In his once-yearly news conference, Wen blamed Washington for the recent deterioration in what he called China's most important foreign relationship, even suggesting that U.S. efforts to boost its exports by weakening the dollar amounted to "a kind of trade protectionism."

In April, the U.S. Treasury Department will be required by law to declare whether China manipulates its currency - an announcement that could fuel calls in Congress for retaliatory measures against the nation.

A growing group of U.S. lawmakers are proposing stiffer tariffs on Chinese goods to offset an unfair advantage they say arises from the undervalued yuan.

"Chinese officials are alone in their refusal to acknowledge that the yuan is undervalued," said Senator Charles Grassley, R-IA, the minority leader on the Senate Finance Committee. "If they choose to stick their heads in the sand, we'll have to find another way to address this problem because it's been going on for far too long."

Wen said China needs to be careful about changing crisis policies, which have included pegging the yuan at about 6.83 per dollar since July 2008 as the global financial crisis took hold.

Western countries, including the United States and Europe - and even China's Asian neighbors - insist that its currency policy has left the yuan seriously undervalued and creates an unfair advantage in trade at a time when many other economies are struggling.

The yuan rose 21% against the dollar between July 2005 and July 2008, before the government stepped in to protect exporters. The dollar and the yuan have strengthened against the euro this year, pushing up the cost of Chinese exports to the European Union, the Red Dragon's biggest market.

U.S. President Barack Obama said last week that he wanted to double U.S. exports over the next five years and challenged China to adopt a "market-oriented exchange rate" for its currency.

However, Wen said China will keep the yuan "basically stable" and maintain a moderately loose monetary policy and a proactive fiscal stance. He said it's "essential" for the timing of any policy changes to be "appropriate."

"This is a sign that there will be no one-off revaluation in coming months," Lu Ting, an economist at Bank of America Corp's (NYSE: BAC) Merrill Lynch unit in Hong Kong told Bloomberg. "China's top policy makers do have their own currency reform plans but coercion from other countries will do disservice to this cause."

Wen also warned the U.S. against efforts to boost its exports by weakening the dollar as it would hurt the value of Chinese-held assets. Treasury Department figures show China's holdings of Treasury securities dropped for a second month in December to $894.8 billion. Only Japan holds more Treasuries.

America should "take concrete steps to reassure investors" spooked by concerns surrounding a growing U.S. fiscal deficit, he said.

The U.S. currency has climbed about 7% from last year's Nov. 25 low, according to the Dollar Index, a six- currency gauge of the greenback's value.

China has waged an ongoing campaign against tariffs imposed by the United States that began in September when Obama imposed additional duties on imports of Chinese tires. Since then Beijing and Washington have traded shots over exports of tires, chickens, steel, nylon, autos, paper and salt.

China posted a $198 billion trade surplus with the rest of the world last year, with exports to the U.S. outpacing imports by more than 4 to 1. But China has also filed more complaints with the World Trade Organization's powerful trade tribunals than any other country, the New York Times reported.

Wen also said recent diplomatic tensions were caused by $6.4 billion in U.S. weapons sales to Taiwan - the self-ruled island that China considers part of its territory - and President Barack Obama's meeting with the Dalai Lama.

"These moves have violated China's territorial integrity," Wen said. "The responsibility does not lie with the Chinese side but with the United States."

U.S. officials sought to downplay the effects of Wen's tough talk. Fred Lash, a State Department spokesman, told The Wall Street Journal that despite the recent tension, U.S. officials looked forward to keeping "an open channel of communication with China...and fostering a good bilateral relationship."

News & Related Story Links:

• Time.com:
  China Takes Aim at the U.S. on Currency Conflict
• Wall Street Journal:
  China Talks Tough to U.S.
• Bloomberg:
  China's Wen Rebuffs U.S. Calls for Stronger Currency
• Money Morning:
  U.S. Escalates Trade Dispute With China
• Money Morning:
  China Fuming Over the Latest U.S. Trade Complaint

Lehman's bankruptcy filing on Sept. 15, 2008 - the largest Chapter 11 filing in financial history - unleashed a crisis of confidence that threw financial markets worldwide into turmoil. 

The scathing report lambastes Lehman's executives, who "should have done more, done better."

Lehman "repeatedly exceeded its own internal risk limits and controls," and a series of judgment errors by its management led to the bank's demise, the report said.

Valukas blamed Lehman executives for conduct that "ranged from serious but non-culpable errors of business judgment to actionable balance sheet manipulation."  Their behavior multiplied the firm's problems, he alleged, eventually hurting its creditors and shareholders.

The report said former Chief Executive Richard Fuld was "at least grossly negligent in causing Lehman to file misleading periodic reports."

Specifically, the report alleges that when the credit squeeze caused investor confidence to falter in the fall of 2008, Lehman tried to stave off collapse by using an exotic accounting maneuver to paint a misleading picture of its financial condition.

Lehman used the accounting device, "Repo 105," to unload roughly $50 billion of toxic assets from its balance sheet at the end of the first and second quarters of 2008 instead of selling those assets at a loss, according to the report.

Accounting rules permitted Lehman to treat this transaction as sales instead of financing, "so that the assets could be removed from the balance sheet," the report said.

The examiner's report cited e-mails from Lehman's global financial controller, Martin Kelly, stating "the only purpose or motive for those transactions was reduction in the balance sheet," adding that "there was no substance to the transactions."

"In this way, unbeknownst to the investing public, rating agencies, government regulators, and Lehman's Board of Directors, Lehman reverse engineered the firm's net leverage ratio for public consumption," says the report.

The report said there was "sufficient evidence" that Fuld knew about the use of Repo 105 before signing off on quarterly financial reports that didn't mention using the accounting device.

The report also alleges that Ernst & Young, Lehman's financial auditor, didn't challenge or question the use of Repo 105.

Later, as Lehman reached the tipping point in September 2008, several factors helped to push Lehman over the brink in its final days, Valukas wrote.  Investment banks, including J.P. Morgan and Citibank, made demands for collateral and modified guarantee agreements that compromised Lehman's liquidity and pushed it into bankruptcy.

"The demands for collateral by Lehman's lenders had direct impact on Lehman's liquidity," Valukas wrote. "Lehman's available liquidity is central to the question of why Lehman failed."

Although Lehman's lenders had reasons to protect themselves as the investment bank's finances deteriorated, both JPMorgan and Citigroup may be sued to undo the guarantees they received from Lehman in the days before its bankruptcy and reverse the transfers of collateral under those agreements, the examiner said.

Additionally, the allegations of accounting manipulation and other abuses could influence pending criminal and civil investigations into Lehman's former executives. The Manhattan and Brooklyn U.S. attorney's offices are investigating whether they misled investors about the firm's finances before it filed for bankruptcy protection, and whether Lehman overvalued its real-estate assets, The Wall Street Journal reported, citing people familiar with the matter.

Both former CEO Fuld and Ernst & Young were quick to deny any culpability that might result from possible legal actions.

"Mr. Fuld did not know what these transactions were -- he didn't structure or negotiate them, nor was he aware of their accounting treatment," Fuld's lawyer, Patricia Hynes of Allen & Overy LLP Hynes, said in a statement obtained by CNNMoney.com.

A spokesman for Ernst & Young said in an email obtained by Bloomberg that it conducted its last audit of Lehman for the fiscal year ended Nov. 30, 2007 more than nine months before the Chapter 11 filing. 

Furthermore, "Lehman's financial statements for that year were fairly presented in accordance with generally accepted accounting principles [GAAP] and we remain of that view," Bloomberg reported.

Lehman CEO Bryan Marsal said in a separate e-mail to Bloomberg that he would "carefully evaluate" Valukas's report to assess how it might help "ongoing efforts to advance creditor interests."

News & Related Story Links:

• Bloomberg:
  JPMorgan, Citigroup Helped Doom Lehman, Report Says
  
• Wall Street Journal:
  Examiner: Lehman Torpedoed Lehman
  
• CnnMoney.com:
  What killed Lehman
  
• Money Morning:
  How Complex Securities, Wall Street Protectionism and Myopic Regulation Caused a Near-Meltdown of the U.S. Banking System
  
• Money Morning:
  The Real Reason for the Global Financial Crisis...the Story No One's Talking About

A total of 308,524 properties received a filing - including mortgage default notices, house auctions and home seizures by banks - or one in every 418 households, the Irvine, California-based company said in a statement.

Foreclosures are considered to be one of the most important measures of the U.S. housing market, which continues to be vulnerable to setbacks and remains heavily dependent on support from government programs.  Consistent shrinkage in the number of foreclosures would be a very strong signal that the market is on the road to recovery.

It's probably premature to declare an end to the foreclosure epidemic, however.

"This leveling of the foreclosure trend is not necessarily evidence that fewer homeowners are in distress and at risk for foreclosure, but rather that foreclosure prevention programs, legislation and other processing delays are in effect capping monthly foreclosure activity," Saccacio said in the statement.

Severe winter weather probably temporarily slowed the processing of foreclosure records in some states, RealtyTrac said.

The Obama administration's main effort to keep people in their homes - the Home Affordable Modification Program (HAMP) - resulted in about 830,000 trial loan modifications for delinquent borrowers through January, according to the Treasury Department.

But many critics say the foreclosure prevention program has fallen short of addressing the main causes of the problem. On an annual basis, foreclosure filings were still up for the 50th straight month in February and topped the 300,000 mark for the 12th consecutive month, RealtyTrac said.

HAMP has been hammered by relentless criticism from lawmakers and housing experts who say it has failed to offer adequate relief to homeowners who are "underwater" on their mortgages. Homeowners with negative equity are frequently unable to refinance or sell their homes and are more likely to walk away or default on such mortgages.

Only about 116,000 mortgages have been permanently modified under the government's program, compared with as many as 4 million targeted by December 2012. New data will be released March 15, Meg Reilly, a Treasury spokeswoman, told Bloomberg News.

Meanwhile, homes repossessed by banks are swelling the number of houses on the market.

Lenders seized 78,683 properties last month, up 6% from February 2009 but down 15% from the peak in December, RealtyTrac said. More than 2 million empty homes were on the market in the fourth quarter, according to the Census Bureau.

"We've got a disjointed market where most of the housing supply is coming from foreclosures rather than building new homes," Brian Bethune, chief financial economist at IHS Global Insight in Lexington, Massachusetts, told Bloomberg.  Bethune predicted a "high" rate of foreclosures for at least the next 12 months.

RealtyTrac expects bank repossessions to set an all-time record this year, said Rick Sharga, executive vice president for marketing.

Nevada had the highest foreclosure rate for the 38th straight month in February, with one in 102 households receiving a filing. Arizona and Florida tied for second at one in 163 households, according to an analysis of the data by The Wall Street Journal.

California ranked fourth at one in 195 households, followed by Michigan at one in 226. Utah, Idaho, Illinois, Georgia and Maryland rounded out the 10 highest foreclosure rates.

The most filings were in California, with 68,562, down 15% from a year earlier. Florida was second with 54,032, up 16%, and Michigan was third at 20,028, a whopping 59% rise.

Las Vegas had the highest foreclosure rate for cities with a population of more than 200,000, with one in 90 households receiving a filing. Cape Coral-Fort Myers, Florida, was second at one in 92.

Port St. Lucie, Florida, showed a 66% increase, said RealtyTrac.

News & Related Story Links:

• Reuters:
  US foreclosures drop 2nd straight month in Feb-RealtyTrac

• Bloomberg:
  Foreclosure Filings Rise at Slowest Pace in 4 Years

• Wall Street Journal:
  Foreclosure Filings Increase at Slowest Pace in Four Years

• Money Morning:
  Housing Market Still in Shambles as Obama's Loan Modification Program Falls Flat

"Overheating in the domestic economy has led to stronger imports of commodities -- so we have strong export-demand recovery as well as domestic overheating." Ma Jun, Hong Kong-based chief China economist with Deutsche Bank AG (NYSE: DB) told Bloomberg.  "The rapid rise in exports will add to inflationary pressure and reinforce the arguments for domestic policy tightening." People's Bank of China (BOC) Governor Zhou Xiaochuan said last week that while China must tighten stimulus policies "sooner or later," the government will err on the side of caution when timing an exit because the global economic recovery is still fragile. And other Chinese officials have said they are seeking more evidence of a sustained export recovery before they let the yuan appreciate.

Just this week, a report from Yi Gang, China's director of the State Administration of Foreign Exchange (SAFE), shrugged off calls for currency appreciation despite increasing inflows of "hot money" and deteriorating foreign trade relations.  Premier Wen Jiabao's government has prevented any rise in the currency against the dollar since July 2008 to aid domestic exporters.China's refusal to loosen currency policy has continued to anger U.S. manufacturers who say increasing the yuan's value would strengthen the U.S. export industry and create employment opportunities. The IMF called the yuan "substantially undervalued" in a March 1 note to Group of 20 (G20) finance ministers and central bank governors. Commerce Minister Chen Deming recently reiterated the government's position, saying it was too early to determine that exports had recovered from the financial crisis.

"The direction of yuan reform will be gradual and controlled," Chen said Monday. "If external demand has not recovered yet, how can we have a fundamental recovery? No country can have a recovery on its own." Despite external pressure, Wen also said the government will maintain the yuan exchange rate's "basic stability." And some economists point out that as China's domestic consumption keeps growing, exports may slow, reducing calls for the government to float the yuan. 

Alastair Chan, an associate economist with Moody's Corp.'s (NYSE: MCO) Economy.com, said Chinese import growth "will outpace export growth this year because the domestic economy is doing better than those of China's trading partners." 

"If imports increase quite a lot and the trade surplus shrinks, international pressure will fade," he said, noting that China's trade surplus narrowed to $7.61 billion in February from $14.17 billion in January. Until now, the BOC has limited tightening measures to forcing banks to increase their cash reserves and advising lenders to restrict the expansion of credit. But the central bank may start raising interest rates by the end of this month as its next step, according to Wang Qian, an economist with JPMorgan Chase & Co. (NYSE: JPM) in Hong Kong.

News & Related Story Links:

• Bloomberg:
  China's Exports, Property Prices Add Pressure to Pare Stimulus
• Money Morning:
  China Standing Firm on Currency Policy Despite Mounting Pressure
  
• Reuters:
  China cautions against expecting fast yuan rise
  
• Wall Street Journal:
  Pickup in China's Exports

Cooperation in Congress Elusive

The President tried to set the framework for last Thursday's healthcare summit by stressing the common ground legislators and the White House share on the issue, leading with, "The thing is, we basically agree."

Yet somehow the conclave didn't spark a bipartisan breakthrough that would alter the political landscape and allow meaningful health reform to move forward with support from both parties.

Almost every Republican told Obama that lawmakers should start over and draft a new bill - something White House officials have ruled out.

"A step-by-step approach sounds good in theory, but the problem is, we can't solve pre-existing conditions if we don't do something about coverage," Obama said.

The reality is that there is a vast philosophical and policy gulf on health care in Washington. Even though the summit was billed as a fresh start, the stage was already set for a political standoff when Obama last Monday released a new plan based on weeks of negotiation between House and Senate Democrats.

The meeting may have simply put a moderate political polish on what will end up with Democrats force-feeding a bill through Congress that is unlikely to win even one Republican vote.

After asking the Republicans in the room to do some "soul searching" to find a way to work with Democrats on health care, Obama made it very clear that if they do not find a way, Democrats will move forward without them.

That leaves reconciliation as the most likely path to implementing Democrats' version of health care reform.

For a reconciliation bill, no filibusters are allowed. Also, while it usually requires a supermajority of 60 Senators to silence a Senator who's using unlimited debate to hold up a measure, in reconciliation it only takes 51 votes to shut down the process and pass a bill.

But even reconciliation is strewn with obstacles that could cause the effort to collapse.

"This path is fraught with potholes and pitfalls, and we're just going to keep hammering away at it," U.S. Rep. Diana DeGette, D-CO, a key

Hot Button Issues Still There

Obama's plan effectively resolved about 95% of the differences between the House and Senate versions of the legislation passed last year.

The president improved the Senate bill by eliminating controversial kickbacks to a handful of Senators including $300 million in Medicaid relief promised to the state of Louisiana, and more than $22 million to Nebraska. He also delayed the enactment of a tax on high-end "Cadillac" insurance plans offered by some employers.

Still, the plan left disagreements over hot-button issues such as abortion and immigration unsolved.

The less restrictive version of the two bills allows companies operating in the proposed insurance exchange to cover at least some of the costs of abortion. Some conservative members of the House flatly oppose that provision, while members of the pro-choice caucus view it as too weak.

At the same time, some House democrats oppose a provision in the Senate plan that prohibits illegal immigrants from buying insurance in the exchanges, despite the fact they would have to do so with their own money.

The stalemate leaves Democrats with a narrow window of opportunity to move the legislation forward. But even with the aid of reconciliation, it is unclear to many lawmakers exactly what topics can be covered.

Differences between the House and Senate versions of the legislation would be subject to review by Alan Frumin, the Senate Parliamentarian, who will determine what issues can be addressed.

"The first thing that has to happen is we have to clarify what issues can be fixed in reconciliation and what issues can't," said DeGette, laying out what negotiators will likely take up in the coming weeks. "Then we have to see if we have consensus around that plan. Then we have to figure out what other agreements we need to make to fix these other issues, like the abortion issue."

Mid-Term Elections Loom

It remains unclear if the unresolved issues would cause enough Democrats to vote to sink the bill, sending health reform to the legislative graveyard for the foreseeable future.

Without any Republicans on board, Democrat party leaders must persuade their most vulnerable colleagues to vote for a bill that could be used against them in the November elections.

However, White House Office of Health Reform Director Nancy-Ann DeParle said Sunday on NBC's "Meet the Press" that Democrats "will have the votes to pass this in Congress." She added that Obama is ready to use reconciliation and repeated the president's call for "an up or down vote" on reform legislation.

But some observers have their doubts.

House Democrats last year just barely passed their bill. Now, after several retirements and deaths, Democrats have fewer votes they can count in favor of the bill.

U.S. Rep. Jason Altmire, D-PA, voted against the health care bill in the House the first time around and said last week's summit did not make him much more optimistic about the bill's success.

"I don't see very many at all who voted no who are going to switch their votes unless there are substantial changes in the bill," he told the New York Times.

Frumin most likely will interpret the rules to allow easier passage. Yet no matter how much legislative sleight-of-hand the Democrats employ, it will be difficult to pass everything Obama wants in the reconciliation process.

But whatever the legislators decide, the clock is now ticking.

News & Related Story Links:

• U.S. House of Representatives:
  The Budget Process & The Budget Resolution
• CBS News:
  Obama, Dems Plan Steps Forward on Health Care
• Denver Post:
  Health summit the start of legislative endgame
• New York Times:
  Both Sides Stand Their Ground on Health Care

India has shaken off the "despondency and gloom" that had haunted the economy a year ago as the global financial crisis stifled growth in large emerging markets, said Finance Minister Pranab Mukherjee. Growth fell to 5.8% in the last quarter of the 2008-09 fiscal year, after peaking at close to 9%.

"We began the current fiscal year with a sense of uncertainty; we end it with confidence," he said as the Economic Survey was presented in parliament.

The economic report painted an even rosier outlook for the future, projecting that economic growth could be as high as 10% in four years, making India the fastest growing economy in the world.

But the survey also highlights the specter of high inflation. Prices for staples like sugar, lentils and rice have been soaring recently, after weak monsoon rains last year fostered a drought, hampering farm output. The report warns that food inflation, which is presently hovering around 18%, could persist for a year and spawn inflation in other sectors of the economy.

Sushma Swaraj, the leader of the opposition in the lower house of parliament, said yesterday that high economic growth means little to millions of poor people in the country for whom basic food items are becoming unaffordable, Voice of America News reported.

The Economic Survey also recommended that the government take steps to rein in public spending, referring to a report by a government panel's recommendation to cap total federal and state debt at 68% of gross domestic product (GDP) by 2014-15. Combined federal and state debt now hovers around 80%.

The country appears headed for the economic equivalent of a one-two punch -- a simultaneous monetary crisis and fiscal crisis, according to Money Morning Contributing Editor Martin Hutchinson.

"Inflation will get uncomfortably high while the government struggles to fund its budget deficit and "crowds out" small- and medium-sized business borrowing while doing so," Hutchinson wrote in a recent article.

While reining in spending could solve both problems, Hutchinson sees that as unlikely because the governing Congress Party has a history of heavy public spending. Either way, he says, there is likely to be a period of considerable retrenchment among India's business and consumers.

Additionally, India's emergence from the financial crisis has pushed Sensex stock prices sharply higher.

"At some point India is likely to run into crisis," said Hutchinson. "That's when you should buy the market, because the long-term-growth prognosis is unquestionably positive."

News & Related Story Links:

• Financial Times:
  India forecasts 8.8% economic growth
• Voice of America News:
  India Estimates 2010 Economic Growth
• Money Morning:
  Despite India's Optimism, There May Be a Better Time to Buy

The federal loan guarantees will provide The Southern Co. (NYSE: SO) with approximately $8.3 billion in construction and operating funds for a pair of reactors the company will build for the Alvin W. Vogtle Electric Generating Plant in Burke County, Ga.

The newly proposed reactors would generate power for some 1.4 million residents and employ about 850 people, administration officials told The Associated Press, adding that the Georgia project would create about 3,000 construction jobs.

Under the loan-guarantee program, the government promises to assume a company's debt obligations if it defaults on liabilities incurred for the projects. It's widely believed that it would be impossible for a company to build a nuclear plant in the current environment without the government's backing.

A case-in-point: The two-reactor plant Southern will build near Augusta, Ga., is projected to have construction costs of $14.5 billion. That's twice the cost of a coal-fired plant and is triple the cost of a natural-gas plant.

Such a massive capital outlay would probably represent an unacceptable risk to investors or banks in view of the associated uncertainties, including lengthy construction timelines, stringent operating costs, and unstable electricity rates that could affect potential returns on investment.

Most nuclear power plants in Europe have to run for 20 years before they break even, a European physicist told the Christian Science Monitor.

But critics say the government guarantees are little more than "masked subsidies" that will stick U.S. taxpayers with huge risks - especially given the industry's past record of cost overruns and loan defaults . Reports by Congressional Budget Office (CBO) and the Government Accountability Office (GAO) have estimated that the risk of default for new nuclear reactors could be as high as 50%.

"This is a pre-emptive bailout where the government has already guaranteed to saddle taxpayers with any failure that the (nuclear) industry might run into," Allison Fisher, an energy organizer at Public Citizen, a Washington-based consumer advocacy group, told reporters.

Three Mile Island Casts Long Shadow

It's been 30 years since the meltdown of a reactor at the Three Mile Island nuclear power plant near Harrisburg, Pa., also caused a meltdown in the U.S. commercial nuclear power business.

Even though no one was seriously injured - and only a small amount of radiation leaked into the air above Eastern Pennsylvania - the March 28, 1979 accident put the perils and mysterious nature of nuclear energy squarely in the spotlight and cast a pall over the industry from which it never recovered.

Indeed, TMI served as an industry epitaph. Not a single new commercial power plant has been ordered - let alone built - in the United States since the accident, and most experts believed the rabid anti-nuclear sentiment in the U.S. market would be impossible to overcome.

But in the U.S. market, the appetite for electricity continues to soar. While electricity demand will "only" increase by 50% in the United States between now and 2030, demand will increase 400% in China and six-fold in India.

Overall, across the planet, electricity consumption is expected to double by 2030, increasing by 17 trillion kilowatt hours.

New, renewable sources of energy won't be enough to make up the difference. While those renewable technologies will be important adjunct sources of power, alternative energy won't make a meaningful contribution to the world's power needs before 2030, the International Energy Agency reported recently.

In an effort to revive the moribund nuclear industry, utilities have applied to build more than 30 new reactors here in the United States, often at spots adjacent to existing plants. And to meet global-warming goals, 42 reactors could be built the next two decades, according to the Electric Power Research Institute.

But just maintaining nuclear energy's current 20% share of power generation in the U.S. economy would require the construction of three reactors every two years - starting in 2016, the U.S. Department of Energy has said.

And to hold output steady, every one of the reactors currently being reviewed for approval by the Nuclear Regulatory Commission (NRC) would have to come on line by 2030. The NRC says the first approvals could come by 2011. Given how long it takes to build a plant, the first one wouldn't hit the power grid until 2016.

Obama Changes His Tune

Prior to his election, President Obama appeared to be lukewarm on commercial nuclear power. While acknowledging that nuclear is one of several viable components of the nation's energy portfolio, he questioned its safety and emphasized a need to diversify the nation's energy mix with more wind, solar and other renewable sources.

And even though nuclear plants provide 70% of our non-carbon-generated electricity from pollution-free sources, including wind, solar and hydroelectric dams, Obama said that the industry's waste-storage concerns had to be solved before the nation could build new plants.

But in his Jan. 27 State of the Union speech, Obama announced his renewed support for nuclear energy, calling for "a new generation of safe, clean nuclear power plants." He later unveiled a budget proposal for 2011 that would add $36 billion in new federal guarantees - nearly tripling to $54.5 billion the current amount authorized by Congress in 2005.

Although the administration has ruled out Yucca Mountain northwest of Las Vegas as a storage option for nuclear waste, U.S. Energy Secretary Steven Chu told Congress last year that nuclear "has to be [part of] our energy future." Waste, he said, can be stored at reactor sites "for decades."

And in his press conference announcing the loan guarantees, President Obama referred to the Georgia reactors "just the beginning."

The administration hopes that project is "just the first of what we hope will be many new nuclear projects," Carol Browner, director of the White House Office of Energy and Climate Change Policy, said in a press briefing.

The administration's new stance has encouraged many utility companies to file applications to tap into the funds as quickly as possible.

Along with Southern Co., Scana Corp. (NYSE: SCG), Constellation Energy Group Inc. (NYSE: CEG) and NRG Energy Inc. (NYSE: NRG) were on a short list of companies with projects still in the running for federal loan backing as of May.

"We're working with the applicants as fast as we can to get through these processes," Chu, the U.S. energy secretary, told The Wall Street Journal.

News & Related Story Links:

• Associated Press:
  Obama's loan guarantee for nuclear plants signals shift in energy strategy
  
• Christian Science Monitor:
  Obama aid for nuclear power plant: a start, but no renaissance
  
• Wikipedia:
  Alvin W. Vogtle Electric Generating Plant
  
• Associated Press:
  Fed loan guarantees may boost nuclear power return
  
• Money Morning:
  Thirty Years After Three Mile Island, Nuclear Power is Poised for a Comeback
  
• Wall Street Journal:
  Obama Unveils Loan Guarantees for Nuclear Plant
  
• PublicCitizen.org:
  Official Web Site

"If they don't get a handle on this [problem], it could be a deal killer," Fitz-Gerald said in a recent interview. "They're risking catastrophic damage to their brand for years to come."

Toyota is the world's largest automaker. For years, U.S. drivers have viewed Toyota's products as the standard bearer for quality. Its management approach, corporate culture and manufacturing techniques have been studied by rivals in the United States and abroad.

Yet the company now faces at least 30 class-action lawsuits, multiple investigative hearings before Congress, and competitors like Ford Motor Co. (NYSE: F) and General Motors Corp. (NYSE: GM) gleefully circling like sharks with blood in the water.

So what happened? How could one of the world's most admired companies find itself suddenly dashed on the rocks like a ship that's run aground?

Matter of National Pride

The latest blow to Toyota's sterling reputation came last Tuesday, when company officials announced they would recall 437,000 hybrid vehicles worldwide for braking problems, including its flagship hybrid, the Prius.

The Prius announcement boosted the number of Toyota vehicles recalled since October to more than 8.4 million, nearly a full year's production for U.S. carmakers, and one of the largest series of auto recalls in history.

"You have to understand the Prius is the best-selling car in Japan," said Fitz-Gerald, who owns one himself. "This now becomes a matter of national pride, not just another car recall."

The Prius recall was the last in a series that began in October, which included eight different top-selling models, due to a gas pedal problem. A second recall occurred because of friction that was causing sudden unintended acceleration.

The situation turned even worse when U.S. safety regulators on Jan. 21 told Toyota it would have to take the unprecedented step of suspending sales of the eight models while it rushed to find a fix. That stranded $2.5 billion in unsold inventories of cars and trucks at the automaker's dealerships.

Changing the Message

During the weeks leading up to the first recall, and in the following months, Toyota kept reassuring the public that it had identified exactly what the problems were and was doing everything in its power to fix them.

Initially, Toyota insisted the acceleration problems in 3.8 million vehicles stemmed from floor mats that can trap a gas pedal. But the company changed its tune in late January, when Toyota's safety staff in Washington called the National Highway Transportation Safety Administration (NHTSA) to let the agency know it had discovered a flaw with an accelerator pedal part.

The part - which costs $15 - was manufactured by CTS Corp. (NYSE: CTS), an Elkhart, Ind., supplier that the automaker had begun to use in 2005 during its fast-growth phase. That flaw, a mechanical glitch that can cause the pedal to become stuck, affects over 2 million vehicles.

As Toyota hemmed and hawed in public, repeatedly issuing statements that it was doing everything it could, the lines of communication got tangled, according to a Reuters analysis.

In one example, Toyota representatives told dealers on the morning of Wednesday, Jan. 27 that the company would be expanding its floor-mat recall by 1.1 million vehicles, but withheld the announcement from a jittery public until later.

When asked to comment on rumors of a recall that afternoon, Toyota spokesman Brian Lyons said it was "an unsubstantiated rumor." Later that night, Toyota's Washington office made it official when it filed the paperwork with the NHTSA.

"Our jaws dropped when we heard that (they were delaying the public announcement)," said one dealer, who said he thought the episode showed how the company was slow to come to terms with the stakes of the safety crisis.

Where Were Government Regulators?

A focus of the Congressional hearings to be held starting February 24 is sure to be whether Toyota has really identified all its problems.

In fact, safety advocates and lawyers for a Michigan woman killed in a high speed crash in 2008 argue that evidence suggests electronic throttle controls are at fault, not floor mats or "sticky pedals," according to a Reuters report.

Complaints about unintended acceleration soared more than tenfold from model years 2002 to 2007, after Toyota switched to an electronic throttle for the 2002 model year Camry, according to an analysis by Safety Research and Strategies.

And in late 2007, a team of number-crunching accident investigators known as CRASH at privately held insurer State Farm Insurance Co. had noticed a spike in accidents involving Toyota vehicles, including the top-selling Camry.

State Farm, the largest U.S. auto insurer, notified U.S. regulators of the pattern. "If we believe a vehicle played a significant part in causing damages, we go back to the manufacturer," spokesman Kip Diggs told Reuters. "We tell them: 'We believe your product is faulty and you need to pay us for the damages'."

But at least five probes conducted by the NHTSA found no problems with electronic throttle systems, even though complaints had grown steadily.

"That's the real issue," Fitz-Gerald said. "If these problems were discovered back in 2007, why wasn't the NHTSA doing anything about it?"

The answer could raise eyebrows all over Washington. Court and government records examined by Bloomberg News show that former regulators hired by Toyota helped end at least four U.S. investigations of unintended acceleration in the last decade, warding off possible recalls.

Christopher Tinto, vice president of regulatory affairs in Toyota's Washington office, and Christopher Santucci, both of whom previously worked for the NHTSA, helped persuade the agency to end probes involving 2002-2003 Toyota Camrys and Solaras, court documents show.

"Toyota bamboozled NHTSA or NHTSA was bamboozled by itself," Joan Claybrook, an auto safety advocate and former NHTSA administrator in the Carter administration told Bloomberg. "I think there is going to be a lot of heat on NHTSA over this."

Apologies Not Enough

Conducting a recall is bad for any automaker because it admits there's a defect in their product and repairs can be expensive.

But it goes deeper than that at Toyota. "(Toyota) has built itself on pillars of safety, quality and reliability," Rebecca Lindland, a forecaster at IHS Global Insight Inc. (NYSE: IHS) in Lexington, Mass. told Bloomberg. "A defect in their product is appalling to them, sort of unthinkable."

Despite all the criticism being leveled at his company, it took until Feb. 5 before Toyota's president, Akio Toyota, finally emerged from seclusion to apologize and address criticism. "I apologize from the bottom of my heart for all the concern that we have given to so many customers," said Toyoda, promising to beef up quality control.

The company followed up with a Super Bowl commercial that delivered an important message: "In recent days, our company hasn't been living up to the standards you've come to expect from us - or that we expect from ourselves," an announcer said.

What Toyoda failed to answer is how this happened. In a company founded on the concept of "kaizen," the ethic of constant, incremental improvement, it seems Toyota has lost its way.

In any case, Toyota's wild ride has brought the company to a crossroads. It has a chance to start to win back trust or it can lose even more face if it fails to be forthright during the congressional inquiry, which could open a second act of the crisis.

But Fitz-Gerald, who lives in Japan for part of every year, says Toyota's faltering approach to public relations is simply evidence of a communications gap, not a reflection of a company in denial.

"In his words to the American public, Toyoda is demonstrating absolute resolve to fix the problem, he just can't translate his words to the American psyche," he said. "He's absolutely committed to fixing the problem...but he fails to understand the American public doesn't give a damn if he's committed, they just want the problems fixed."

News & Related Story Links:

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• MSNBC:
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• Bloomberg News:
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• Huffington Post:
  Toyota President Akio Toyoda Apologizes For Global Recalls