Rising delinquencies among consumer and corporate borrowers are the "next wave" of the financial crisis and may affect banks that have avoided losses so far, said Deutsche Bank AG Chief Executive Officer Josef Ackermann.

"This crisis has consisted of a series of earthquakes, with changing epicenters," Ackermann said late yesterday at an event in Zurich. "Bad loans are the next wave. Banks that have fared relatively well so far will also be affected by this."

Deutsche Bank, Germany's biggest lender, said this week it set aside 1 billion euros ($1.4 billion) for risky loans in the second quarter. The seven-fold increase in provisions and below- forecast revenue from trading sent the Frankfurt-based bank's shares to the biggest decline in four months on July 28.

The economy's long, churning decline leveled off significantly from April through June, the government reported on Friday, supporting hopes that the economy would turn around in the second half of the year.

The American economy shrank at an annual pace of 1 percent in the second quarter, after contracting at an annual pace of 6.4 percent earlier this year. Government spending, bolstered by the first payouts from a $787 billion stimulus package, propped up the economy and accounted for 20 percent of the country's output.

But consumer spending, which makes up about 70 percent of the overall economy, has continued to fall as fearful Americans hold onto their paychecks and whittle down their spending. This has led to concerns about what will happen once stimulus funds peter out.

Green shoots!

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

July 31 (Bloomberg) -- The dollar slumped to the lowest level of the year, U.S stocks climbed to a nine-month high and gold, oil and copper rallied after a smaller-than-forecast contraction in the economy sent investors to higher-yielding assets. Treasuries increased as inflation concern eased.

The Dow Jones Industrial Average added 0.3 percent as of 2:38 p.m. in New York, extending its best monthly gain since 2002, after the Commerce Department said gross domestic product contracted a better-than-forecast 1 percent annual pace. The dollar fell 1.3 percent to 1.4258 per euro, from $1.4075 yesterday, while gold, copper and crude futures increased by at least 2 percent. The yield on the 10-year note slipped 10 basis points, or 0.1 percentage point, to 3.51 percent.

Investors bought commodities and securities that benefit most in an expanding economy on speculation the worst recession in half a century is ending. Government bonds rose after a gauge of consumer spending in the GDP report retreated more than projected, suggesting prices remain in check.

WASHINGTON (Reuters) - Government regulators could prohibit incentive-based pay packages at large U.S. financial institutions that encourage "inappropriate risks" under a bill approved on Friday by the U.S. House of Representatives.

Heading next to the Senate, where its outlook is uncertain, the bill would also give shareholders in public corporations the right to cast annual, nonbinding votes on executive pay, giving them a louder, but largely symbolic "say on pay."

The House Democrats' bill, part of a broad push to tighten banking and market regulation, would also impose new standards on corporate compensation committees and compensation consultants, requiring them to be independent of managers.

Financial institutions with assets of less than $1 billion would be exempted from the regulation on incentive-based pay.

The House vote signifies progress for Democrats' drive to toughen oversight of banking and markets amid the worst financial crisis in generations and a stubborn recession.

Inflation in the 16-member eurozone went further into negative territory in July in the wake of this year's worldwide economic slowdown. Unemployment in the bloc also took a turn for the worst. 

Preliminary figures from the European Commission's statistics office, Eurostat, showed consumer prices fell more than forecast from minus 0.1 per cent in June to minus 0.6 per cent this month. Economists had forecast a drop to minus 0.4 per cent in July.

Weaker energy and food prices are believed to be central to the overall predicted drop.

But dwindling consumer prices have also helped to stoke fears about the threat of deflation, which in turn could undercut hopes of an early rebound in the eurozone economy from what has been its deepest downturn in more than 60 years.

The eurozone economy shrank by 4.8 percent year-on-year during the first three months of 2009.

However, European Central Bank (ECB) chief Jean-Claude Trichet has insisted that the negative inflation in the eurozone was likely to be short-lived. Trichet told a press conference this month that the latest consumer price data reflected only temporary effects.

The US and Switzerland on Friday reached an agreement on the closely watched dispute over whether UBS should be forced to reveal the identities of thousands of its American clients.

Details of the settlement, which could deal a blow to Switzerland's famed bank secrecy, are still being negotiated by the two sides. However, Stuart Gibson, a lawyer for the US Department of Justice, told the federal judge presiding over the civil case in Miami that there was an "agreement in principle"' on the "major issues" and that the remaining issues were expected to be resolved within a week.

Skype might have to shut down because of a dispute over the core technology used to make the internet telephone system work.

EBay, which paid $2.6 billion (£1.6 billion) for the voice-over-the-internet system in 2005, is facing a court battle with the original founders of the company who retained the rights to the technology at the heart of the system.

EBay admitted in a regulatory filing that it might have to close down the company. It said it was trying to develop alternative software but if that did not work, or if eBay lost the right to the original software: "Skype would be severely and adversely affected and the continued operation of Skype's business as currently conducted would likely not be possible."

The dispute also threatens eBay's plan to spin off Skype, scheduled for next year.

Unemployment in Japan surged to a six-year high as the country set a new record for core consumer price deflation in June, data released on Friday showed.

The 1.7 per cent year-on-year fall in consumer prices, excluding fresh food, and the 5.4 per cent jobless rate highlight the continuing troubles of the world's second-largest economy, despite a sharp rebound in industrial output over the past four months.

The dozens of insurance companies that make up the American International Group show signs of considerable weakness even after their corporate parent got the biggest bailout in history, a review of state regulatory filings shows.

Over time, the weaknesses could mean trouble for A.I.G.'s policyholders, and they raise difficult questions for regulators, who normally step in when an insurer gets into trouble. State commissioners are supposed to keep insurers from writing new policies if there is any doubt that they can cover their claims. But in A.I.G.'s case, regulators are eager for the insurers to keep writing new business, because they see

Next to a Chinese restaurant in Burlington, Vt., lurks a quiet guardian of Wall Street -- an obscure insurance company that is supposed to protect big-money investors in the event of a catastrophic failure of a major brokerage firm.

A failure, for instance, like the one that brought down Lehman Brothers nearly 11 months ago. Now, after years in the shadows, the insurer, the Customer Asset Protection Company, could finally be put to the test, and questions are starting to swirl.

The worry is that the company, which has never paid out a claim, might be unable to cope with the Lehman bankruptcy.

If it were overwhelmed by claims, the banks and brokerage companies that own Capco, as it is known, could end up owing billions of dollars.
...
By some industry estimates reviewed by the insurance department, Capco could face nearly $11 billion in claims but has only about $150 million with which to meet them. The state is examining whether the company sold policies without the means to cover them, according to a person with direct knowledge of the inquiry who had signed confidentiality agreements.
...
Capco, which is private, is something of a financial mystery. Its members include Wall Street giants like Morgan Stanley and Goldman Sachs, banks like JPMorgan Chase and Wells Fargo, smaller brokerage firms like Robert W. Baird & Company and Edward Jones, and Fidelity, the mutual fund giant.

Fannie Mae and Freddie Mac are unlikely to repay the government in full for all the capital it has pumped into the companies, according to their regulator.

"My view is that some assets in the senior preferred will have to be left behind as they come out of conservatorship," Federal Housing Finance Agency Director James B. Lockhart said Thursday in response to a question at a panel discussion in Washington. "That will mean that some of the losses will never be repaid."

The Treasury has agreed to pump $200 billion into each company in order to keep them solvent. In exchange, the government receives senior preferred stock that pays a 10% dividend. So far, it has injected $85 billion in total into the companies, but Lockhart said that figure was likely to rise in the coming months.

The value of global financial assets grew from less than 45 per cent of global GDP in 2003 to nearly 490 per cent in 2007.
...
On the fiscal front, governments from the world's largest 20 economies are expected to collectively pump about $US5 trillion into their economies by the end of next year (or nearly 8 per cent of global GDP since the crisis began). Altogether, the measures are the equivalent of an extraordinary and unprecedented 18 per cent of global GDP
...
The average budget deficit for OECD economies increased more than sixfold, from 1.4 per cent of GDP before the crisis in 2007 to 8.8 per cent of GDP in 2010. Public borrowing is required to finance these deficits and is expected to increase from 73.5 per cent of GDP in 2007 to 100.2 per cent in 2010. Among the big advanced economies, net debt will increase from 52 per cent of GDP in 2007 to 79 per cent in 2010.

Hat tip naked capitalism

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet

Writing in the Financial Times yesterday, Josef Ackermann - CEO of Deutsche Bank - argued that larger banks are not more dangerous to the health of financial system (and thus to taxpayers) than smaller banks.  According to him, system danger arises primarily from the degree to which banks are "interconnected".

Inadvertently, Mr. Ackermann makes a strong case for banking system reform.  You can break this down into five parts.

NewYork Times technology columnist David Pogue is mounting a campaign against those canned messages that cellular carriers play after the greeting on your mobile phone voicemail (hat tip Mark Thoma's son) - you know, the ones that say "to leave a voice message, wait for the beep," only they take 30 seconds doing so, for th sole purpose of chewing up the mobile phone minutes of the person calling you. (According to Pogue, multiple carrier executives have admitted that the sole purpose of these value-destroying messages is to maximize airtime and hence revenue.)

This is exactly the same kind of "innovation" that we've seen in financial services and in health insurance. In each case, it's what you get when you have too much concentration, so that a small group of oligopolists can effectively agree on the same business practice that generates profits at the consumer's expense.

According to Bloomberg, Decreasing Exports subtracted 0.76% from GDP. At the same time, falling Imports added 2.14%.  Net contribution of the fact that Imports are free falling twice as fast as Exports are = 1.38%.

If they were both falling at the same rate -- if Europe and Asia's consumers were hurting as much as ours -  GDP would have been -2.38%.

If it seems weird to you that the ratio of domestic and overseas shrinking economies and their reduced consumption somehow turned into a positive GDP contributor, well, welcome to the wonderful world of government statistics.

By Sen. Edward Kaufman, Dem. Delaware

Here are just four areas where the SEC needs to act urgently to protect investors and restore market integrity.

First, the SEC should restore the substance of the uptick rule. This rule, a mainstay of investor protection for 70 years until it was repealed in June 2007, required investors simply to pause and to wait for an uptick in price before continuing to short sell. Without such a rule in place, investors who own stocks are more vulnerable to organized "bear raids" - abusive short selling combined with coordinated "misinformation" campaigns - which many believe contributed to the demise of Lehman Brothers and Bear Stearns, key elements in the collapse of our financial markets last year.

Second, the SEC should implement tougher rules that will stop naked short selling through an enforceable system. Naked short selling is the practice of selling stocks without first locating or borrowing the actual shares needed for timely delivery at settlement, sometimes in a concerted action to manipulate a stock price downward....That is some progress, but not enough. Two months from now, the Commission will finally begin to discuss publicly the potential solutions that I and a bipartisan group of Senators have been urging: either a pre-borrow requirement or a centralized "hard locate" system, which would prohibit short selling unless the executing broker first obtains evidence of a unique identifier number associated with specified shares set aside for timely delivery. The Depository Trust & Clearing Corporation tells us that it has the capacity and the willingness to implement that system - but only if the SEC requires it through a rule.

Third, the SEC should ban the use of so-called "flash orders" by high-frequency traders. Flash orders allow exchange members who pay a fee to get a first look at share order flows before the general public. By viewing this buy and sell order information for just milliseconds before it goes to the wider market, these investors gain an unfair advantage over the rest.  As the New York Stock Exchange complained to the SEC on May 28, selling flash orders for a fee provides "non-public order information to a select class of market participants at the expense of a free and open market system." To use a baseball metaphor, flash orders allow some batters to pay to see the catcher's signals to the pitcher, while the rest of us don't see them. Markets that permit a privileged few to have special access to information cannot maintain their credibility.

-Skip-

Finally, the SEC should establish disclosure and transparency equality: the disclosure requirements that apply to pooled funds worth greater than $100 million should apply uniformly to all, including hedge funds, for both long and short positions. And the level of transparency for order flows should be the same for all.

It is tempting to believe that the relative ebullience of stock markets in recent weeks is a reflection of all this and, more importantly, a harbinger of better times to come. If only it were so simple.

As we ought to have learnt by now, market behaviour is as much about animal spirits, group-think, technical factors, and relative opportunities for investment, as about mirroring the world outside.

Recent gains in global equities are only partly about improving fundamentals. Much is the result of trading games and the sheer weight of money coming off the sidelines, with such uninspiring returns to safer assets.