Barack Obama economic adviser Laura Tyson said at the Democratic National Convention on Monday that U.S. financial regulation needs modernizing, but hedged on how big a role to give the Federal Reserve.

Tyson, former chair of the Council of Economic Advisers in the Clinton administration, said she believes the Fed failed to crack down on subprime mortgage lending in recent years.

“What we have learned from the past two years … is that the old form of regulation is broken,” Tyson said.

View the full video conducted by Corbett B. Daly, Washington bureau chief for Thomson Reuters markets.  Click here for the related story from Reuters News.

Singapore wealth fund Temasek may have gotten hold of some bad stuff this year when it bought a 9 percent stake in Merrill Lynch. The stock has lost more than half its value since the purchase was announced in late December. But far from swearing off noxious bank assets, the flush Asian fund says it wants more. And why shouldn’t it? It just doubled its full-year profit by selling assets in local power and its national telecoms and airlines companies, as well by cutting a stake in Bank of China, so the toxicity of Merrill’s share price is not making it sick. Financials grew by two percentage points to 40 percent of its portfolio in the year through March and are likely to grow further, with Temasek saying it expects contagion from the credit crisis to spread. That should keep prices down for a while. Temasek said it will not cap its investments in the sector, but it was mum on whether it was thinking of taking on any Lehman exposure.

India’s largest oil producer ONGC has agreed a 1.4 billion pounds ($2.6 billion) takeover of Russia-focused oil explorer Imperial Energy Corp as it works to secure energy to fuel India’s booming economy. Imperial said ONGC’s overseas arm, ONGC Videsh, would pay 1,250 pence in cash for each of its shares in a deal that could double state-owned ONGC’s proved and probable reserves. This is less than the 1,290 pence approach Imperial said last month it was discussing with an unnamed bidder, which sources close to the matter identified as ONGC. Investors aren’t wholly convinced though, with the shares trading down more than 1 percent this morning after rising sharply in recent weeks on hopes for a bidding war.

Infosys Technologies agreed to buy British consultancy Axon Group for 407 million pounds ($753 million) as India’s second-biggest software services exporter looks for growth beyond an uncertain U.S. market. The cash deal values Axon at six pounds per share, a 19.4 percent premium over Friday’s close of 5.025 pounds and 33 percent over the average price of the last six months, Infosys CEO Kris Gopalakrishnan said. The stock has risen to 611, and Infosys shares have taken a hit as expectations rise another bid will emerge. Altium Securities said in a note it believed there was room for a counterbid closer to 700 pence.

Other deals of the day:

* Hyundai Heavy Industries, the world’s top shipbuilder, expressed its interest in Daewoo Shipbuilding, joining three other major bidding groups vying for its smaller rival. State-owned Korea Development Bank (KDB) and a government agency have put up for sale their combined 50.4 percent stake in the world’s No. 3 shipbuilder, in a deal estimated to fetch up to $8 billion, more than double Daewoo Shipbuilding’s current market price.

* Bluescope Steel, Australia’s top steel maker, will sell its New Zealand iron sands mining operation for NZ$250 million ($176 million) to Hong Kong’s Cheung Kong Infrastructure Holdings, the company said.

* Pennar Industries said Hyderabad’s JR Realtor Services had acquired 13 million shares, or 10.28 percent of its share capital.

Lufthansa has said it is interested in acquiring a stake in Austrian Airlines. Austrian state holding company OeIAG has invited bidders for its 43-percent stake in the carrier, worth about $223 million.

It’s a small deal, but it’s a big deal.

If Austrian’s board picks Lufthansa, the German carrier will own nearly half of Austria’s main carrier. And that could spur more consolidation — or partnerships at the very least — among other airlines, analysts said.

Lufthansa, affectionately known as Lufthie, is on a spree. In December, the airline bought a 19-percent stake in JetBlue Airways for about $300 million.

Under U.S. law, no foreign airline can own more than 25 percent of a U.S. airline.  By limiting its stake to 19 percent, Lufthansa remains below federal limits on foreign ownership of a domestic airline.

But the passive investment includes a representative on JetBlue’s board and opens up an opportunity for Lufthansa to make a bigger deal down the road.

Also, the “open skies” agreement is sure to increase competition among carriers — in Europe and in the United States. 

As airlines like Lufthansa take stakes in more airlines, and other carriers hold merger talks (British Airways and Iberia are in merger discussions while the two also entered a partnership with American Airlines earlier this month), airlines not in the middle of any talks could find themsleves left out in the cold.

After a New York Post article reported that Hollywood studio MGM had retained investment bank Goldman Sachs to look into a possible sale or capital raising, the studio issued a statement that it was not for sale. MGM, however, may look at “enhancements” to its long-term capital structure.

Private equity sales to strategic buyers have become a silver lining in an exit environment made difficult in part by a weak IPO market, writes the Wall Street Journal’s Deal Journal. According to Dealogic, U.S. sales to corporate buyers by PE firms are up 46 percent from a year earlier.

CNBC reported that private equity fund Kohlberg Kravis Roberts was in the lead in bidding for Neuberger Berman, beleaguered investment bank Lehman Brothers’ “crown jewel,” its asset management unit.

OTHER DEALS OF THE DAY

** Infosys Technologies, India’s No. 2 software services exporter, said it had agreed to buy UK-based consultancy services firm Axon Group Plc in an all-cash deal valued at 407.1 million pounds. ($753.1 million)

** Norwegian solar industry group Renewable Energy Corporation (REC) plans to build its next silicon materials plant in Bécancour, Quebec in Canada with a goal of starting production in 2012, REC said on Monday. A final investment decision will be made after preliminary engineering is completed, but REC’s investment in the plant is assumed to be at least $1.2 billion, Chief Executive Erik Thorsen said.

** Chip maker Broadcom Corp said it would buy Advanced Micro Devices Inc’s digital television chip business for $192.8 million in cash to enter the market for cheaper television sets. After the deal, Broadcom would be selling chips for television sets with screens of up to 20 inches priced around $200 to $300.

** Q9 Networks Inc, which provides data centers and network management services to other companies, agreed to be bought by private-equity firm Abry Partners in a cash transaction worth about C$361 million ($345 million), the companies said on Monday. Boston-based Abry, through its affiliate CDC Acquisition Corp, will buy all of the outstanding common shares of Q9 for C$17.05 each.

The yo-yo that is Lehman Brothers’ stock took another spill before the market opened on Monday, after a top South Korean regulator threw cold water on the idea of a state bank buying the battle-scarred Wall Street warrior. Financial Services Commission Chairman Jun Kwang-woo told reporters Korea Development Bank (KDB) should be a “cheerleader” and let local private banks take the lead in any such purchase. KDB’s interest lit a rocket under Lehman’s shares on Friday. When asked about the status of KDB’s possible interest in Lehman Jun said: “That would be an international marriage. Would you get married just after one or two blind dates?” A couple of blind dates might be a step up from the shot-gun buyouts that South Korea’s banks faced after the Asia crisis.

Canada’s Precision Drilling Trust will buy U.S. driller Grey Wolf for $2 billion in cash and stock, creating one of the largest North American oil and gas rig operators. The announcement comes a month after Grey Wolf shareholders voted down a proposed purchase of well-servicing company Basic Energy Services. Precision Drilling, Canada’s largest oil and gas driller, first made an unsolicited purchase offer for Grey Wolf in June. News that a deal had been struck emerged on Sunday. Based on financial results through June, the combined companies will have annual revenue of $1.8 billion.

Germany’s Commerzbank could buy insurer Allianz’s Dresdner Bank possibly by the end of this month, according to a source familiar with the situation at the bank. German weekly Welt am Sonntag said an agreement between the two was possible within the coming week. The two companies had agreed on the basic principles of the transaction, according to the paper, which said Commerzbank would buy Dresdner for slightly more than 9 billion euros ($13.38 billion) and Allianz would vouch for writedowns on the balance sheet of Dresdner of up to 1 billion euros. The sums were still being negotiated. Allianz would have a stake of slightly less than 30 percent in the merged bank, the report also said.

Australia has approved Chinese aluminum giant Chinalco’s recent purchase of a minority stake in Anglo-Australian miner Rio Tinto, but warned the Chinese firm against buying more shares without prior approval. State-owned Aluminium Corp of China (Chinalco), backed by U.S. peer Alcoa, began amassing shares this year with the aim of taking up to 14.9 percent of Rio, the target of a $127 billion takeover bid from rival BHP Billiton. Treasurer Wayne Swan said Chinalco had already vowed not to raise its stake above 14.99 percent without receiving fresh government approval and, secondly, not to seek to appoint a director to Rio Tinto’s board. Rio Tinto is at the center of a tug-of-war that reflects China’s anxiety over BHP Billiton’s proposed all-share bid for Rio, which would create a titan unrivaled in its degree of control over a wide range of industrial commodities. Rio is a major aluminum producer and both it and BHP are global suppliers of copper, but China’s biggest concern about the takeover bid surrounds iron ore, which is used in steel-making.

Other deals of the day:

* Japanese brewer Kirin Holdings is expanding its food business in Australia through unit National Foods’ $780 million acquisition of Dairy Farmers, helping it diversify away from a shrinking domestic beer market as Japan’s population ages.

* Lufthansa has formally announced its interest in acquiring a stake on offer in Austrian Airlines, a spokesman for the German carrier said. OeIAG is offering its 43 percent share in Austrian, worth around 157 million euros ($233.4 million), but said the size of the stake sold would depend on preserving an Austrian group of core shareholders owning 25 percent between them.

* Irish food group Glanbia said it would spend $315 million to buy Optimum Nutrition Inc, a U.S. maker of supplements for body builders, which will use by-products of its cheese manufacturing.

* Singapore Telecommunications said it has bought a 60 percent stake in Singapore Computer Systems for S$140 million ($99 million) as it seeks to boost its IT business.

* Norwegian shipping group DOF ASA said that uncertainty in the financial market had forced it to re-evaluate a planned buyout of offshore services group DOF Subsea.

* MLP Chief Executive Uwe Schroeder-Wildberg was quoted by Swiss finance newspaper Cash Daily as saying he believes Swiss Life’s plan to take over the German financial adviser would fail.

King Pharmaceuticals Inc’s $1.4 billion offer to buy Alpharma Inc follows a wave of unsolicited bids in the otherwise weak merger market.

So far this year, there have been 50 unsolicited bids, totalling $137.3 billion worldwide, up from 19 deals totaling $30.2 billion for the same period a year ago, according to Thomson Reuters data.

The amount of unsolicited or hostile takeover bids has increased as weak stock prices have enticed large corporations that have the luxury of cash on their books or the ability to raise funding despite tight credit markets.

Other unsolicited offers this year included InBev NV’s successful battle for Budweiser brewer Anheuser-Busch Cos Inc, and Microsoft Corp’s abandoned effort to buy Yahoo Inc.

King warned it would make a hostile bid if Alpharma refused to accept its bid. King wants to expand its pain drug business through the acquisition of Alpharma, which makes the pain drug Kadian and pain patch Flector, as well as plus products to treat animals.

So far this year, there have been 9 hostile bids valued at $12 billion, compared with 6 bids valued at $102.2 billion at this point last year, according to Thomson Reuters.

It looks like King may have a battle ahead of itself as Alpharma said the offer was not in the best interest of its shareholders. The proposal was essentitally identical to two previous offers by King that Alpharma already rebuffed, Alpharma said.

Alpharma, however, said it would be open to discussions for a deal at a higher price. Analysts said Alpharma’s hint that it would consider more money puts the company in play for other suitors to emerge and potentially creates a costly bidding war for King.

Just yesterday, the sound of doors closing could almost be heard echoing across the pacific as Lehman Brothers reportedly hit the Asian wealth circuit looking for help filling its expected $4 billion in third-quarter writedowns. Now state-run Korea Development Bank says it might be interested in buying the bank, lighting an 8 percent fire cracker under Lehman’s stock in premarket trade. “We are studying a number of options and are open to all possibilities, which could include (buying) Lehman,” a KDB spokesman said. KDB said it was open to mergers or acquisitions of both domestic and foreign companies to beef up its weak areas as the government was aiming to privatize it by 2012. Previous reports said KDB and CITIC Securities, China’s biggest brokerage, balked at the high price Lehman was asking.

Since its long-standing dispute with CME Group’s Chicago Board of Trade over trading rights is just about settled, the Chicago Board Options Exchange may soon become a takeover target. While the CBOE is expected to pursue an initial public offering, with a filing possible as soon as next month, many exchange industry experts see that as only an interim step. It will be like sticking a “for sale” sign up, they argue. Despite being the top U.S. equities options market, with a stranglehold on index options, the CBOE may have to consider a bigger partner. It is one of the few remaining stand-alone exchanges, which leaves it vulnerable to a squeezing of its margins by growing competition, particularly exchanges that can offer investors stocks and options under the same roof.

Mining giant BHP Billiton’s $128 billion bid for rival Rio Tinto could raise competition issues in iron ore. With mines across Australia’s ore-rich Pilbara region, Rio Tinto and BHP are the world’s second- and third-largest iron ore producers, respectively, behind Brazil’s Vale, and analysts reckon a combined group would control about 35 percent of the world’s seaborne traded iron ore. In a nine-page “statement of issues” ahead of its Oct.1 ruling, the Australian Competition and Consumer Commission (ACCC), which can order companies to sell assets if it thinks they have too big a hold in one sector, highlighted the likely impact of a deal on the iron ore trade and, in particular, on Australian steelmakers, but saw no major competition issues in copper, gold, uranium, bauxite or alumina. “I don’t think that’s a surprise to the two companies, particularly BHP … that iron ore would be the one area the regulators would be looking at very closely,” said Ken West, a partner at Perennial Growth Management. “But the Pilbara is the one they don’t want to be tampered with. If the regulators don’t show flexibility, then the Pilbara could become a deal breaker,” West said.

Other deals of the day

* Aon Corp, the world’s largest insurance broker, has made a recommended cash offer for Benfield valuing the UK-listed broker at 844 million pounds ($1.6 billion).

* New Zealand jeweller Michael Hill International said it had agreed to acquire 17 stores from the chapter 11 bankruptcy of Whitehall Jewelers Holdings Inc. The company said it would pay $5 million for the stores in Illinois and Missouri, its first foray into the U.S. market.

* Providence Equity Partners and MBK Partners are among the private equity firms on the shortlist for a 45 percent stake in the new telecom unit of Hong Kong’s PCCW, in a deal that could fetch more than $2.5 billion.

* Mining giant BHP Billiton’s $128 billion bid for rival Rio Tinto could raise competition issues in iron ore, Australia’s antitrust regulator said.

* Vitec Group said it will buy California-based LED lighting business Litepanels for up to $64.5 million to expand its Broadcast Systems division.

* British alternative software vendor Formjet said it has decided not to go ahead with a planned 1.2 million pound acquisition of a specialist distribution company.

* Sale of Russia-focused Imperial Energy is likely to be announced next week, an Indian government source said, confirming that Oil and Natural Gas Corp is in the race to buy the firm.

* South Korea’s POSCO, the world’s No.4 steelmaker, may buy iron ore, steel mill and shipyard assets in Ukraine, as it looks to reassure investors who have questioned its potential acquisition of Daewoo Shipbuilding.

Schaeffler has finally won the battle for Continental in an $18 billion deal that would create the world’s third-largest auto supplier.

Schaeffler makes ball bearings, typically used to steer a car. Its mechanical joints can be found in everything from the London Eye ferris wheel to the U.S. space shuttle. Continental makes a variety of components from tyres to brakes.

The grand finale ends a long and bitter battle in which Schaeffler quietly amassed a 36-percent stake in Continental, while Continental attacked Schaeffler as “egotistical, autocratic and irresponsible.”

Despite all that acrimony, Continental has decided to give control of the company to the Bavarian group owned by glamorous billionaire Maria-Elisabeth Schaeffler and her son.

The move by Continental is a sign of the times. And a harbinger of things to come. Rising gas prices, falling home prices and weak credit markets have eaten into car sales all over the world. In the United States — the world’s largest auto market — July auto sales plunged to their lowest in 16 years.

As automakers try to cut costs in every way possible, they are amping up the pressure on suppliers. And as suppliers get squeezed, fewer of them will be able to stand alone. At least half of the major U.S. suppliers have gone through bankruptcy. A few are struggling to exit Chapter 11.

Already squeezed by record commodity prices, the auto supplier industry has been hit hard by the slump in vehicle sales.

Not only are suppliers faced with the need to present automakers with lower bills, but they are also suffering from unexpected production cuts. While several automakers are slashing production of pickups trucks and SUVs, the suppliers were banking on the original (higher) production numbers.

More suppliers may be forced to seek bankruptcy protection or merge to capture cost-savings, analysts predict. As automakers look to streamline every part of their business, they may want a one-stop-shop for supplies instead of dealing with multiple parts vendors, which could also put an emphasis on consolidation.

Asia’s sovereign wealth funds may be loaded, but they don’t need long memories to recall the big losses they’ve suffered on seemingly sure-thing investments in Wall Street’s troubled banks. So with reports that Lehman Brothers came up empty in efforts to win funds from top Chinese brokerage CITIC Securities and state-owned Korea Development Bank, it’s anybody’s guess where it will come up with the cash it needs to deal with an expected $4 billion in writedowns before announcing results in September.  

The path most traveled heads further east, to Singapore and the gulf, where investors could be equally, if not more gun-shy given the news flow. A ray of hope could shine from Singapore though. State investment firm Temasek said it was prepared to plunk more money into Western banks. An Singapore sling couldn’t come at a better time. This morning, Citi’s Prashant Bhatia became the latest big bank analyst to warn on Lehman and fellow investment banks Goldman and Morgan Stanley, lowering third quarter estimates for all three, and The Wall Street Journal says the Fed had called Credit Suisse last month to see if it had pulled a credit line from Lehman, acting to prevent a repeat of the cascading speculation that helped sink Bear Stearns.

U.S. private equity investor Lone Star is buying the rump of lender IKB, Germany’s most prominent casualty of the subprime crisis. The sale by state bank KfW closes an embarrassing and costly chapter for Europe’s biggest economy. IKB nearly collapsed a year ago under the weight of $24 billion in investments linked to risky U.S. home loans, making it Europe’s first major victim of the global financial crisis. The government brokered the first of three rescues to avert what the country’s banking watchdog warned could trigger Germany’s biggest financial crisis since the 1930s depression. But as the cost of the rescues spiraled towards 10 billion euros ($14.8 billion), Berlin started looking for a buyer.

In a Wagnerian triumph echoing through Europe’s car factories, ball-bearing maker Schaeffler has won the battle for control of tires-to-brakes firm Continental. Continental Chief Executive Manfred Wennemer, who had slammed Schaeffler as “egotistical, autocratic and irresponsible” after it covertly gathered 36 percent of Continental’s stock, will go by the end of the month, leaving the way clear for the creation of the world’s third-biggest car-industry supplier, with sales of $50 billion. The agreement allows Schaeffler’s stake to creep up to just under 50 percent. But with effectively 36 percent already, the Bavarian group owned by glamorous billionaire Maria-Elisabeth Schaeffler and her son already has control.

Mizuho Financial Group, Japan’s second-largest bank by assets, said it would invest $120 million in U.S. merger advisory firm Evercore Partners, marking the latest push by a Japanese financial company into the world’s largest economy. Mizuho and Evercore, a boutique company that advises on larger mergers and acquisitions, also agreed to work together on M&A deals between Japan and North America, the Japanese bank said in a statement. Though on a smaller scale than Mitsubishi UFJ Financial Group’s $3.5 billion deal for UnionBanCal Corp last week, which was seen as providing the Japanese lender with a U.S. base for its M&A dreams, and Tokio Marine’s $4.7 billion bid for Philadelphia Consolidated last month, it’s clear the Japanese are serious about overseas expansion, which is aimed at offsetting slackening growth in the domestic market. Acquisitions by Japanese companies abroad totalled $24 billion in the first half of this year, according to Thomson Reuters data, nearly matching the total for all of 2007.

Deals of the day:

* Investment firm Bay Harbour Management snapped up U.S. apparel chain Steve & Barry’s for $168 million at an auction, the retailer said.

* Polish restaurant operator AmRest has offered 20.2 million zlotys ($9 million) for 11.2 percent of smaller rival Sfinks to boost its stake to 25.5 percent, the company said in a statement.

* Mold Tek Technologies said it has signed a preliminary agreement with the promoters of a U.S.-based firm and its associate firm in India to acquire 100 percent stakes in both of them.

* Japanese communications satellite firm and pay TV broadcaster Sky Perfect JSAT said it would set up a joint venture with U.S. firm Stratos focusing on mobile satellite services.

Late to the game, or the stamp of authority? Goldman Sachs cut its earnings outlooks for Citigroup, JPMorgan, Lehman Brothers, Merrill Lynch and Morgan Stanley last night, citing mounting write-downs on mortgages, a slowdown in overall activity, and legal expenses, and this morning, Bernstein cut its outlook on Lehman, Goldman, and Morgan Stanley. The round third-quarter smack down started with stalwart bank analyst Dick Bove of Ladenburg Thalmann, who cut Goldman and Morgan Stanley on August 11. Top-ranked Deutsche bank analyst Mike Mayo downgraded Goldman on the 12^th, as did Meredith Whitney of Oppenheimer. Goldman’s William Tanona said Lehman could lose $9.65 per share for the year, versus a prior forecast for a loss of $2.10 per share. “We assume no or negative earnings for the majority of firms in our universe this quarter, and for some of our firms, the third quarter marks the fourth consecutive quarter of reported losses, clearly an unprecedented streak.”

Ericsson and STMicroelectronics have agreed to join their wireless chip and software businesses to create a joint venture that will supply four of the world’s top five cellphone makers. The new company will bring together the Mobile Platforms unit of Ericsson, the world’s biggest mobile telecoms equipment maker, and ST-NXP wireless, the third-largest maker of wireless chips globally. With pro-forma 2007 revenues of $3.6 billion, the venture will present a tougher challenge to wireless chip market leader Qualcomm and number two Texas Instruments. Ericsson and ST-NXP Wireless already cooperate with one another. “This is an interesting merger in that the new company will be a supplier to all the big mobile companies except Motorola,” Redeye analyst Greger Johansson said.

Changi Airports International, owned by Singapore’s government, may consider buying British airports that Spain’s Ferrovial may be forced to sell. “We are open to evaluating the deal, but we will wait to see the terms if they are attractive,” said a Changi Airports spokeswoman. Airports operator BAA, owned by Ferrovial, was told by Britain’s Competition Commission that it should sell three of its seven British airports, due to problems created by its near monopoly. Changi has been on a global expansion spree in the past two years, buying a stake in China’s Nanjing Lukou and clinching management contracts in India, Russia and the Middle East.

Other deals of the day:

* ArcelorMittal, the world’s biggest steel producer, said it had agreed to buy iron ore miner London Mining Brasil for up to $810 million to help improve its self-sufficiency in raw materials.

* Business software maker Salesforce.com said that it bought smaller software maker InStranet for $31.5 million.

* Israeli holding company Koor Industries said it had raised its stake in Credit Suisse after gradually reducing it in recent weeks.

* Kirloskar Electric said its board has approved picking up stakes in two German firms. It will buy about 95 percent in German manufacturing firm Lloyd Dynamowerke and 100 percent in Lloyd Beteiligungs from CMP Fonds.