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Quest Means Business

IMF's Chief Economist Says A Firm Hand Is Needed In Emerging Economies Or They Could Overheat; Renault's Strange Case Of Corporate Espionage, Scapegoats, And Tarnished Executives

Aired April 11, 2011 - 14:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

MAX FOSTER, CNN ANCHOR, QUEST MEANS BUSINESS: An oil spoiler. Tonight the IMF's chief economist and BlackRock's chief exec both tell us we're in a danger zone.

Britain's banking balancing act, new rules and regulations are proposed.

And a bid to buy Arsenal. Stan Kroenke becomes the major shareholder of the gunners.

I'm Max Foster in for Richard Quest. This is QUEST MEANS BUSINESS.

Hello to you.

Boom and bust, could be back in 2011. The International Monetary Fund says a firm hand is needed in emerging economies or they could overheat. Rising prices caused by political upheaval also presents a new danger to the global economy. In its latest world economic outlook the IMF cut its forecast for U.S. economic growth this year from 3 percent to 2.8 percent. The report says the U.S. needs-uh, the U.S. now urgently needs to make spending cuts and reforms or it risks loosing credibility in the financial markets.

For other developing economies and especially the Euro Zone. The biggest risks are the moribund housing market and sovereign debt. The forecast for the area still is up slightly to 1.6 percent. China's growth forecast stays strong at 9.6 percent. The IMF says countries with a big trade surplus, like China, should let exchange rates rise. It warns that runaway prices and too much credit are dangerous.

The IMF says Japan's earthquake exacted a terrible human toll, but its impact on the global economy will be limited. Japan's economy, itself, will suffer with its growth forecast cut to 1.4 percent. The global growth forecast remains unchanged at around 1.5 percent. But the IMF says the global economy is still running at two speeds, with developing economies in the fast track and developed economies in the slow lane. The IMF's chief economist Olivier Blanchard told me more.

(BEGIN VIDEOTAPE)

OLIVIER BLANCHARD, CHIEF ECONOMIST, IMF: The global economic recovery is strengthening, but it is unbalanced. And both aspects are important. I think the best way to show it is to give you three, for the world, for each year, for the next two years, 4.5 percent growth; but if you look at advanced economies 2.5 percent growth. If you look at emerging and developing economies, 6.5 percent growth. So it is really this unbalance, which is the issue.

FOSTER: Pretty good figures, generally, though. And actually you talk there about the emerging economies. You are concerned that they may be doing too well, aren't you? You are talking about them possibly overheating now?

BLANCHARD: No we're getting there. I mean for a number of countries we are-you know, we are back to the old trend. In some countries we are above it. We are starting to see signs of inflation. We are starting to see signs of very high credit growth. So, they have to watch out. They have to be ready to slow down a bit, yes, absolutely.

FOSTER: And how do they do that? Do they have to set up some sort of barriers, this hot money going around the world, is too much flowing into those economies?

BLANCHARD: No, I think they are facing two separate problems. They have to deal with both. But money is just started overheating, which would be there whether or not there were capital flows. And the other is how they deal with capital flows. So, much of what is happening is really domestically driven. They have to use the standard tools of policy, which is to increase the interest rate, do fiscal contraction where needed, that is needed. With respect to capital flows they have to be careful. If they see risk building up they have to use macro financial (ph) tools. They may have to use capital controls. But really the issue is overheating comes from the fact that the economies are just doing very, very well.

FOSTER: Unlike some European economies, obviously; those southern economies of Portugal, Spain, perhaps. Tell us about your concerns about the Euro Zone.

BLANCHARD: Well, you know, I think that there are the core countries and there indicate (ph) slow growth. They will get out of it. They have to push demand. They have to do structural reforms. Then we have these countries which are in more serious trouble, which are Greece, Ireland, and Portugal. And they have to put in place a fairly ambitious program of reforms. Now, these reforms are going to take-these are structural reforms, fiscal consolidation as well. They are going to take a long time to work out. And during that time it is very clear that they are going to be-they are going to need help on the financing and this is why we have these programs in place, in two countries, and hopefully, in the future, in the third one.

FOSTER: And one problem all economies are facing is escalating oil prices. What is your biggest concern there?

BLANCHARD: The concern is if the prices stay more or less where they are, where the markets think they are going to be, that is not a major concern. I mean, the increase in oil prices is not going to have the effects that it had in the 1970s. It is not going to create major stagflation. So, it will have some impact on inflation, some impact on growth. But things are very different from the `70s. I mean, you have-oil is playing less of a role, you don't have wage indexation, which was a big issue then. You have anchored expectations. So it is going to create a bit more inflation than would have otherwise have been the case. A bit less growth, but nothing major. Now, if the price were to go up to $150, or you know, or more, then clearly that is a different ballgame. But under the current assumptions, the current forecast, that is not a major issue.

FOSTER: OK, and a brief word, if you would on Japan. Obviously, it has had a terrible time of it recently.

BLANCHARD: Right.

FOSTER: How is the economy going to get through that?

BLANCHARD: Well, the economy is going to get through it. It is clearly going to affect growth a bit this year. But, you know, the Japanese economy is a very large economy, so in terms of macro numbers, this immense human tragedy, still is a limited macro event. So we have revised growth down by about 0.2, 0.3 percent. There is uncertainty about it, but of that order. And then they need to rebuild a lot which is going to boost growth, next year. So, in macro terms that is a serious issue, but it is not overwhelming. Again, in human terms, it is clearly.

(END VIDEOTAPE)

FOSTER: Well, that is the IMF's view. The head of the world's largest money manager says oil prices are in a danger zone. Larry Fink, CEO of BlackRock, says anything above $120 a barrel will set back the U.S. economy.

Felicia Taylor met Fink at BlackRock's New York trading floor to get his thoughts on oil instability and the European debt crisis.

(BEGIN VIDEOTAPE)

FELICIA TAYLOR, CNN FINANCIAL CORRESPONDENT (voice over): Inside this nondescript office building in Manhattan, the world's largest money manager is at work. BlackRock controls assets worth more than $3.5 trillion, with clients, including the U.S. Federal Reserve. At the top is this man. You may not have heard of him, but CEO Larry Fink is one of the most powerful figures in the financial world. We met on BlackRock's trading floor where I asked about the market impact of global instability.

(On camera): Do you think that Americans have a false sense of this recovery, that things may not really be as good as people seem to think?

LARRY FINK, CEO, BLACKROCK: Actually I think the equity market is properly priced, and in fact, I think it is still undervalued. You know we have great corporate earnings. We have had U.S. corporations were in very good shape before the great recession, before the credit crisis, and they were able to lead the great recession in even better shape. They were able to build huge cash reserves. They were much more efficient. Efficiency means less jobs, by the way, but they are more efficient. And they were actually in a better position to really rebuild.

We don't have a perfect picture in the United States, but we have a very prominent growth pattern for the private sector, related to the world. I think Libya is more drama than substance.

TAYLOR: But let's say that tensions escalate. Let's say that things do bleed over into places like Saudi Arabia. How much of a concern is that then?

FINK: The area where I'm most concerned about is Bahrain. So, Bahrain is a causeway, a bridge, across Saudi Arabia. A few miles-long bridge. And on the other side of that bride is the oil fields of Saudi Arabia. That area of eastern Saudi Arabia is also where all the many Shiites are. So the problems that you are seeing in Bahrain, which is being funded by Iran, is the most important thing to watch. And could that go over to Saudi Arabia? I don't think so. You saw that Saudi Arabia actually moved military alongside some other Gulf Region countries into Bahrain. So, you know, they are going to do whatever they can to protect their regimes.

TAYLOR: But if it is not manageable and we are already seeing oil prices teetering at about $108 a barrel, where do you see oil prices going in the near term?

FINK: In the near term, with the most recent stability you are going to see oil prices probably go back down a little. We don't know yet. So, if oil persists at $108 a barrel, I don't believe it will disrupt the U.S. economy. If oil creeps up and persists at $120, we are going to have some setbacks in the economy. It is a taxation to the consumer, who is already fragile.

TAYLOR: Coming up in June, the Federal Reserve will probably begin to wind down QE2. How much of a problem will that be for the equity and the bond market?

FINK: This is not a surprise. It is in the market. With perfect information in three months, the Federal Reserve is going to cease purchasing and, indeed, they begin to sell. And so we already know that. So, what will be the impact? I would say it would put a bias toward higher rates. But rates can't go that high unless there is a persistency in higher inflation, which we are not seeing yet, in the United States.

TAYLOR: Let's go back to European sovereign debt. How much of a concern is that for you? I mean, we still have problems in Greece, in Italy, in Spain, in Portugal. Name all the perilous (ph) countries.

FINK: Ireland.

TAYLOR: Exactly. Ireland, someplace where you have been very much involved in terms of the stress test. How much of a concern is that?

FINK: I think that is one of the most misunderstood problems. I think it is a severe problem. Because who owns these products today? The banking system.

TAYLOR: Uh-huh?

FINK: So, if these countries persistently have problems, and they have to be restructured in any way, then we have a real problem in the banking system. They are going to be undercapitalized. And so, to me the most-the biggest question I have right now is Europe, and the role between government and their banks.

(END VIDEOTAPE)

FOSTER: One of the most powerful CEOs in the world there, speaking to Felicia. And if that has persuaded you to invest in your stocks, then here is where things stand at the moment.

You will be interested, we'll be live on the trading floor of the New York Stock Exchange, coming up. Currently, up 0.2 percent, you can make your own judgment on whether that is overvalued or not.

(COMMERCIAL BREAK)

FOSTER: A look at the European markets. Actually, some losses across the board, there wasn't great news all the indices finishing slightly in the red. The London FTSE was just a shade off with Barclays and RBS shares reacting well to a report on the British banking sector. More on that in just a moment.

In Germany, carmakers helped pull the DAX down. Daimler, BMW, both off by around 2.5 percent. Paris CAC currant saw the worst losses, down more than 0.5 of 1 percent.

Britain's bankers are preparing for a gentle shake up. The changes are designed to make the system less vulnerable to shocks and more competitive. They are the recommendations of the U.K. independent commission on banking. Its report contains few surprises and few real details, really. Either banks will be required to increase their rainy-day cash holdings to 10 percent, according to the report. That is the idea, anyway. The report says it should be standard for large retail banks investment banks would have to meet international standards. The report recommends that retail operations are fenced off from the investment banking side of business. But not totally separated. No details as to how this would actually work though.

The report also examined Lloyds' HBOS, that take over, at the height of the crisis. The reports says that Lloyds needs to sell more branches, suggesting it is too powerful. Thus to increase competition, again, no exact details.

Well, few people can gauge the mood of the city better than David Buik, of BGC Partners. He's been working there for decades. I asked him what he made of the report.

(BEGIN VIDEOTAPE)

DAVID BUIK, BGC: I think they've got it absolutely spot on. The ring fencing of the retail banking, the deposits in the small business enterprises, absolutely spot on, because we don't want, under any circumstances, any replication of the absolute debacle that we all experienced three years ago.

FOSTER: There is obviously some concern in the city that the clamp down will be too severe and, you know, bankers would end up leaving the financial center of Europe as it is now.

BUIK: Well, the cost of capital is obviously one point of debate. And the other thing is, of course, the subsidiaries, which are going to have to be formed, as we understand it, and in order to have a presence within investment banking, and wholesale banking. Now that means that subsidiaries will have to raise capital. And because they are not existing banks, the cost of that capital will be significantly higher. And so, I don't think you will, for some weeks and months to come see the banks absolutely showing tested approval and acceptance of these terms.

Because one thing, Max, they don't want is to be disadvantaged against the rest of the world. We have to remember now that banks are not domestic propositions, they are global. And the competition that is out there is fierce. The government really has to make up its mind. Does it want London to be the major player of financial services in London, and in which case it is going to have to adhere to some of the requests of the city in terms of what the cost is going to be.

And also there are still prickly issues on taxation, whether it is from a levy point of view or from personal taxation, which could make other parts of the world more attractive to do their business. That doesn't mean thousands of people are going to leave the United Kingdom and go elsewhere, it will just mean a re-appropriation of capital to more deserving and more attractive parts of the world.

FOSTER: Does it make the financial system more stable?

BUIK: Definitely. Because I think the one thing everybody is unanimous in their thought process is stability is an absolute perquisite. Under no circumstances is any bank ever too big to fall. If any bank gets into trouble then we can transfer the deposits to another bank. With a minimum of these, but there is plenty of competition on the street; that the regulatory requirements are far greater and better than they were before. And that I think, above all else, everybody wants.

I think, essentially (ph), if you are an international player, then you will want to make sure, essentially (ph), you are not disadvantaged.

FOSTER: What did you make of Gordon Brown, the former prime minister's comments over the weekend? I know you have got some strong opinions about him. We've heard them in the past. But what do you-he has a sense of regret about what he did at the time. You were quite critical at the time, as well, weren't you?

BUIK: I was. Astonished, absolutely astonished. I think I must say 100 percent more of him than I did before. I think that for him to admit that the felt that this was an isolated problem, with obviously Northern Rock, without actually having it named, which was run by a reckless chief executive in Adam Applegarth, that lent money long and borrowed short in huge amounts, and that the problem was localized. That he underestimated, as did many other people, the depth of the problem, was-you know, a tremendous admittance. And I think he gets a certain amount of credit for his blunt honesty. And not before time, if I may say so, because everybody has paid their role in the demise of the banking system and also in the recession. And there has been little tacit admittance from Gordon Brown in this area before now. But all power to him for doing it.

(END VIDEOTAPE)

FOSTER: That was David Buik, there.

The New York Stock Exchange meanwhile, has said no to Nasdaq's takeover offer. Just the latest twist in the merge madness we are seeing New York and markets across the world, actually. Felicia Taylor is at the NYSE.

It wasn't a bad offer, was it, Felicia?

TAYLOR: No, actually it was a terrific offer on some levels, because it was a bigger offer, but frankly, it was a pretty defiant no thank you to the Nasdaq. It was a unanimous vote that the NYSE rejected that offer, remaining committed to the Deutsche Borse offer. Now, like I said, the Nasdaq offer was actually a 19 percent premium. They offered $11.3 billion, the Deutsche Borse has only offered about $10. I mean, only, you know, what am I thinking? Only $10 billion.

But nevertheless, this is probably going to set the stage for a pretty tough fight for the Big Board to come. And now, of course, there is a little bit of a word that they might even include the Swiss and Spanish exchanges in that Deutsche offer. Both deals offer cost savings. The Nasdaq is claiming that it will be even larger in terms of reigning in costs. The Nasdaq, though, would have to take the stock and options exchanges, the ICE, which was partnering with Nasdaq, would have taken the derivatives business.

The New York Stock Exchange deal would lead to higher debt. And it could be a mistake. That is what, you know, the opposing opposition is saying. The head of the New York Stock Exchange, which is Duncan Niederauer, now plans to meet with New York Stock Exchange shareholders and try to sell them on this deal. But shareholders, those are the ones that are really the most important here. They are not happy about giving up the premium. The shares have gone down even further as the day has progressed. New York Stock Exchange shares now are down about 3 percent. Nasdaq shares are down just over 2 percent. So, it is the shareholders that have gotten the most significant reaction about who is going to take over the New York Stock Exchange, Max.

FOSTER: Yes, and what about the rest of the market, how is that doing today, Felicia?

TAYLOR: It is a mixed market, frankly. It opened up a little bit higher and then as the day gone on, the Dow was down, not it is up fractionally. But the Nasdaq and the S&P are in negative territory. It is oil prices. They have fallen back about 2.5 percent to now about $110 a barrel. That is on word of a ceasefire in Libya, which is obviously a good thing.

The real focus though, this week, is going to be on earnings. And that is going to take, like a few weeks to come out. ALCOA is supposed is supposed to report after the bell today. The company might benefit from higher price of aluminum, but on the other hand, it is those margins that are going to be affected by the higher of oil and gas that we have seen recently. Expectations are pretty good, but nevertheless, the stock is down about four-fifths of 1 percent right now. What is really important during the earning season is forward guidance, as you know. Investors want to hear how companies are going to deal with the rising prospect of commodity inflation.

Overall, expectations are high. People are expecting to see most companies up about 10 percent year on year, at least those in the S&P. So we'll find out. Like I said, earnings are going to take a couple of weeks. Right now, the stock, again, of ALCOA is off about 0.75 of 1 percent.

FOSTER: OK, Felicia, thank you very much indeed, for that.

Now investing in the Internet to build a brighter future. Rwanda's capital is going online to leave its tragic past behind. Kigali is our "Future City" after the break.

(COMMERCIAL BREAK)

FOSTER: Well, it is a city that still conjures up images that are so tragic. This month marks 17 years since the Rwandan genocide. Now its capital Kigali is looking to get past that legacy and transform itself into a modern metropolis. To do that it has plans to become East Africa's computer hub. It wants to complete its one laptop per child program by 2017. And it is laying 2,500 kilometers of fiber optic cables for high speed broadband. For tonight's "Future Cities", Richard Quest sees how computers can help Kigali heal its scares.

(BEGIN VIDEOTAPE)

RICHARD QUEST, CNN ANCHOR, QUEST MEANS BUSINESS (voice over): Think Kigali and high-tech hub is probably not the first thing that springs to mind. You may need to revise your thinking. Because these cables represent the early stages of what is hoped to be a boom in technology in the landlocked Rwandan capital.

Kigali is attempting to position itself at the cutting edge of high- tech East Africa. It may seem a bold ambition for a city not long ago devastated by war. But after the genocide in 1994, Kigali had to start again.

JOHN GARA, CEO, RWANDA DEVELOPMENT BOARD: Investment in ITC (ph), has for us been a kind of a long-term project. The last five years is where we have concentrated on infrastructure. The fiber optic backbone, our National Data Center, and these investments have now reached a point where the next stage, for the next five years, we are looking at now providing services to the people.

QUEST: 2,500 kilometers of fiber optic now circles the country's perimeter. Rigging it up for high speed broadband. The network has been designed to reach every point in the city and all the neighboring countries, serving Kigali's vision of becoming an IT hub to the region.

ANDREW RUGEGE, COO, MTN RWANDA: We used to be at a disadvantage because we are kind of landlocked, but now as far as technology is concerned there is no such a thing as landlocked.

PATRICK NYIRISHEMA, HEAD OF IT, RWANDA DEVELOPMENT BOARD: What we have done here, specifically in Kigali, is to have a virtual point from which we can service the rest of the Central Africa.

QUEST: Within the city the strategy is to get everyone board, whatever their economic situation. With new mobile technology, those without bank accounts can pay bills and transfer money from anywhere in the city by sending an SMS. A the market, Ishoko, another mobile app allows farmers and traders to find out local prices without moving an inch.

UNIDENTIFIED FEMALE: Write the name of the market, then the commodity, you send to 7656, instantly I will get a response, which tells me the price of beans.

UNIDENTIFIED MALE: Now, what is the track of this circuit.

QUEST: And in primary schools, children are being trained early to build on the high-tech foundations thanks to a scheme called One Laptop Per Child.

NKUBITO BAKURAMUTSA, COORDINATOR, ONE LAPTOP PER CHILD: What we believe is we need to create a knowledge-based economy and for that, education plays a fundamental role. If you look at all the infrastructures that you visited, they need people to run them, to man them. And the best way for us is to ensure that we have a local population that is knowledgeable enough, that has skills that are comparable to the entire world. So investing in laptops is really ensuring that we ultimately have a return on our investment.

QUEST: The plan is to transform the impoverished, agricultural society into a high-tech innovator. Most people in Rwanda still survive off the land. And much of the country remains without basic services. Yet 17 years after the genocide, Kigali believes that investing in IT is the key to leapfrogging into the 21st century.

PAUL KAGAME, PRESIDENT OF RWANDA: When you are talking about knowledge, information, there is no limit. And it easily cuts across boarders. It helps business, it helps every activity.

QUEST (voice over): Mr. Gabanzisa (ph) opened his Internet cafe 11 years ago. He has seen it grown from strength to strength.

UNIDENTIFIED MALE (on screen translation): When I started business, the thing that helped me was the made ICT products tax free and that has really helped my business grow.

QUEST: The government's message has been, get onboard. Businesses display clearly their support for the vision, even if the signs do seem a bit, perhaps, pre-IT.

NYIRISHEMA: Rwanda is a place where things change quickly because it is firmly embedded in the thinking of the society. Considering that only 15, 16 years ago Rwanda was really a destroyed country, quite impressive progress is made. But I think the journey is still long.

RUGEGE: Inside every Rwandese is that commitment, there is the will to take the extra step. Yes, we know we have been behind for a while. We had our issues, we have sorted out issues. And we've leapfrogged what those other people have been doing for years.

QUEST: It is easy to pick holes and point out that Kigali has a long way to go.

UNIDENTIFIED MALE: Remember to save.

QUEST: But that ignores the ambition and the object. Kigali intends to become East Africa's Silicon Valley. The current trends are positive. And with the will of the people strong, there is at least hope it might be realized.

(END VIDEOTAPE)

(COMMERCIAL BREAK)

FOSTER: Welcome back I'm Max Foster. You are watching QUEST MEANS BUSINESS. Let's check the headlines this hour.

(NEWSBREAK)

FOSTER: Several Renault executives are revealing (ph) the chief operating officer is to step down over a spying scandal. COO Patrick Pelata asked to be relieved of his duties following a report into the incident, which lead to three other executives being unjustly accused. Christian Mallard of France's TV3 joins me now from palace-palace-Paris, even.

Ah, Christian, this gets more and more complicated for us. Explain to us the latest movement in this story.

CHRISTIAN MALLARD, SENIOR FOREIGN POLICY ANALYST, FRANCE TV3: Yes, I think, tonight that the impression that people will retain is that the judgment that we have got tonight on the Renault spy affair leaves a strange taste. It definitely will tarnish the image of the Renault car factory. No doubt about that. Because we get the impressions tonight that we have a few scapegoats really paying the price for a scandal. It is a scandal that, of these three people, who have been unjustly charged with doing a spying affair and have not been involved in that.

So, you have, tonight, the Chief Operating Officer Patrick Pelata, you alluded to him, who is officially quitting his job as number two, chief operating officer. But at the same time he remains inside the group with another part, with the Renault/Nissan Alliance, as you know. And a lot of people thinks he should have definitely been fired. And we have three people belonging to the security department who have been-who are going to be fired. And, you know, the impression is that for less than that, because it is a real scandal and it is a big affair, a lot of people still think tonight that the chairman of the company, Carlos Ghosn, should have been paying the price for it, for not being able to control the whole affair. And this is what we are up to. It is-some people would say it is typically French judgment, ha!

FOSTER: Just explain to us what we know about what happened here then? How did this investigation, which looked like it was thorough, actually reached the conclusions that it did? That there was a spy scandal, when there wasn't one?

MALLARD: Well, it is six pages, a kind of conclusion, we have got the summary after tonight. It is very technical and all that, and it seems that Renault has been so much embarrassed by the affair, that tonight they tried to cool down things, and say, OK, we have some people paying for the price of it. They want to, let's say, hide from the real truth of it; because it should not have happened, definitely.

And as I said, Renault has a future, which is urged by that, its future is definitely (UNINTELLIGIBLE) by that. And the image will definitely be tarnished for a long time. And I think Carlos Ghosn is protected by the government, by the French government, because he is considered as being quite a good chairman of the company, trying to put Renault on the right track. But even tonight, I think after this scandal, Renault will have to be careful and not trying to face some troubles ahead, because definitely it has probably turned a page in the history of Renault. But it is a very sad and very bad page.

FOSTER: Carlos Ghosn, as you say, does have a lot of respect. He has a lot of respect around the world. He's done remarkable things with the company. But do you think he's going to get away with this? Are the French people going to allow the boss to stay put whilst he gets rid of his underlings, effectively?

MALLARD: Well, we cannot see the impact yet, but we can probably expect that Renault having, as I said, an image which is really tarnished after this big scandal, might pay the price for it, selling less cars in the world. In a world of economic crisis it is clear that Renault was not doing too bad until now. But after this scandal people have lost the trust in the board of the company. And definitely, we will see some price to be paid for that around the world, as you said, not only in France. So, we will see what the impact is in the near future. It is too early to say right now, but definitely there will be a price for that.

FOSTER: OK, Christian Mallard, thank you very much indeed for joining us from Paris.

Well, next, stocks, spies and audio tapes in a multi-million dollar insider trading case. We'll look at the defense of Galleon Group co- founder Raj Rajaratnam, as his trial continues there in New York.

(COMMERCIAL BREAK)

FOSTER: In New York a hedge fund billionaire accused of insider trading is facing an uphill battle. After a month of prosecution evidence, as Maggie Lake tells us, Raj Rajaratnam has a chance to refute conspiracy and fraud charges against him.

(BEGIN VIDEOTAPE)

MAGGIE LAKE, CNN FINANCIAL CORRESPONDENT (voice over): After five weeks and 18 government witnesses it is time for the defense to step up to the plate in what many call the largest U.S. insider trading case in at least a generation. It is not an enviable task. The government played dozens of secretly recorded audio tapes to the jury in its case against Raj Rajaratnam, the found of now defunct hedge fund giant, Galleon Group.

Proof, prosecutors say, that Rajaratnam was tipped off to market moving news before they were released to the public. One tape features former Wall Street analyst, Danielle Chiesi, one of 19 people who have already pled guilty in the case. In July 2008 she allegedly tells Rajaratnam of an upcoming profit warning from tech firm Akemai (ph).

DANIELLE CHIESI: Please don't (EXPLETIVE DELETED) with me on this. I'm not short anything. I'm not trading it anymore, but I'm trading it tomorrow.

RAJ RAJARATNAM, CO-FOUND GALLEON GROUP, DEFENDANT: Yeah.

CHIESI: They are going to guide down. I just got a call from my guy. I played him like a finely tuned piano. And then-

RAJARATNAM: Uh-huh?

He just called me now. I was talking about the family and everything and he said, "People think it's going to go to 25. They print on Wednesday."

LAKE: Some of the most damning evidence, experts say, comes from tapes of Rajaratnam and friend Rajat Gupta, who sat on the board of Goldman Sachs. The government says these conversations prove that Gupta tipped Rajaratnam off to key talks inside Goldman, which Galleon allegedly traded on.

RAJARATNAM: And there's a rumor, that Goldman might look to buy a commercial bank.

RAJAT GUPTA, GOLDMAN SACHS: Uh-huh?

RAJARATNAM: Have you heard anything along that line?

GUPTA: Yeah, this was a big discussion at the board meeting.

RAJARATNAM: Uh-huh?

GUPTA: On whether we, uh,

RAJARATNAM: Buy a commercial bank?

GUPTA: Buy a commercial bank. And you know it was a divided discussion in the board.

RAJARATNAM: Uh-huh?

LAKE: Experts say defense lawyers have their work cut out for them.

JACOB FRANKEL, FORMER FEDERAL PROSECUTOR: The government has been able to use Mr. Rajaratnam's own words against him through the audio tapes. That is what makes wire tap evidence so powerful. This whole case is going to boil down to whether the information was or was not in the public domain. Clearly the defense is that Mr. Rajaratnam was putting together this broader picture for making his investment decision based on information that was publically available, the mosaic theory.

LAKE: The defense is expected to take only a week or so to present its case. Rajaratnam is not expected to take the stand in his own defense, but the trial is not over yet and surprises may still be in store.

(END VIDEOTAPE)\

FOSTER: Maggie Lake reporting there.

Let's get the weather for you.

(WEATHER REPORT)

FOSTER: Now, one of the world's richest football teams could soon have a new owner. American billionaire Stan Kroenke has launched a takeover bid for Arsenal to be the latest building block in his huge empire, sporting empire. Kroenke purchased more than, more club shares over the weekend. Enough to actually trigger a clause that forces him to bid for the rest of the club so he can get the whole of the club, in theory. But if Arsenal's chairman and its manager, Arsene Wenger, have thrown their support behind the deal. It would mean that all of the top four clubs in the English premier league, Arsenal, Chelsea, and the two Manchester teams, would be owned then by foreigners.

The question now is, if Russian billionaire, Alisher Usmanov, will accept Kroenke's offer of just over $19,000 a share. He is the second- largest stake holder; 27 percent of the club shares. That puts him on level terms with Kroenke's 29 percent stake. But after the American's latest move, his time at the club could be over. He could counter bid, though. In a classic boardroom drama, earlier, I asked World Sports' Pedro Pinto to unravel it for us.

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PEDRO PINTO, CNN WORLD SPORTS CORRESPONDENT: What has occurred over the last 24 hours is that Stan Kroenke has agreed a price for the shares of two of the people who hold a substantial amount of them, to then trigger a take over of the club. So he will become the major shareholder. He will become the new owner of Arsenal Football Club. This should be confirmed at any moment.

The other major shareholder, who is Alisher Usmanov, has 27 percent of the shares right now. From what we have heard is he will not agree to sell his chunk to Stan Kroenke, but it really doesn't matter, because by taking over these new shares, Kroenke will have 62 percent-over 62 percent of the shares, so he will be the new owner of Arsenal Football Club.

FOSTER: But Usmanov, in theory, could launch a counter bid, couldn't he? Is that any-is there any possibility of that?

PINTO: There is a possibility of that occurring and we've heard that he will make a counter offer. What we have also heard from sources close to the club is that the two people who are selling these shares, who are Danny Fiszman and Lady Nina Bracewell-Smith, they do not want to sell to Usmanov. They would rather have Stan Kroenke take over the club. And the question is why. Well, Kroenke is someone who has a lot of experience owning clubs. His company, Kroenke Sports Enterprises, already owns four teams in the United States, St. Louis Rams, Colorado Rapids, Colorado Avalanche, and the Denver Nuggets. So they have proven that they have the experience to control a major team, like his Arsenal Football Club, in England Premier League.

FOSTER: There was a time in the past where English fans would be furious that a foreigner was taking over their club. But it is just not unusual anymore now, is it?

PINTO: Well, I'm sure you remember when the Glazers, when Malcolm Glazer took over at Manchester United, they were protests on the street. They said they were selling out. The club didn't have its identity anymore. And this is something that fans in England have to accept, because now 10 of the clubs are foreign owned. Five of them are owned by American businessmen.

And it seems, Max, that it is a status symbol to say I own a premier club. Because it has been the league that has been better marketed, better branded, over the last two decades. And international businessmen, if they have the money to burn, let's say, they'd like to be associated with the competition like the Premier League, that has such a big brand and such a big name all over the world.

FOSTER: It wouldn't happen in other parts of Europe, though, would it?

PINTO: No, because clubs normally, like the Barcelonas, the Real Madrids, they are owned by the fans. And they need to be elections to take over a club. You need to win an election from the members of clubs in order to become a chairman, the president, and make those decisions. Here in England it is privately owned clubs that can be taken over by anyone who has the money to take over and who can pass a fit and proper test given by the Premier League.

FOSTER: Well, they are much more like businesses it seems, in Britain, where elsewhere they are clubs?

PINTO: Completely. You know, a few years ago, obviously, the football market was revolutionized when clubs became companies. But that has been taken to an extreme in England where the clubs have to announce, on a regular basis, the earnings, the debt, the expenditure, all of that has to be transparent, because these clubs are like companies nowadays. They have shares and they are dependent on the results on the pitch. But so much, as well, on how much they are making and losing, which is the case a lot of the times, in England.

FOSTER: Expect more on that to be coming out.

Both the domestic struggles and the challenges of family life, common themes on the hit TV show "Desperate Housewives" Tonight Actress Eva Longoria opens up about her divorce and more in a revealing hour with CNN's Piers Morgan. That starts 30 minutes from now. Right after QUEST MEANS BUSINESS.

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FOSTER: Let's get back to our important International Monetary Fund that we were looking at earlier. The IMF actually says the BRIC countries, Brazil, Russia, India, and China, are far outpacing growth in the developed world. CNN's Shasta Darlington looks at how, in Brazil changing fortunes, are changing everyday lives.

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SHASTA DARLINGTON, CNN INTERNATIONAL CORRESPONDENT (voice over): Rio de Janeiro's Sahara Market has always packed in the crowds. But in 2011 their wallets are thicker and they've set their sites higher.

"Refrigerators, washing machines, microwave ovens," says a shopkeeper. "Nowadays even those who earn little can buy a washing machine."

With 7.5 percent growth in 2010, Brazil overtook Italy to rank as the world's seventh biggest economy. A decade ago, economists like Marclo Neri thought it was laughable when Brazil was included in the BRIC emerging economies.

MARCLO NERI, GETUILO VARGAS FOUNDATION: Probably because it sounds better, BRICs, than RICs, Brazil at the time was not an emerging country. We had-we were stagnated, but so I don't think Brazil at the time really deserved to be part of the BRICs.

DARLINGTON: But times have changed. Runaway inflation and a devastating currency devaluation gave way to an unprecedented wave of prosperity. Thanks in part to a commodities boom. From iron ore and steel to soybeans and coffee. But unlike other members of BRICs, Brazil's GDP was also driven by a growth in the middle class, as millions were lifted out of poverty.

NERI: The income of the 50 percent poorest grew in the last 10 years, five times what the income of the richest. So inequality is going down in Brazil. Makes it very different.

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DARLINGTON: It also made former President Luiz Inacio Lula da Silva one of the most popular leaders in the country's history. You can see the difference in Rio's notorious vavelas (ph), where in some cases banks have replaced drug gangs. And in markets like the popular Sahara.

"It is much better," says this state worker. "Because we had high inflation and it is now under control. Because many people who were below the poverty line were able to get out."

Brazil has an increasingly important role on the world stage, a point I heard U.S. President Barack Obama make repeatedly when I was covering his recent visit there.

The country has plenty of challenges ahead. Its first female president, Dilma Rousseff, has to rein in crime and improve education and health. But the economy keeps booming and could be among the world's top five as early as this year. Shasta Darlington, CNN, Havana.

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FOSTER: Well, the giant of the developing nations, China, has reported a traded deficit of more than $1 billion for the first three months of this year. It is the first time since 2004 that quarterly imports have outpaced exports in the world's second biggest economy. And it is a sharp turn around from the country's more than $13 billion surplus in the same period last year. Beijing says stronger domestic demand, higher food and energy prices and a longer Chinese New Year holiday helped produce the deficit.

China's imports have surged nearly 32 percent in the first quarter to a record $400.7 billion. And its exports were around 25 percent, up around 26 percent. Despite the deficit in this first quarter, China still reported a trade surplus in March and analysts expect the country to post a surplus for the year overall. Meanwhile China, Chinese investors will be looking ahead to Friday when Beijing releases its first quarter inflation and GDP figures.

Now tomorrow QUEST MEANS BUSINESS will live in Beijing for you. On Tuesday, we'll look at China's economy and hear from the CEOs of Burberry and Cathay Pacific. Richard will also show us a manufacturing craze that has reached royal proportions. Plus catch up with Michael Wu, in "The Boss". That is QUEST MEANS BUSINESS in China.

We'll be back with a final look at the day's numbers in just a moment. This is QUEST MEANS BUSINESS.

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FOSTER: The Dow is up by around a 0.01 of 1 percent, as you can see investors bracing themselves for the start of earnings season. Actually it has just gone down, just a fraction. ALCOA kicks that off in just a few hour's time, after the market closes. One company to watch today is Tyco, its shares up around 3 percent. There is speculation that Schneider Electric is eying a bid for that industrial giant.

As for Europe it was a fairly negative beginning to the week. All the major indices finished slightly in the red. The London FTSE flirted with some small gains through out the day with Barclays RBS (ph) shares reacting well to those U.K. banking reforms we mentioned earlier. Germany's carmakers Daimler and BMW both off around 2.5 percent. Volkswagen also helped to drag the DAX down. The Paris CAC currant saw the worst losses, though, down more than 0.5 of 1 percent.

That is QUEST MEANS BUSINESS. I'm Max Foster in London. Richard will be live for you in China tomorrow. Whatever you are up to in the hours ahead, he'll be telling you. He hopes they will be profitable.

"PIERS MORGAN TONIGHT" is just ahead. But first, a check of the headlines.

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