just a minute.


FOSTER: Welcome back.

I'm Max Foster in London in for Richard Quest, and this is QUEST MEANS BUSINESS here on CNN.

Well, the past year has turned bankers into public enemy number one. They're blamed for pushing the economy into recession and then rewarding themselves with fat bonuses. But that cash has been building for some time. And now Britain's finance minister, Alistair Darling, says he's going to outlaw rewards for taking excessive risks.


ALISTAIR DARLING, U.K. FINANCE MINISTER: We won't allow greed and recklessness ever again to endanger the full global economy and the lives of millions of people.


FOSTER: Now, Darling says he aims to ban what he called automatic bonuses and expects to introduce legislation putting that into effect in the next few weeks. He told the annual conference of the Labor Party, the ruling Labor Party, a reckless culture in the banking industry had put the pursuit of short-term profits ahead of long-term success. New laws would bar top management at banks from taking immediate payoffs, with only bonuses in future to be paid over a period of years. They would allow them to be clawed back if long-term performance goes sour.

The legislation will be in line with an agreement between the leaders of the G20. It's a sentiment echoed by the president of the European Central Bank, Jean-Claude Trichet.

Let's hear more of his conversation now with Jim Boulden.


TRICHET: First of all, I think that the principles that have been designed by the Frankfurt Stability Forum -- the Frankfurt Stability Board now -- are good and I'm happy that they have been confirmed by the G20.

Of course, what is particularly important for central banks and for supervisors, I would say, is that you have to avoid all kinds of incentives to take absurd risks, as has been the case in the past, because then it's absurd from a moral standpoint. It's absurd in the eyes of -- of our, I would say, democratic functioning. It's also totally absurd as regards the functioning of global finance and the financial sphere as a whole.

So I am very happy that what had been elaborated, what had been designed, again, by the Frankfurt Stability Board, has been approved.

BOULDEN: It's hard to gauge absurd (ph), though.

Do you think there's going to be rules and laws and some specifics in here?

Or is it just guidelines and that the banks would be able to get around those guidelines?

TRICHET: It is guidelines and principles, but which will have to be monitored by the supervisory authorities and the supervisory authorities have the capacity to, I would say, be very, very keen on having effective implementation.

So I think that these are not only words and it wouldn't be accepted if it were only words, I think.

BOULDEN: You said before the European Parliament today that there are no scapegoats. You don't want to attack or pick on anybody, because everybody was to blame. But still, everyone seemed to be going after the bankers and their -- their bonuses and their pay packets.

Do you think that's unfair, that everyone seemed to be focusing on that issue as part of this whole global economic crisis?

TRICHET: Again, at a time there was a focus on the rating agencies that were responsible for everything. Then it was the investment banks that were responsible for absolutely all errors. After -- after that, it could be, you know, any part and parcel -- it was the accounting boards, it was the persicicality (ph) that you have in any kind of, you know, rules, including the financials.

I think, again, what is very important is to see that it is the whole system which proved extremely fragile. It is the whole system that has to be fixed. And again, all part and parcel of this system should be improved -- and, I would say, significantly improved, because we -- we never reflected on the global finance from the standpoint of resilience, from the standpoint of combating fragility. And it is -- it is what we are going to do now.


FOSTER: Well, that was the president of the European Central Bank, Jean-Claude Trichet, speaking to Jim Boulden.

Well, it seems like everyone is pointing their finger at the bankers right now, but what do they make of it all?

I spoke to Ralph Silva. He's senior research analyst at TowerGroup. As an industry insider, I asked him what he thought of the bonus backlash.


RALPH SILVA, SENIOR RESEARCH ANALYST, TOWERGROUP: I think there's a big misconception into -- in terms of the financial services industry. I think many leaders have called it casino banking as an example. And, quite frankly, that's not true. It's -- they don't play in the casinos, they own the casinos. The people taking the risks are, in fact, not the banks themselves, but the banks' customers, people like you and I.

And I think some of the things that Else Drum (ph) has been saying about this, he's basically saying that customers aren't going to be able to take that risk. And that's a very dangerous road to go down.

FOSTER: But he's also representing customers in the sense that this huge problem we've got right now is caused by the financial sector, which he will accept. So there's no sympathy and there is, actually, a lot support for anything which cut -- cuts back on particularly bonuses, which are seen as greedy right now.

SILVA: Oh, absolutely. And bonuses need to change, there's no question. And banks have changed them. By the way, just so that you know that, in the past 18 months, no contract has been signed that guarantees a bonus. That's gone. That's -- that's no longer coming back.

FOSTER: So the system has sorted itself out anyway?

SILVA: To a certain extent. There's still about 5 percent of the people out there that get a bonus just for waking up in the morning and that's certainly wrong. But 95 percent of the people get a bonus because of the activities they do on behalf of their customers.

In essence, it's a commission. You sell more shoes, you make more money. They make more money for their customers, they make more money. And that's fair.

FOSTER: One of the huge problems that people had with the bonus system that developed was that it was quite short-term. So you would get a bonus, really, whether you did a good job or not. What Alistair Darling tried to do is make it more long-term.

And that's to be supported, isn't it?

SILVA: It certainly is. And the banking industry supports that 100 percent. There is no question about that. But he also only refers to the bonus payout.

And one of the problems that I have with this is let's say if somebody would get a $12 million bonus, what's their stopping the banks from paying them a million dollars a month instead?

And the reality is, is he's just dealing with bonuses, not the full compensation plan, and that's a real problem.

FOSTER: So it's fundamentally flawed because you're just going to whack up -- well, the banks are just going to whack up the base salary and ignore the bonuses?

SILVA: Nobody knows about loopholes better than banks. And they will find loopholes to make sure they pay. There's this misconception that banks pay bonuses because they want to. Banks are the stingiest organizations in the world. If they can get away with paying $5 an hour, they would try to get away with $4.95. And that's the way of the banks.

The banks are paying the people the bare minimum they have to to keep the people. So they're going to have to continue to pay them to keep them. And whichever way they pay them, they're going to have to keep doing it.

FOSTER: And the next fixture of our argument is that a lot of them are based here in London, which is Europe's financial capital, because a lot of the rules and the systems in place here -- well, the lifestyle, actually, suits a lot of bankers.

Do you think there's any chance that those could damage London's reputation as a financial hub and basically businesses will go elsewhere because they can get bonuses elsewhere?

SILVA: My initial reaction is yes, except for one thing, is that Angela Merkel has also said the same thing, Sarkozy has also said the same thing.


SILVA: There's just very few places in Europe to go. You'd have to go east. You'd have to go to the Middle East or Asia...

FOSTER: Would that wash?

SILVA: And, quite frankly, a lot of people would rather have the lifestyle in this area.


FOSTER: Ralph Silva of the TowerGroup, speaking to me a little earlier on.

Now, we go back to business school with the Biz Clinic. After the break here on QUEST MEANS BUSINESS, we'll hear about those liquidity tripping markets.

But what exactly does that mean?

We'll explain the logistics of liquidity, after this.


FOSTER: The markets around the globe have rallied sharply over the past six months, coming back from their lowest levels in several years. One term you hear of explanation for all of the gains is that it's -- it's liquidity driven, it's a liquidity driven rally.

But what exactly is liquidity?

Well, Maggie Lake joins us in New York to give us a lesson in our weekly Biz Clinic segment. It's about time, too. We keep hearing this term.

MAGGIE LAKE, CNN CORRESPONDENT: It's true. In fact, I've heard it more over the last year, Max, than I think the entire time I've been reporting on -- on finance and the economy. Central banks around the world have been pumping billions of dollars into financial markets -- measures that may say have helped us begin a discussion about the prospect of a global recovery.

So, as part of this week's Biz Clinic, I took a dive into the definition of that word we keep hearing about, liquidity.


LAKE (voice-over): It is one of the most familiar sights on Earth -- water.

(on camera): Even in a concrete jungle like New York, water is everywhere. But there's another kind of liquidity that's harder to see, but critical for modern life -- financial liquidity.

ENRIQUE ALVAREZ, IDEAGLOBAL: Liquidity is important for the individual investor, for example, that may hold positions in different financial assets. What liquidity means for that individual investor is that he's holding an asset that is easily tradable. That is the essence of liquidity.


LAKE: Cash is the most liquid asset of all because it loses little, if any, value when you sell it. Everything after that -- bonds, stocks, real estate -- are judged by how easily they can be converted back into cash.

(on camera): Shares of large, multinational companies traded on major exchanges like this one very liquid.

UNIDENTIFIED MALE: Thank you very much, indeed.

LAKE (voice-over): A rare work of art auctioned off once every few decades, not so liquid. Cash may be king in the financial world, but it has to move around to be useful. When the financial types are wide open, a steady flow of cash courses through the economy. People can borrow and buy things. Companies invest. Deals get done.

UNIDENTIFIED MALE: Look at the money.

LAKE: When the pipes break down, that liquidity, or money flow, freezes up. Banks are reluctant to lend. Goods and services no longer move easily through cities and across borders. That's what happened last year, during the height of the financial crisis.

To get the gears of the world economy moving, central bankers turned on the printing presses and flooded the system with money. But just like any plumbing system, too much liquidity can cause problems.

ALVAREZ: One of the essences of this is when there's too much money hanging around that starts chasing too few goods -- and this is one of the primary concerns ahead for the Federal Reserve and one of the key issues -- a crucial issue in the mind of investors has to do with inflation. Too much money chasing too few goods means there's an instantaneous price or expectation of price rises over time. And that's why the Fed will have to find the correct inflection point in which to start decreasing the amount of liquidity so we don't have this inflation phenomenon take hold.

LAKE: It's a tricky task. Too little liquidity can be ruinous. Too much of it can create a nasty hangover. The major task for policymakers is to find just the right mix in the years ahead.



LAKE: We hope it will make us free.

So, Max, the reason sort of I think it's important for people to understand what it means in the context of what's happening right now, the idea that it's money flow, is I think a lot of people sitting at home see this huge stock market rally and think wow! the economy must be getting so much better when actually a lot of people say it's these flows of money through switching around the world that are pouring back into equities.

So maybe not so much of the conviction that things have actually turned the corner, but a lot of people who are sitting in cash sort of getting back into equities as they traditionally are. A little bit of a difference, but it's an important one to be aware of.

FOSTER: So people keep talking about it as a positive, don't they, all this liquidity or this cash that's swimming around -- we want cash, don't we, particularly at the moment?

But as you're saying, it's making the ups and downs worse in the market?

LAKE: It -- I don't know that it's making it worse, but I think that the -- there's an expression. In fact, it's all over the pages of the paper here. There's a debate going on now. There are a lot of money managers that feel that -- that things are actually not great in the economy, that this recovery is temporary, that there are big structural problems that haven't been fixed. They're actually very pessimistic but they're getting killed because every time they try to sell equities, all of this other money sort of moving around and flowing in is sort of -- it -- it's squashing them.

So, in fact, today you have the stock market up triple digits, but nobody can really understand why. They don't think it's justified by some of the underlying fundamentals. So you might think of it as sort of hot money or fast money that can flow the other way really quickly, as opposed to a longer-term, very convicted, committed money.

So a little -- that's the sort of distinction I think some of us need to be a little aware of. It's not that it's positive or negative, it's just that it's moving quickly and it could move out as quickly as it's moving in.

FOSTER: Maggie, thank you so much. Really, really useful stuff.

Now, just a reminder, you can check in with the Biz Clinic every Monday at this time here on QUEST MEANS BUSINESS. You can tune into that at the time seen on your screen right there.

Now, a lot of tropical activity in the Southeast Asian region and heavy flooding, also, in the Philippines. We're on top of this for you.

Guillermo is at the Weather Center.

What's the latest on that -- Guillermo?

GUILLERMO ARDUINO, CNN METEOROLOGIST: Well, it's -- according to the forecast, it's pretty much understandable what's going on. And it seems that all the forecasts are in agreement right now where -- with what we can expect.

We have to go back a little bit and see what was going on, especially in Vietnam. Of course, I'll talk about the Philippines in a second, because we got rain over the weekend. We got rain on Friday, as well. And now we have the proximity of this typhoon. It is the one that went through the Philippines and killed over 140 people, as we've been reporting. Now it's making landfall very soon, in hours -- only hours -- in parts of Vietnam.

So you have the path here, the before, the current and the future path. But we need to look at the terrain, as well. So that's something else that we're doing in here.

When we have a low lying area and on top of that we have rivers on the coast, like you see over here, for instance, going through towns on the way or some other towns over here with the same situation. You see the mouth of the river over here. Imagine a wall of water coming from the ocean or from the sea pushing that wall of water into the river.

So it's going to flood internal areas of Vietnam, as well.

So not only are we dealing with the cyclone itself, but with what it brings along with it. So the -- because of the proximity to the forecast or to the landfall period, because of that proximity, all the agreement -- all the models are in agreement so we have no doubt about where it's going to make landfall.

On top of that, we're looking at another system, Tropical Storm 19, that has entered -- intensifying very quickly, too. That is going to pretty much this general area -- the same area.

Now, it is not, according to what we gather right now, going to make landfall in the Philippines. But because of the proximity and because of the fact that we still have two or three days to see what's going to happen, we have to keep an eye on this because it's too close for comfort.

And we're not done yet. We have another one behind, tropical depression 18, pretty much taking the (INAUDIBLE) the general di -- the same general direction. And we'll have to see what happens with these two low systems and their interaction with each other, because one may be more prominent than the other or one may be misleading us in terms of what's going to happen, because of a lack of information coming from there.

So we'll see what happens. I'll let you know.

In the meantime, nice in England; cool, though, I must say. The rain persists in Scotland. You see London has in the forecast some clouds moving into the area.

But what's going to happen in the north?

Temperatures are going to go down big time -- not in London, but look at what's going on in Scandinavia and the northern parts of Europe. Because of the passing of this front, we see autumn-like or even winter like, for other areas, conditions big time that are kicking into the area.

In the south, in the meantime, it remains OK. But we are going to see some stormy weather here into Southern France and into parts of the Balearics and southern parts of Spain and Italy, as well. So the same pattern in Italy. We see now the arrival of bad weather into Spain.

Dublin with rain showers; Amsterdam, rain showers, too, but we're not talking about delays because of weather; Copenhagen, winds; Vienna, wind; and Barcelona, more storms.

We'll see you after the break.

Stay with CNN.


FOSTER: The outsourcing sector may be synonymous with call centers in India, but some industry giants are now turning to Egypt for its cheap, abundant and educated workforce.

CNN's "MARKETPLACE MIDDLE EAST" heads to one of Cairo's first call centers, where business is so good, they're looking at setting up shop in the U.S.

Ben Wedeman reports.


UNIDENTIFIED FEMALE: Yes, that's great. That's great.

BEN WEDEMAN, CNN SENIOR INTERNATIONAL CORRESPONDENT (voice-over): English, Greek, Spanish, Portuguese, French, Italian, Hebrew, Arabic -- it's a veritable Tower of Babel at Xceed, Egypt's first and largest outsourcing company.

India pioneered this sector, but Xceed chairman and CEO, Adel Danish, is confident Egypt can carve out a special niche, capitalizing on its location, state-of-the-art telecommunications and the country's polyglot potential.

ADEL DANISH, CHAIRMAN & CEO, XCEED: So that's the -- the very special thing about the pool of talent here is that multi-lingual capability. And most of the large companies, they prefer to have in one destination where they can handle many languages instead of going to different places.

WEDEMAN: Xceed's clients include industry giants Microsoft, Oracle and Sisco. Until the current economic slump, Xceed's business grew 50 percent a year since its founding in 2001 and plans are to continue expanding.

Here's an interesting twist -- taking advantage of the downturn in the American economy, this Egyptian company is seriously studying the possibility of opening a call center in the United States.

In this business, what goes around comes around.

DANISH: The location is not yet decided, but we are extremely excited about this idea. We think, sincerely, we think that we can bring lots of jobs back from India or the Philippines or maybe from Egypt back to the U.S.

WEDEMAN: This operation, based in the high tech Smart Village outside Cairo, works around the clock with a staff of 2,000 mostly young university graduates, many of whom are amazed at how, over the phone, few people can even guess where they're speaking from.

NERMEEN BILAL, SPANISH CALL TEAM, XCEED: They never complain about my accent. They kind of -- it's almost native. I can't say it's native, but it's almost native. I know I've never been to Spain, but I think that the Egyptians or Arabs in general have the ability to -- to speak foreign languages easily and -- and they can learn the accent really fast.

WEDEMAN: The Egyptian Hebrew speakers face a special challenge -- keeping business and politics strictly separated. In fact, they sound like they're from Tel Aviv, not Cairo, modifying their names to avoid curiosity. Mounir, the Hebrew team leader, uses the nickname Muni (ph).

MOUNIR MAHMOUD, HEBREW TEAM LEADER, XCEED: We think that's -- that there is no need to -- to create a situation of asking about clear, obvious Islamic or Christian (INAUDIBLE) because there's a concentration in some of the calls.

WEDEMAN: Calls that are coming into this Tower of Babel that keeps on growing.



FOSTER: And we'll be back in just a moment with an update on that apparent rally on Wall Street today.



Let's have a look at those U.S. markets. It's been a pretty interesting day so far. As you can see, the markets are up. We're not anywhere near the 10000 mark quite yet, but up 137 -- a pretty broad-based rally. But as Susan was telling us earlier, the volumes weren't huge, so it's not the full picture there -- not a huge amount of deals going down.

We're also going to recap the markets elsewhere. Stock markets in Europe and Asia were singing from different hymn sheets as the new week got underway. This and the ocean Frankfurt (INAUDIBLE) the Dax showed strong gains after Angela Merkel won a new term as chancellor in Germany's general election.

Markets in London and Paris climbed back strongly after losing ground last week. We reported on that. But it was a different picture in Asia. Hong Kong's Hang Seng Index was down more than 2 percent, with financials and telecom stocks falling the most there. So market specific or industry specific, at least in Tokyo's D.K. (ph), 225 each last round -- 2.5 percent. A strong yen has some investors worried there about the outlook for -- for Japanese exports.

Again, the markets in South Korea and Australia also closed lower.

So a mixed bag across the world today in terms of the markets.


I'm Max Foster in London in for Richard Quest, of course.

Christiane Amanpour is next after your headlines from the I. Desk.