Thursday, July 10, 2008

Fed chief: Gov't needs more power when firms fail

By JEANNINE AVERSA, AP Economics Writer

Federal Reserve Chairman Ben Bernanke speaks at the The Federal Deposit Insurance Corporation on July 8, 2008 in Arlington, Virginia. Bernanke urged Congress Thursday to require stricter regulation of Wall Street firms in the wake of the near-collapse of Bear Stearns earlier this year.(AFP/Getty Images/File/Mark Wilson)
AFP/Getty Images/File Photo: Federal Reserve Chairman Ben Bernanke speaks at the The Federal Deposit Insurance Corporation on July...

WASHINGTON - The nation's top economic officials urged Congress on Thursday to give them new regulatory tools to better protect the country from economic and financial havoc if a major Wall Street firm were to fail.

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Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson made the recommendations in a joint appearance before the House Financial Services Committee as fresh worries gripped investors about the financial shape of mortgage giants Fannie Mae and Freddie Mac as well as investment bank Lehman Brothers Holdings Inc.

Both Bernanke and Paulson endorsed creating new procedures by which the government can guide an orderly liquidation of a failing investment bank in an effort to minimize any fallout that might be inflicted on the broader financial system and the overall economy. Such procedures, which are in place for commercial banks, might have made the dissolution of investment firm Bear Stearns more orderly.

Although Bernanke defended the Fed's controversial decision to financially back JP Morgan Chase's takeover of the Bear Stearns, the Fed chief said, "This is not something I want to do again" were other investment firms to falter.

Given a crush of other business, Congress is unlikely to give financial regulators new powers this year. It will be for the next president and the next Congress to grapple with.

The committee's chairman, Rep. Barney Frank, D-Mass., suggested it was more important for Congress to "do it right" rather than act quickly on substantial legislative changes. Bernanke and Paulson agreed with that assessment. "Realistically it is going to be difficult to get things done this year," Paulson acknowledged.

Still, new powers could help insulate the financial system — U.S. taxpayers — from getting walloped if a big financial company were to collapse, Bernanke and Paulson said.

"In light of the Bear Stearns episode, Congress may wish to consider whether new tools are needed for ensuring an orderly liquidation of a systemically important securities firm that is on the verge of bankruptcy, together with a more formal process for deciding when to use those tools," Bernanke said.

Paulson, who recently laid out such a proposal, said: "It is clear that some institutions, if they fail, can have a systemic impact." However, financial players need to be disciplined in managing risk and not expect the government to fly to their rescue, he added. "For market discipline to effectively constrain risk, financial institutions must be allowed to fail," he said.

The recommendations were part of a broader debate about the best ways to revamp the country's antiquated regulatory system. The idea is to brace the system to better respond to modern-day crises like the housing and credit debacles that have badly bruised the economy.

The Treasury chief also sought Thursday to calm investor jitters about the financial health of mortgage giants Fannie Mae and Freddie Mac. They are "working through this challenging period," Paulson told Congress. "Their regulator has made clear that they are adequately capitalized."

Shares of Fannie and Freddie tumbled Thursday amid widespread fears on Wall Street that shareholders will be wiped out if the government is forced to rescue the two companies.

Asked whether such companies could pose a risk to the U.S. financial system, Paulson replied: "In today's world, it is not helpful to speculate about any financial institution and systemic risk."

Meanwhile, Lehman Brothers, the nation's fourth-largest investment bank, is seen by many analysts to be the weakest of Wall Street's biggest firms. The company's shares plunged Thursday morning. Concerns emerged about Lehman's liquidity and leverage last month after the investment bank reported an unexpected $3 billion loss for the second quarter.

Of the broader financial system, Paulson said: "Right now we're going through a period of unusual turmoil" and the government's focus needs to be on stabilizing the situation. Bernanke echoed that sentiment.

On the weakened value of the U.S. dollar, which has boosted exports but contributed to high oil prices, Paulson said: "We want a strong dollar. A strong dollar is in our nation's interest. ... We're going through a tough period right now."

Bernanke has called for stronger oversight of big Wall Street firms, which are regulated by the Securities and Exchange Commission. Those firms have been given unprecedented — albeit temporary — access to tap the Fed for emergency loans, a privilege that has been granted for years to commercial banks, which are more tightly regulated.

With credit problems persisting, the Fed may extend the lending privilege to investment banks into next year, Bernanke has said.

The Fed's financial backing of JPMorgan Chase's takeover of the troubled Bear Stearns has drawn criticism from Democrats, who call it a government bailout that could put billions of taxpayer dollars at risk. Both Democrats and Republicans lawmakers said changes need to be made to protect taxpayers in the future should another big firm get into trouble.

Rep. Spencer Bachus, R-Ala., said a "shock absorber" is needed to make sure that "taxpayers are not holding the bag. ... This is a tall order."

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10 Things You Might Not Know About Your Credit Card

As you might imagine, we get a lot of questions about using credit cards. Based on those piles of emails we've put together a list of 10 things a lot of people don't know about credit cards. Enjoy!

1) Unsigned Cards Are Not Valid And Merchants Can And Will Refuse Them

You might think that everyone knows that you have to sign your credit card in order for it to be valid — after all — there's a panel on the back that says "Not Valid Unless Signed," but you'd be shocked at the number of angry emails we get from people who have tried to use an unsigned credit card with "SEE ID" or "CHECK ID" written on it and were turned away when they refused to sign their card.

Here's what VISA says should happen when you present an unsigned card:

1) The merchant will ask for your government ID.
2) You will be asked to sign the card. If you sign it, the signature on the card will be compared to the signature on the government ID. If you refuse, the card will not be accepted.

Here's VISA's official statement on "See ID":

Some customers write “See ID” or “Ask for ID” in the signature panel, thinking that this is a deterrent against fraud or forgery; that is, if their signature is not on the card, a fraudster will not be able to forge it. In reality, criminals don’t take the time to practice signatures: they use cards as quickly as possible after a theft and prior to the accounts being blocked. They are actually counting on you not to look at the back of the card and compare signatures—they may even have access to counterfeit identification with a signature in their own handwriting. “See ID” or “Ask for ID” is not a valid substitute for a signature. The customer must sign the card in your presence, as stated above.

Most merchants don't follow this policy, but some (most notoriously— the U.S. Postal Service), are quite strict.

2) The Maximum Liability For Unauthorized Use Of A Credit Card* Is $50 According To Federal Law

The Fair Credit Billing Act protects you from suffering damages due to unauthorized use of your credit card. If you report a lost or stolen card before anyone uses it, you are not responsible for any charges. If you do not report it before an unauthorized use you are liable for a maximum of $50.

(*Credit cards only. Debit cards and ATM cards are covered under the Electronic Fund Transfer Act, and your liability depends on how quickly you report the loss. Unlike credit cards, debit and ATM cards can have unlimited liability in certain circumstances.)

3) Merchants Cannot Require You To Present ID, Unless Your Card Is Unsigned
Some consumers enjoy it when a clerk asks to see their ID. Others do not. In some states, it's actually illegal for a store to record any additional information (such as an address or drivers license number) as a condition of processing a credit card transaction (unless the address is needed for shipping, of course.) For some reason this is always a hotly debated topic, so we'll go right to VISA for the answer:

Although Visa rules do not preclude merchants from asking for cardholder ID, merchants cannot make an ID a condition of acceptance. Therefore, merchants cannot refuse to complete a purchase transaction because a cardholder refuses to provide ID. Visa believes merchants should not ask for ID as part of their regular card acceptance procedures. Laws in several states also make it illegal for merchants to write a cardholder’s personal information, such as an address or phone number, on a sales receipt.

We think that's pretty clear. Don't want to show your ID? Don't.

4) Merchants Cannot Require A Minimum Transaction Amount
It's a violation of the credit card company's merchant agreement to refuse a transaction because it is below the "minumum."

VISA says:

Imposing minimum or maximum purchase amounts in order to accept a Visa card transaction is a violation of the Visa rules.

Mastercard says:

A Merchant must not require, or indicate that it requires, a minimum or maximum Transaction amount to accept a valid and properly presented Card

5) Merchants Cannot Charge A Surcharge For Using A Credit Card, However, They Can Offer A "Cash Discount"

You may have noticed that gas stations are starting to offer a different, higher price for credit cards. This isn't technically allowed— unless it is marketed as a "cash discount." In other words, if you fill up your car and find that you've been charged more than advertised because you paid with a credit card — that's not allowed. If, however, you decide to pay with cash because you saw an advertised "cash discount" to the "regular price" — that's ok. A subtle distinction, but an important one.

(There is something called a "convenience fee" that some institutions are allowed to charge if they do not typically accept credit cards in their normal course of business. The example VISA gives is a utility company where the customary way is to pay by mail or in person. The rules for charging this fee are somewhat complicated and there are loopholes, etc.)

6) Many Credit Cards Have Programs That Will Automatically Double The Manufacturer's Warranty And Other Excellent Benefits
We get a lot of complaints that can be easily solved by the complainee's credit card company. We've helped readers get laptops replaced out of warranty, and helped them get their money back when Best Buy sold them a box full of bathroom tile instead of a hard drive. Your card may come with extended warranty protection, 90 day accidental damage protection that includes vandalism, rental car insurance, road side assistance, baggage insurance, and return protection. You should be aware of what benefits your credit or debit card offers so that you remember to use them when you need them.

7) Merchants Are Not Allowed To Make You Give Up Your Right To A Chargeback

You might see a receipt that has suspicious-looking waiver stating that you're agreeing to give up your right to issue a chargeback against the merchant for any reason, no matter what, period. These waivers are the result of some crafty entrepreneurs selling sales-receipt paper with the waiver printed on it, claiming that it helps protect the merchant. It's all nonsense and it isn't allowed. If you see it, you should report the merchant.

8) Merchants Are Not Allowed To Place A Hold For The Estimated Tip

Because so many consumers have instant access to their account information, merchants aren't allowed to place an "authorization" for an estimated tip. For example, if you go to dinner and the bill is $100 and you pay with a credit card, the restaurant might be tempted to "authorize" your card for $120—a 20% tip. If you choose to leave a 15% tip and then check your balance — it will appear that you have been overcharged. This apparently results in lots of angry customers, so the practice has been forbidden in VISA's merchant agreement.

9) If Merchants Suspect You Of Fraud They Are Supposed To Call With A "Code 10"
If a merchant is suspicious of you, they are supposed to make a "Code 10" call. They are instructed to take your card, call in, and say “I have a Code 10 authorization request." They will then be asked a series of questions that can be discreetly answered with either yes or no. The merchant bank will then authorize or deny the card. They are not supposed to threaten to call the police or try to detain you. Mastercard says that if the police need to be involved, the "Code 10" operator will call the police while the clerk waits on hold.

10) If Merchants Break These Rules, You Can Report Them To The Credit Card Company
Here's Mastercard's Merchant Violation form. To report merchant violations to VISA, they ask that you report them to the financial institution that issued you your Visa card. You should be able to find the number your on Visa statement or on the back of your card.

(Photo: Maulleigh )

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Abu Dhabi buys 90% of New York City's Chrysler Building

Adam Rountree/The Associated Press
The government of Abu Dhabi bought a 75 percent stake in the landmark Chrysler building Tuesday for $800 million.

The government of Abu Dhabi bought a 90 percent stake in the Chrysler Building on Tuesday for $800 million from German real estate investors and Tishman Speyer.

But while it might seem that the buyer, the Abu Dhabi Investment Council, got a controlling interest in the Art Deco tower, a landmark, for that kind of money, that was not the case.

Despite having only a 10 percent holding, Tishman Speyer Properties will continue to control the property and manage it, much as it has since 1997, because it controls the land beneath the 77-story tower, with its trademark stainless steel crown, gargoyles and elevator cabs that evoke the chrome-laden autos of the 1930s.

Tishman Speyer Properties and the Abu Dhabi Investment Council, an arm of the Gulf emirate government, which tends to shun publicity, did not return calls requesting comment.

Teresa Miller, a spokeswoman for Prudential Real Estate Investors, which managed the German fund, confirmed on Wednesday that "we no longer own a 75 percent stake in the Chrysler Building."

Miller declined to disclose the fund's sale price. But real estate executives who were told about the transaction said that Tishman Speyer sold the investment council an additional 15 percent, and that the total price was $800 million. The investment council is also negotiating to buy the retail space in the seven-story glass Trylons, or pavilion, that Tishman Speyer built next to the Chrysler Building.

Tishman Speyer and its partner, Travelers Group, bought the Chrysler Building, at 42nd Street and Lexington Avenue, and the adjoining Kent Building in 1997 for about $220 million from a consortium of banks and the estate of Jack Kent Cooke.

Jerry Speyer, the chairman of Tishman Speyer, outmaneuvered competing bidders for the property by pre-emptively securing a 150-year lease with Cooper Union, which owns the land underneath the tower.

The tower was built in 1930 by Walter P. Chrysler, the automaker, and was briefly the tallest building in New York, losing out months later to the Empire State Building.

The Chrysler Building's lobby featured African marble and chrome, and the Sky Club on the 66th floor offered spectacular views.

But by the 1970s, the building was badly in need of refurbishing.

Tishman Speyer poured $100 million into a three-year renovation, which included erecting a retail pavilion on East 42nd Street under three glass pyramids between the Chrysler Building and the 32-story Kent Building, which was not included in the sale.

Less than four years later, Travelers sold its 75 percent stake for $300 million to the German real estate fund, TMW. "Tishman Speyer will maintain a controlling interest and full decision-making authority" over the building, Mr. Speyer said at the time.

Prudential later acquired TMW and sold its share of the Chrysler Building on Tuesday. Such funds generally buy assets for five to seven years and are not interested in being long-term owners of real estate.

Miller of Prudential Real Estate said that the fund had earned a 20 percent annual return on its investment in the Chrysler Building, the last property in that fund to be sold before it closes.

Last year, TMW and Tishman Speyer sold 666 Fifth Avenue, a 1.5-million-square-foot office tower, for $1.8 billion. They had bought it in 2000 for $518 million from Sumitomo Realty, a Japanese company that acquired the building in 1988 for $488.6 million.

Japanese companies and institutions flooded into New York during the 1980s real estate boom, with Mitsubishi Estate's purchase of Rockefeller Center touching off an outcry over foreign control of American property.

The Japanese lost a fortune after property values plunged by 50 percent during a recession in the early 1990s.

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Soldier Sues Army, Saying His Atheism Led to Threats

FORT RILEY, Kan. — When Specialist Jeremy Hall held a meeting last July for atheists and freethinkers at Camp Speicher in Iraq, he was excited, he said, to see an officer attending.

Ed Zurga for The New York Times

Specialist Jeremy Hall, 23, outside Fort Riley, Kan., where he has been stationed since being sent home early from Iraq because of threats from fellow soldiers.

Kevin Moloney for The New York Times

Mikey Weinstein, founder of the Military Religious Freedom Foundation, talking to cadets at the Air Force Academy.

But minutes into the talk, the officer, Maj. Freddy J. Welborn, began to berate Specialist Hall and another soldier about atheism, Specialist Hall wrote in a sworn statement. “People like you are not holding up the Constitution and are going against what the founding fathers, who were Christians, wanted for America!” Major Welborn said, according to the statement.

Major Welborn told the soldiers he might bar them from re-enlistment and bring charges against them, according to the statement.

Last month, Specialist Hall and the Military Religious Freedom Foundation, an advocacy group, filed suit in federal court in Kansas, alleging that Specialist Hall’s right to be free from state endorsement of religion under the First Amendment had been violated and that he had faced retaliation for his views. In November, he was sent home early from Iraq because of threats from fellow soldiers.

Eileen Lainez, a spokeswoman for the Defense Department, declined to comment on the case, saying, “The department does not discuss pending litigation.”

Specialist Hall’s lawsuit is the latest incident to raise questions about the military’s religion guidelines. In 2005, the Air Force issued new regulations in response to complaints from cadets at the Air Force Academy that evangelical Christian officers used their positions to proselytize. In general, the armed forces have regulations, Ms. Lainez said, that respect “the rights of others to their own religious beliefs, including the right to hold no beliefs.”

To Specialist Hall and other critics of the military, the guidelines have done little to change a culture they say tilts heavily toward evangelical Christianity. Controversies have continued to flare, largely over tactics used by evangelicals to promote their faith. Perhaps the most high-profile incident involved seven officers, including four generals, who appeared, in uniform and in violation of military regulations, in a 2006 fund-raising video for the Christian Embassy, an evangelical Bible study group.

“They don’t trust you because they think you are unreliable and might break, since you don’t have God to rely on,” Specialist Hall said of those who proselytize in the military. “The message is, ‘It’s a Christian nation, and you need to recognize that.’ ”

Soft-spoken and younger looking than his 23 years, Specialist Hall began a chapter of the Military Association of Atheists and Freethinkers at Camp Speicher, near Tikrit, to support others like him.

At the July meeting, Major Welborn told the soldiers they had disgraced those who had died for the Constitution, Specialist Hall said. When he finished, Major Welborn said, according to the statement: “I love you guys; I just want the best for you. One day you will see the truth and know what I mean.”

Major Welborn declined to comment beyond saying, “I’d love to tell my side of the story because it’s such a false story.”

But Timothy Feary, the other soldier at the meeting, said in an e-mail message: “Jeremy is telling the truth. I was there and witnessed everything.”

It is unclear how widespread religious discrimination or proselytizing is in the armed forces, constitutional law experts and leaders of veterans’ groups said. No one has independently studied the issue, and service members are reluctant to come forward because of possible backlash, those experts said.

There are 1.36 million active duty service members, according to the Pentagon, and since 2005, it has received 50 formal complaints of religious discrimination, Ms. Lainez said.

In an e-mail statement, Bill Carr, the Defense Department’s deputy under secretary for military personnel policy, said he “saw near universal compliance with the department’s policy.”

But Mikey Weinstein, a retired Air Force judge advocate general and founder of the Military Religious Freedom Foundation, said the official statistics masked the great number of those who do not report violations for fear of retribution. Since the Air Force Academy scandal began in 2004, Mr. Weinstein said, he has been contacted by more than 5,500 service members and, occasionally, military families about incidents of religious discrimination. He said 96 percent of the complainants were Christians, and the majority of those were Protestants.

Complaints include prayers “in Jesus’ name” at mandatory functions, which violates military regulations, and officers proselytizing subordinates to be “born again.” After getting the complainants’ unit and command information, Mr. Weinstein said, he calls his contacts in the military to try to correct the situation.

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Kevin Moloney for The New York Times

At center, the chapel at the Air Force Academy in Colorado Springs. In 2005, new rules went into effect after cadets complained that evangelical Christian officers proselytized on campus.

“Religion is inextricably intertwined with their jobs,” Mr. Weinstein said. “You’re promoted by who you pray with.”

Specialist Hall came to atheism after years as a Christian. He was raised Baptist by his grandmother in Richlands, N.C., a town of fewer than 1,000 people. She read the Bible to him every night, and he said he joined the Army “to make something of myself.”

“I thought going to Iraq was right because we had God on our side,” he said in an interview near Fort Riley.

In the summer of 2005, after his first deployment to Iraq, Specialist Hall became friends with soldiers with atheist leanings. Their questions about faith prompted him to read the Bible more closely, which bred doubts that deepened over time.

“There are so many religions in the world,” he said. “Everyone thinks he’s right. Who is right? Even people who are Christians think other Christians are wrong.”

Specialist Hall said he did not advertise his atheism. But his views became apparent during his second deployment in 2006. At a Thanksgiving meal, someone at his table asked everyone to pray. Specialist Hall did not join in, explaining to a sergeant that he did not believe in God. The sergeant got angry, he said, and told him to go to another table.

After his run-in with Major Welborn, Specialist Hall did not file a complaint with the Army’s Equal Opportunity Office because, he said, he was mistrustful of his superior officers. Instead, he told leaders of the Military Association of Atheists and Freethinkers, who put him in touch with Mr. Weinstein. In November 2007, Specialist Hall was sent home early from Iraq after being repeatedly threatened by other soldiers. “I caution you that although your ‘legal’ issues are yours and yours alone, I have heard many people disagree with you, and this may be a cause for some of the perceived threats,” wrote Sgt. Maj. Kevin Nolan in Specialist Hall’s counseling for his departure.

Though with a different unit now at Fort Riley, Specialist Hall said the backlash had continued. He has a no-contact order with a sergeant who, without provocation, threatened to “bust him in the mouth.” Another sergeant allegedly told Specialist Hall that as an atheist, he was not entitled to religious freedom because he had no religion.

Responding to questions about Specialist Hall’s experience at Fort Riley, the staff judge advocate, Col. Arnold Scott, said in an e-mail message, “In accordance with Army policy, Fort Riley is committed to ensuring the rights of all its soldiers are protected, including those of Specialist Hall.”

Civilian courts in the past have been reluctant to take on military cases, and the Justice Department has yet to respond to Specialist Hall’s lawsuit.

“Even if it doesn’t go through, I stood up,” Specialist Hall said. “I don’t think it is futile.”

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No doubt it's torture, says U.S. journalist after trying waterboarding

Author and journalist Christopher Hitchens says it was difficult finding someone who would agree to waterboard a man of 60. Author and journalist Christopher Hitchens says it was difficult finding someone who would agree to waterboard a man of 60. (Christian Witkin/McClelland & Stewart)

Christopher Hitchens, a Washington-based journalist known for his support of the Iraq war and the U.S. war on terror, has subjected himself to waterboarding.

The experiment was done in answer to critics who challenged him to try it after he defended U.S. treatment of Muslim prisoners.

The controversial interrogation technique, which simulates drowning, is the focus of an intense debate in U.S. political circles.

Washington has been divided over whether or not waterboarding can be called torture since it was learned the technique was used by the CIA on at least three detainees, one of them being Khalid Sheik Mohammed, who is accused of plotting the Sept. 11 attacks.

The experience left Hitchens with no doubts. The August issue of Vanity Fair will carry his article titled "Believe Me, It's Torture."

Hitchens told CBC News he decided waterboarding was torture while talking with U.S. forces specialists about it after the experience.

He'd lasted, he estimated, less than 10 seconds under the technique. "I would defy anyone to stand more — people with better lungs than me and people who are younger," he said in an interview Monday.

"I'm nearly 60 — which actually made it difficult to get this done because people who were capable of doing it said they wouldn't because at my age it could kill me."

Hitchens went into the experience with a code word he could shout and an agreed-upon physical signal which would let the specialists know he'd had enough.

But he said the experience was still terrifying.

"I was suddenly grabbed from behind and pinioned and a hood pulled over my head, a sort of balaclava helmet. It admitted some light but I couldn't really see," he said. "I was turned around a few times I think to disorient me so I didn't know which direction I was facing."

He was then taken to a shed with strobe lights flashing and metallic music playing.

"With my hands handcuffed to a belt, I then had my arms very tightly wrapped close to my torso so I couldn't move anything above my waist and then the same was done to my legs. I was placed on a board which was a shallow incline, but one that put my head below the level of my heart."

Hitchens said he couldn't move at all.

"Then two or three levels of towel were placed on the outside of my face so I was completely oblivious to the outside world, couldn't hear or see anything and was wondering how I was going to carry on breathing … and then water began coming through the towel into my nostril and that was the situation."

A wet hand was also held over his face and breathing in caused the wet towel to cover his nose.

"It had the effect very rapidly of inducing a panic and gag reflex," Hitchens said. "It's almost impossible to avoid doing that, even though … you have some idea of what's coming and what's going on, your system overrides your brain in a sense and all you want to do is make sure you're not breathing water."

The experience has had after-effects — including bad dreams and a feeling of panic that returns whenever he is breathless, he said.

In an article last year in Slate, Hitchens attempted to draw a distinction between what he called techniques of "extreme interrogation" and "outright torture."

But his Vanity Fair article makes no such distinction.

Coming from a writer who has been a strong defender of the U.S. conduct in Iraq and against Muslim prisoners, Hitchens's experience has attracted attention in Washington.

"I can only judge from the reactions I've had so far, including from some people who are supporters of the administration in general on the war on terror who say they agree with me that it's not something that the U.S. should be doing to its prisoners," Hitchens said.

There is "a feeling a line has been crossed, that we're using methods we would have condemned if they were used by an enemy," he added.

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Iran Gen.: Our finger is always on the trigger

TEHRAN, Iran (CNN) -- Iran test-fired a long-range missile on Wednesday in response to what it says are threats from Israel and the United States, Iranian officials said.

Iran says this test-firing was a success.

Iran says this test-firing was a success.

"We want to tell the world that those who conduct their foreign policy by using the language of threat against Iran have to know that our finger is always on the trigger and we have hundreds and even thousands of missiles ready to be fired against predetermined targets," Gen. Hossein Salami, commander of the Revolutionary Guard ground forces, said on state TV.

"We will chase the enemies on the ground and in the sky and we are able react strongly to enemy's threats in shortest possible time."

Iran's Islamic Revolutionary Guard Corps test-fired a Shahab-3 missile and several other missiles during war games in the Persian Gulf called the Great Prophet III, according to Iran's state-run media and a U.S. military source.

William Burns, a senior U.S. State Department official, said Iran is "as serious ... a problem as any we face today."

The exercise comes a month after Israel conducted a military drill in the eastern Mediterranean involving dozens of warplanes, and the latest Iranian activities prompted concern from Israel and condemnation from the United States.

Iran occasionally tests missiles, but this firing comes amid international tensions over its nuclear aspirations.

The state-run Islamic Republic News Agency said "the war game was aimed at improving the combat readiness of Iran's armed forces. The 2,000-kilometers-range Shahab-3 missiles were tested to demonstrate Iran's capability in hitting its enemies accurately at the early stages of their probable attacks against the Islamic Republic."

The agency added: "Domestic and foreign political and military analysts believe that Shahab-3 is able to reach targets in the occupied lands in case of the Zionist regime's probable attacks against Iran's nuclear sites."

Iran's Press TV said the military "successfully test-fired new long and mid-range missiles." It mentioned the Shahab 3, "which can hit any target within a range of 2,000km." It said the missile was equipped with a one-ton conventional warhead.

"Nine highly advanced missiles with improved accuracy were simultaneously tested including the Zelzal and Fateh missiles with ranges of 400km and 170km respectively."

Press TV said troops were also involved in the maneuvers in the Persian Gulf and Strait of Hormuz areas.

A U.S. military official with knowledge of the testing counted the firing of seven missiles, one Shahab-3 and six shorter-range ballistic missiles. The testing took place over land, the official said.

The official, who noted that these kinds of tests had occurred before and were not unexpected, said the tests were tracked by U.S. intelligence.

Another military source said another Iranian exercise is under way inside the Persian Gulf with surface ships and submarines.

World powers, who suspect Iran is intent on building nuclear weapons, have offered economic and other incentives in exchange for the suspension of its enrichment program.

Iran, which says its nuclear program is strictly to produce energy, defends its right to proceed with enrichment.

There are worldwide worries that Israel, which is concerned by Iran's plans, is pondering a unilateral strike.

Israel's recent aerial military exercise was in part an effort to send a message that it has the capability to attack Iran's nuclear program.

The distance involved in the exercise was roughly the same as would be involved in a possible strike on the Iranian nuclear fuel plant at Natanz, a U.S. military official said.

In 1981, Israel attacked a nuclear facility in Iraq. Israel also struck a site in Syria that some say was a nuclear reactor under construction.

One Israeli Cabinet member, Shaul Mofaz, recently said it "will attack" Iran if the nuclear program was not halted.

Last week, the Islamic Revolutionary Guard Corps commander, Gen. Mohammed Ali-Jaafari, said any strike against Iran's nuclear facilities would be regarded a the beginning of war.

At the same time, Iranian leaders are discounting the possibility of war. President Mahmoud Ahmadinejad, in Malaysia this week for a conference, told reporters Iran was trying to prevent a confrontation.

"We are making all-out efforts to expand peace and security in the world. You should not be concerned about a new war," he said on Tuesday.

Mark Regev, spokesman for Israeli Prime Minister Ehud Olmert, said it did not want conflict with Iran.

"But the Iranian nuclear program and the Iranian ballistic missile program must be of concern for the entire International community," Regev said.

The White House reacted strongly to the Iranian test-firing.

U.S. National Security Council spokesman Gordon Johndroe said: "Iran's development of ballistic missiles is a violation of United Nations Security Council resolutions and completely inconsistent with Iran's obligations to the world."

Johndroe mentioned that the U.S., Britain, France, Russia, China and Germany "are committed to a diplomatic path, and have offered Iran a generous package of incentives if they will suspend their uranium enrichment activities."

"They should also refrain from further missile tests if they truly seek to gain the trust of the world. The Iranians should stop the development of ballistic missiles, which could be used as a delivery vehicle for a potential nuclear weapon, immediately."

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