Banking executives will have their pay linked to long term profitability under new rules designed to prevent a repeat of last year's financial meltdown.

Alistair Darling will tell MPs today that salaries will be aligned to the earnings and overall financial health of institutions when he presents his long-awaited reforms to the system of banking regulation.

Typically, top bankers are paid a fixed basic salary topped up with bonuses linked to their bank's share-price performance. Such arrangements can encourage excessive risktaking and often do not reflect the quality of the bank's balance sheet.

The Chancellor will also announce that the Financial Services Authority (FSA) will cap how much a bank can lend during the good times to ensure that it is not overstretched when the economy deteriorates.

William White predicted the approaching financial crisis years before 2007's subprime meltdown. But central bankers preferred to listen to his great rival Alan Greenspan instead, with devastating consequences for the global economy.

William White had a pretty clear idea of what he wanted to do with his life after shedding his pinstriped suit and entering retirement.

White, a Canadian, worked for various central banks for 39 years, most recently serving as chief economist for the central bank for all central bankers, the Bank for International Settlements (BIS), headquartered in Basel, Switzerland.

Then, after 15 years in the world's most secretive gentlemen's club, White decided it was time to step down. The 66-year-old approached retirement in his adopted country the way a true Swiss national would. He took his money to the local bank, bought a piece of property in the Bernese Highlands and began building a chalet. There, in the mountains between cow pastures and ski resorts, he and his wife planned to relax and enjoy their retirement, and to live a peaceful existence punctuated only by the occasional vacation trip. That was the plan in June 2008.

And now this.

EU finance ministers meeting in Brussels on Tuesday (7 July) agreed on the need for new measures to lessen the effects that leaner economic periods can have on the financial system.

"We are clearly indicating that we need a more robust financial system in Europe with increasing abilities to build buffers against financial instability," said Swedish finance minister Anders Borg whose country recently took over the helm of the EU presidency.

European banks may be required to hold greater capital buffers

New measures would see a change to banking and accounting rules, including an obligation on banks to store away more profits during boom times to pay off expected loses on loan portfolios in the future.

Ministers would also like to see banks build up greater capital buffers to protect against fluctuations in the value of financial assets, with the European commission now likely to come forward with more concrete proposals in October.

srael had won agreement from the United States for the continued construction of 2,500 housing units in settlements in the West Bank, despite U.S. calls for a freeze, according to the Israeli newspaper Ma'ariv.

Israeli government spokesman Mark Regev said the United States and Israel have been trying to find common ground on the sensitive settlement issue, but he had no comment on the front-page report of a deal.

A U.S. embassy spokesman in Tel Aviv also had no immediate comment.

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The report followed a briefing by Defense Minister Ehud Barak to Prime Minister Benjamin Netanyahu on his talks in London on Monday with U.S. envoy George Mitchell on ending a rift with Washington over its demand for a settlement freeze.

Western officials said the United States was moving in the direction of making allowances so Israel could finish off at least some existing projects which are close to completion or bound by private contracts that cannot be broken.

German analysts are greeting an unexpected rise in manufacturing orders with delight, with some going so far as to say the worst is over. Still, plenty of realists are warning that cautious optimism remains the order of the day.

The German government's scrapping premium is partially credited with driving a gain in national manufacturing. There was a very pleasant surprise in store for the German economy with the release of national manufacturing statistics for May: Orders were 4.4 percent higher than in April. The figures, released by Germany's Economics Ministry on Tuesday, surprised analysts who had only predicted a gain of 0.5 percent. They also made May the third successive month in which orders rose. Additionally business confidence was up and there were also positive signals coming out of the steel industry and from medium-sized businesses. The German stockmarket reacted to the positive news and the DAX went up, although it gave up some of those gains later in the day.

And all of this was considered the first solid indicator of an ongoing change for the largest economy in the euro zone, where Europe's common currency is used. It led to optimism in some German quarters, with Commerzbank analyst Dr Ralph Solveen, going so far as to say, "the end of the world has been cancelled, businesses are beginning to re-stock."

European Union regulators have imposed a €1.1 billion ($1.54 billion) fine on German utility company E.ON and France's GDF Suez over a 1975 deal which saw the two divide gas markets up between them. 

The EU Commission, which serves as Europe's anti-trust watchdog, said the energy giants had reached an agreement not to compete in one another's gas markets around the time they cooperated to construct the MEGAL gas pipeline.

As a result, the Commission said in a statement on Wednesday, they would have to pay penalties of €553 million euros each.

European Competition Commissioner Neelie Kroes, who delivered the statement, said E.ON and GDF Suez had "maintained the market-sharing agreement after European gas markets were liberalized."

On Tuesday night, Google announced plans on its blog to launch Google Chrome OS, an operating system designed to directly challenge Microsoft's Windows. The software is projected to be available to the public in about a year.

"This is a direct attack on Microsoft's revenue base," Rob Enderle, a technology analyst in San Jose who consults for the Seattle software company, told the L.A. Times. "Microsoft's Windows operating system platform and its Internet Explorer browser are the keystone products the empire is built on."

But how will it work? Our tech blog reports:

Google Chrome OS, the operating system, is designed to work with the company's Chrome Web browser, launched nine months ago and downloaded by 30 million users. Google said the software will be optimized for small, lightweight laptop computers called netbooks, a fast-selling category of inexpensive machines that sell for as little as $250 and are used primarily to surf the Web and check e-mail.

Time to boost my shares in IKEA chair suppliers, I reckon.

Not exactly sure what to expect out of this.  I'd love to see the evil empire brought to its knees, and certainly if anybody can do it, it's Google.  But I dunno.  In any case, this could be fun.

Conservatives want live babies so they can raise them to be dead soldiers. - George Carlin

NEW YORK - Oil prices neared $60 per barrel yesterday as the government reported that the size of stockpiles of gasoline soared again. Retail gas prices have fallen every day for more than two weeks, and gasoline futures fell more than 9 cents a gallon yesterday. Energy markets are undergoing an extended sell-off, the longest in 10 months.

Benchmark crude for August delivery fell more than 4 percent, or $2.79, to settle at $60.14 a barrel in New York. Prices came within a penny of $60 at one point. In just over one week, oil prices have fallen more than 18 percent.

"The recession is far from over,'' said analyst Stephen Schork. "Perhaps the run-up in prices was a bit overstated.''  [Do you think?]

Crude prices by last week had more than doubled from lows reached in January, following record highs near $150 last summer. Cheap oil sparked a new round of investment, as did the weaker US dollar. Crude is priced in dollars, so it effectively becomes cheaper internationally when the dollar falls.

Yet dismal economic data continue to emerge and the fundamentals of supply and demand appeared to take control of the market last week.

Gasoline, heating oil, and natural gas futures are also tanking. Americans are driving billions fewer miles than in recent years; though refiners are slashing production, gasoline continues to pile up. Gasoline in storage grew by another 1.9 million barrels last week, the fifth straight week of growth.

I wonder if a pattern of price oscillations driven by futures market speculation and economic hype can provide a suitably stable average yearly price to enable continuing investment in the development of additional resources.  The average spot price for the last year, July 1-July 1, should be well over $60/bl.  With a similar pattern this next 12 months we could have an average spot price of $40/bl.  Is there anything worth developing at $40/bl?


As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

Now compare this to yesterday's

Spain is aiming to change its economic model away from construction and towards the "sustainable economy".

Salgado pide a los bancos y cajas 10.000 millones para el fondo de economía sostenible · ELPAÍS.com		Salgado asks banks and S&Ls for €10bn for the sustainable economy fund - ElPaís.com
La vicepresidenta segunda del Gobierno y ministra de Economía, Elena Salgado, ha clausurado el IX Encuentro Financiero Internacional organizado por Caja Madrid y EL PAÍS, acto en el que ha pedido hoy a los bancos y cajas que aporten el 50% del futuro fondo para la economía sostenible que se pondrá en marcha en 2010 y que ascenderá a 20.000 millones de euros. Cuando llegue la recuperación, ha afirmado Salgado, el sector financiero español deberá "redirigir la asignación de recursos hacia sectores sostenibles, es imprescindible su participación en el fondo".		[Spain's] Second Deputy Prime Minister and minister for the Economy, Elena Salgado, has closed the 9th International Financial Meeting organised by [S&L] Caja Madrid and El País, an event in which she asked banks and S&Ls to contribute 50% of the future Sustainable Economy Fund which will kick off in 2010 and will reach €20bn. When the recovery arrives, Salgado claimed, the Spanish financial sector will have to "redirect the resource allocation towards sustainable sectors, its participation it the fund is a requirement".

From the author of Moneyball.  Apologies if it's already been posted, haven't had time to be here lately.

Toward the end of 2004, that changed dramatically--but just how dramatically A.I.G. F.P. was extremely slow to realize. In the run-up to the financial crisis there were several moments when an intelligent, disinterested observer might have realized that the system was behaving strangely. Maybe the most obvious of these was the effects of U.S. monetary policy on borrowing and lending. The combination of the dot-com bust and the 9/11 attacks had led Alan Greenspan to pump money into the system, and to lower interest rates. In June 2004 the Fed began to contract the money supply, and interest rates rose. In a normal economy, when interest rates rise, consumer borrowing falls--and in the normal end of the U.S. economy that happened: from June 2004 to June 2005 prime-mortgage lending fell by half. But in that same period subprime lending doubled--and then doubled again. In 2003 there had been a few tens of billions of dollars of subprime-mortgage loans. From June 2004 until June 2007, Wall Street underwrote $1.6 trillion of new subprime-mortgage loans and another $1.2 trillion of so-called Alt-A loans--loans which for some reason or another can be dicey, usually because the lender did not require the borrower to supply him with the information typically required before making a loan. The subprime sector of the financial economy clearly was responding to different signals than the others--and the result was booming demand for housing and a continued rise in house prices. Perhaps the biggest reason for this was that the Wall Street firms packaging the loans into bonds had found someone to insure against what turned out to be the rather high risk that they'd go bad: Joe Cassano.
.....

But in the case of the subprime-mortgage credit-default swaps, Cassano had agreed to several triggers, including A.I.G.'s losing its AAA credit rating, that would require the firm to post collateral. If the value of the underlying bonds fell, it would fork over cash, so that, for instance, Goldman Sachs would not need to be exposed for more than a day to A.I.G. Worse still, Goldman Sachs assigned the price to the underlying bonds--and thus could effectively demand as much collateral as it wanted. In the summer of 2007, the value of everything fell, but subprime fell fastest of all. The subsequent race by big Wall Street banks to obtain billions in collateral from A.I.G. was an upmarket version of a run on the bank. Goldman Sachs was the first to the door, with shockingly low prices for subprime-mortgage bonds--prices that Cassano wanted to dispute in court, but was prevented by A.I.G. from doing so when he was fired. A.I.G. couldn't afford to pay Goldman off in March 2008, but that was O.K. The U.S. Treasury, led by the former head of Goldman Sachs, Hank Paulson, agreed to make good on A.I.G.'s gambling debts. One hundred cents on the dollar.

and so much more.

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin

As goes California," says the adage, "so goes the nation." All eyes are therefore on the Golden State as it attempts to solve its $26 billion budget deficit. The world's eighth largest economy is not going quietly into that pit of debt and devastation that has devoured Third World countries whole. The State's voters have drawn a line in the sand against further tax hikes, while Democratic leaders have drawn a line at further cuts in services or selloff of public assets. State legislators are deadlocked, caught between the rock of tax ceilings and the hard place of debt limits.

"Expect the best and accept nothing less," says another adage that typifies the attitude sometimes called "California dreaming." You create your own reality. Instead of trying to prop up an old model that has failed, you can dream up a new one. If anyone can come up with an original solution to the problem, Californians should be able to. But what? While waiting for developments, Governor Arnold Schwarzenegger has started paying the State's bills with IOUs ("I Owe You"s evidencing debt, technically called "registered warrants").

Hmm . . . Pay the bills with IOUs. Not a bad idea!

It is happening here and now whether the pundits like it or not.  We have gone from a -3% savings rate (roughly) to a +6.9% one.  This is a 10% swing and with the consumer being 70% of the economy that's an immediate hit of somewhere between 4.83% and 7% of GDP (depending on whether you "count" the negative as an additive force, and you probably should.)

The problem is that it doesn't stop there: The government calls this a "savings rate" but it isn't.  It counts debt repayments as "savings" among other distortions, meaning that trying to use the "savings rate" as an indicator of future capital formation is a lost cause.  In point of fact there is no capital formation going on - people are cutting back on their voluntary 401k and IRA contributions because they don't have any money to put in - they are furiously paying down debt as fast as they're able in an attempt to avoid foreclosure and bankruptcy.

That of course means that spending drops which in turn means that employers need fewer people to work.  Capacity utilization is in the toilet and average hours worked has fallen to never-before-recorded numbers in the history of the data being collected.  This in turn feeds more layoffs which begets more people without income to spend on discretionary purchases (and in some cases non-discretionary ones!)

There is no avoiding the necessary contraction in GDP to bring the system back into balance, and the longer we continue to allow our government and media to LIE about what has happened, who is responsible, and what has to happen before the economy can clear and recover the worse off we will be.

Two years ago I began beating the drum on the prescription for a solution.  It involved pulling the rug - intentionally - on housing price supports, and allowing them to collapse to sustainable numbers, all at once.

This would have resulted in a lot of people losing their homes.  But by now, they'd be starting to buy them back at half or less of their former prices - and at sustainable payments under a 30 year fixed mortgage.  They would have been able to save the 20% down payment too.

We would have seen myriad banks, including most of the big ones, go under.  So what?  The FDIC would have consumed the "bailout funds" in paying off depositors, which is bad, but the debt would be out of the system.  Instead we have gotten exactly nothing out of more than $2 trillion now borrowed and spent by government - the debt is still there, it is still toxic, and it is still preventing recovery.

This story is by no means finished.  The government has spent $2 trillion it does not have and has committed to nearly $6 trillion more in either guarantees or outright payments, and yet capacity utilization continues to drop, employees continue to be laid off, consumption continues to fall and frantic attempts to pay down debt and avoid default continue to rise.

In response the economy has continued to shrink and tax revenues have sunk through the floor, skyrocketing the deficit.  Treasury apparently detected a reluctance among foreigners to continue buying our used toilet paper and changed the rules on reporting of "indirect" sales - which then, even after the change to intentionally overstate foreign interest, have precipitously declined anyway.  It is fair to say that foreign interest in Treasuries is all-but-exhausted and barring a collapse in equity prices to recreate a "fear" environment for holding government bonds, there is going to be an increasing problem with funding the insane "prop up the game" money flood policy of The Fed and Treasury.

California is just the beginning of this unraveling; they are now issuing IOUs.

read the rest, it's brilliant.

~"When an inner situation is not made conscious, it appears outside as fate." Karl Jung~