Zhong emphasized that if the yuan were allowed to appreciate by even a small amount, it would likely push many of its exporters over the brink.

"Water doesn't boil if it is heated to 99 degree Celsius. But it will boil if it is heated by one more degree," he told The Journal. Likewise, "a further rise in the yuan by a very small magnitude might cause fundamental changes" to exporters in China.

Zhong's remarks underscore the domestic political pressures on Beijing amid growing international calls for China to let the yuan rise.

The yuan rose 21% against the dollar between July 2005 and July 2008, when China adopted a managed-float currency system under which the yuan's value was linked to a basket of currencies. But the yuan has been kept almost unchanged against the dollar since the outbreak of the global crisis to help Chinese exporters.  

Western countries, and even China's Asian neighbors, insist that China's 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 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.

After China's Premier Wen Jiabao rejected calls to let the yuan appreciate in a news conference on Sunday, a bipartisan group of U.S. senators introduced legislation aimed at forcing the Obama administration to take action against China over its currency policy, reflecting growing anger on Capitol Hill over the issue.

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. 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.

IMF Managing Director Dominique Strauss-Kahn joined the chorus Wednesday when he said that China's currency remains undervalued.

"Some currencies are obviously undervalued, especially in Asia, especially the renminbi," he said at a conference at the European Parliament, using the Chinese currency's official name.  He called for China to increase domestic consumption.

Zhong emphasized the Chinese are open-minded on currency policy, but don't respond well to outside pressure.

"We are willing to have discussions with the U.S. on the currency issue. There's nothing that can't be discussed between China and the U.S. But if you pressure us to do something, that's not in line with China's culture." Mr. Zhong said.

He also said China is willing to purchase more American goods and take other steps to reduce its trade surplus with the United States.

Zhong is scheduled to arrive in the United States this weekend for a series of meetings with U.S. representatives, including congressmen, to seek ways to improve the bilateral trade relationship amid rising political and economic tensions.

The currency tiff is at least partially responsible for a series of U.S. trade sanctions against Chinese goods 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.

The spat is likely to get even messier in April, when the U.S. Treasury Department will be required by law to declare whether China manipulates its currency.  As November's elections approach, Americans are livid over the lack of job growth, and China is an obvious place for congressional finger-pointing. 

The trade tensions are in addition to other problems complicating U.S.-Sino relations.

Diplomatic relations took a dark turn recently when the U.S. government sold roughly $6.4 billion in weapons to Taiwan - the self-ruled island that China considers part of its territory.  Shortly after that, President Obama ratcheted things up further by meeting with the Dalai Lama at the White House.
Both moves infuriated China.

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

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Since U.S. Federal Reserve Chairman Ben S. Bernanke raised the central bank's discount rate last month, some investors have grown skittish at the possibility of further tightening of the Fed's monetary policy. For that reason, the language in each Fed statement has been highly scrutinized by the public.

Most analysts believe that as a potential interest rate hike draws near, the FOMC will change its language from "an extended period" to something more immediate.

"They're getting close to one. They're going to change the language before they do anything else," Robert Brusca, chief economist at Fact & Opinion Economics, told CNBC.


The Fed announced no changes to its plan to wind down purchases of mortgage-backed assets.

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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."

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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."

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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.

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"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.

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That offer illustrates just how precious a commodity fertilizer has become in a world of growing populations and rising incomes.

Of course, pairing with Norway-based Yara involves some regulatory hurdles Terra would like to avoid.

"Any offer from Yara must be heavily discounted for the substantial risks and length of time associated with closing," said Stephen R. Wilson, CF's chairman, president and chief executive officer (CEO).

Those risks include getting U.S. and European antitrust approval, which is irrelevant in the domestic-based Terra-CF deal. Regulatory authorities have already cleared CF's bid, and the company thinks it can close the deal with Terra within 30 days.

Yara has said it had no intention of entering a bidding war, but its desire for Terra could prove persuasive. Natural gas - a fertilizer feedstock - is priced low in North America, driving Terra's appeal.

"Strategically, this is pretty important to Yara," Dahlman Rose analyst Charles Neivert told Reuters. "Yara is trying to get more and more production into lower-priced gas regions."

CF had hostile words for Terra after the Terra-Yara merger was announced. Since January 2009 CF had been pursuing Terra, which accepted Yara's offer a month after CF threw in the towel.

"We do not understand how Terra could have entered into an agreement with Yara without giving CF Industries an opportunity to bid on a level playing field," Wilson wrote to Terra CEO Michael Bennett.

In another interesting sidenote, Agrium Inc. (NYSE: AGU) has hotly pursued a hostile takeover of CF. If Agrium acquires CF, it will be the second-largest publicly traded nitrogen-based fertilizer producer. If CF gets Terra, it would take on that accolade. Currently, Yara holds the lead.

"Should Agrium, contrary to expectations, acquire CF, then Yara can just come back with their initial offer," said Samir Bendriss, head of research at Pareto Securities ASA, to Bloomberg. "If Agrium doesn't buy CF, then Yara can consider whether to enter a bidding war, which I don't think they'll do because the price is very high and CF has much stronger incentives to buy Terra than Yara has. It's the only way for CF's management to survive, and they have higher synergies."

Due to growing food demand and rising commodity prices, the merger-and-acquisition activity in the fertilizer industry has been "sizzling," according to Money Morning Contributing Editor Peter Krauth, and will be for some time.

The world is in a food crisis - a "silent tsunami" of hunger, and current food production will have to increase by 70% to meet rising demand. With increasing food demand from emerging economies, 10% of arable land being used for biofuels instead of food production, and a growing number of agricultural acres lost to development each year, farmers are under pressure to make the most with what they have.

"After nearly a full year of fertilizer underutilization, robust demand is returning," said Krauth.

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