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Tom Wright shows the results of an examination by the WSJ of the operations of 1Malaysia Development Fund BhD, setup in 2009 for economic development. This report shows lack of transparency and use of the state owned and operated fund to indirectly help the ruling UMNO party and prime minister Najib Razak in the tight 2013 Malaysian general elections. The 1MDB fund is becoming a huge controversy in Malaysia as the former head of the UNMO party and prime minister for 22 years Mr. Mahathir Mohammed, and the opposition parties in Malaysia, are questioning the lack of transparency at 1MDB fund and misuse of funds. Prime minister Najib Razak is chairman of the board of advisors of the fund. The problem is serious because of the $11 billion in debt of the fund- and the need to reschedule debt repayments. The financial report of the fund of March 31, 2014 shows interest costs taking up half of revenues. A $260 million emergency credit was provided by the government in 2015, and a Abu Dhabi state fund provided $1 billion, in an effort to meet loan repayments. Moody's Investors Service and private investment funds see the government eventually coming up with a bailout of 1MDB. Malaysia's currency the ringgit has lost 6% of its value in the first 6 months of 2015, and foreign investors are taking funds out of the country. On the questions of transparency the WSJ examination shows a questionable deal with the Genting Group which owns a casino in New York, and $ 4 billion casino in Las Vegas, plantations, real estate, and power plants in Malaysia. In one deal between Genting and 1MDB, a 75% interest in a power plant near Kuala Lumpur was bought at highly inflated prices, according to the WSJ examination. Genting is shown to have helped the UMNO in the Najib 2013 election campaign. 1MDB has also raised money just before the 2013 election with a $3 billion bond offering arranged by Goldman Sachs in March 2013. The United Malays National Organization (UMNO) party which openly favors Malays has ruled Malaysia for all the years since independence from Britain in 1957. In the 2013 election a key battleground was in Penang state which went to the opposition Democratic Action Party, and the UMNO failed to get a majority of the vote. It held onto government through electoral rules that gave a higher number of parliamentary seats for the rural areas where UMNO draws large support. The situation in Malaysia is unusual because power has shifted to opposition parties in most of the countries in the region- Indonesia, Philippines following dictatorships, Pakistan and Bangladesh following military rule, India and Japan following a long spell under the Congress party and the LDP. Only in Malaysia and Singapore have the UMNO and the PAP party of Lee Kuan Yew held on for almost 6 decades, by keeping opposition parties weak and not allowing a two party system to develop. Indonesia, another Muslim country, has moved ahead with free and fair elections with the recent election of Widodo as president, leading to significant efforts to improve infrastructure development and other parts of the economy. Experts say healthy two party systems and free elections provide economic benefits by giving voters a choice between competing economic plans for the future, as is seen in the higher future growth prospects under new leadership for India, Pakistan, Bangladesh, Sri Lanka, Indonesia, the Philippines, and including Japan with the shift back to the LDP with Abe. Corruption, lack of transparency, and poor management of the economy, are major issues with entrenched parties. ...

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Thomas Frank writing about the public outrage about executive compensation quotes Bill Black, a Professor of economics and law at the University of Missouri-Kansas City, who makes an important point. Beyond the size of this compensation there was something else happening that was perverse in its design and in its effects. Black says that at each point in the development of the disaster of mortgage securitization, it was the pay for performance systems that sent the wrong signals to loan officers, real estate appraisers, accountants, and bond rating agencies. The compensation or reward systems actually encouraged wrong, unethical and ultimately disastrous behaviours for the companies and the economy. Another way to look at it, the way it happened on Wall Street- especially at Merrill Lynch and some other financial institutions- the bonuses and other compensation was a way for executives to recklessly milk (loot is the other word) the companies for all they could yield regardless of the results afterwards. And as Black says, to do this through normal corporate mechanisms. A whole range of behaviours of this type took place in the final years of the boom. See other articles by Thomas Frank. ...

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Anxiety in financial markets about exposure of French banks to Greece pulled down French bank stocks on August 10, 2011. Societe Generale shares were down 15%. A British tabloid the Daily Mail published an article on Societe Generale saying that it was in a perilous condition, and on the "brink of disaster." The Daily Mail later retracted its report. The rumors spread quickly in a jittery market, reminiscent of the rumors that affected Morgan Stanley at the height of the U.S. financial crisis in 2008. Sanford Bernstein analysts say in a report that the selloff in French banking stocks was based more on anxiety and the rising price of insurance of thinly traded credit default swaps, and not based on rational concerns about earnings and raising capital. Societe Generale says it has no exposure to Greek bonds maturing after 2020 on its books- to deflect fears of additional bank bondholder haircuts beyond 2020- and has taken a 395 million euro provision against losses on Greek sovereign bonds maturing upto 2020. The jittery condition of markets was also affected by rumors that France was about to be downgraded. Moody's, Fitch, and S&P reaffirmed that French credit ratings of triple A and stable outlook would not change....

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Jerry Brown is likely to get a fourth term as Governor of California. Brown's focus is on a Water initiative, Proposition 1, and an initiative for a rainy day fund, Proposition 2, for the state. His campaign spending of only $500,000 suggests that he prefers to make his legacy with the right actions for the state. Proposition 1 addresses the water problems in the state which is facing a long drought. It is a water bond that will invest $7.1 billion on water storage and recycling, watershed management and loans to regional water management projects. Proposition 2 addresses the second major problem in the state of California- the failure to build enough reserves to tide over periods of economic downturn. It requires the state to set aside 1.5% of general fund revenue and a larger percentage of capital gains taxes till the rainy day fund reaches 10% of the state general fund or $15 billion for 2014. Brown is unique among the nation's governors for his ability to stay away from politics and ideologies to take a common sense approach to the state's major problems. As a former governor he returned to office decades later with experience that few governors have, enabling him to carry on the legacy of his father, a former governor, to make a huge contribution to the state. Fed chairman Volcker has started an initiative to encourage public service in the U.S., Jerry Brown has shown how it is done. Bringing the experience, the courage for needed action, coupled with the humility of outstanding public servants....

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Eisinger says the Federal Reserve's staff plays an important role in regulatory reform. He quotes Cornell law professor, Robert Hockett, who says the general counsels tend to become more conservative over time and inclined to support the status quo. This makes required regulatory changes such as increasing the capital reserves at banks and reducing leverage more difficult. Eisinger describes the position of the U.S. Federal Reserve's general counsel, Scott Alvarez, on disclosure of lending by the Fed during the banking crisis, and on capital reserves, which veered more to the position of the banks which preferred less information be released and capital reserves be left at the 5% level than the 6% proposed by the FDIC and the Office of the Comptroller of the Currency. Comments by Alvarez in nonpublic hearings to Congressional staff members on May 18, 2012, about the JP Morgan London Whale trading losses, according to Eisinger, shows lack of awareness of the overall implications of the breakdown in financial controls and supervision inside the bank....

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In its May 2011 special report on international banking the Economist points out the need for banking regulators to take stronger action than they have so far. What it calls "pre-emptive insurance" it says is needed - stronger regulation, larger capital cushions, and some form of separation of different kinds of banking. Without this the dangers of excessive risk taking and banks that are "too big to fail" will continue to threaten the world's economy. Banks that are smaller and better capitalized says the Economist can fail more gracefully than the large mega banks that exist at this time. In fact the banks today in the U.S. are larger than at the time of the 2008 crisis. Other analysts also point to the lack of major changes in banking and financial structures today compared to the situation before the 2008 crisis, both in Europe and the U.S.

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RBS CEO Stephen Hester steps down in 2013 after 5 years of UK government ownership of RBS. Finding good leaders at the British banks has been difficult for the UK government. Hester's stepping down comes as the Board plans to return RBS to private ownership. The fragile health of British banks and weak lending to business is holding back Britain's economic recovery.

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Volcker says that even with all the fuss about the length of the Volcker Rule, its important to remember that the regulation itself is only 35 pages. And he says that lawyers for the banks are not honest when it comes to this, because they spent a lot of time finding holes in the rule and were working to add complications to it, and now they are turning around and saying that the Volcker Rule is too complicated. Asked about Dodd-Frank, Volcker says that it does make the U.S safer in a financial crisis because of the crisis resolution process set up under Dodd-Frank legislation. A bank fails and the resolution is clearly laid out- the government takes over and liquidates it, or merges it or sells it. Stockholders don't get a bail out, management is fired, and creditors have to take losses. A lot still depends on having vigorous and alert regulators. He sees two large problems, the Euro crisis and the U.S. deficit, which need strong action. Volcker remains perplexed by why the situation of huge disparities in income growth has not been expressed to a greater extent- on one side the lack of growth in income for the average family in 10-15 years and the other side having the huge increase in incomes at the top end. He does not know of any years when this was as big as it is now- except 1928, 1929....

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Economists are calling this a "wage-less" recovery in the U.S. With unemployment at 8.8%, wage pressures are weak. Average hourly earnings were flat in March 2011. The annualized growth of average hourly earnings for the last 5 months is 1%, according to Gluskin Sheff chief economist Rosenberg. After accounting for higher inflation, real wages are actually falling.

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Britain's banks still owe the government 100 billion pounds ($158 billion) from the bailouts that followed the 2008 financial crisis. The incentivizing of risk by pay structures and bonuses was seen as a big part of the problem. LIBOR manipulation abuses by banks are still on regulators minds. The Financial Conduct Authority and the Bank of England's Prudential Regulation Authority, have set new rules to correct the problem. Earlier EU rules limited bonuses to 100% of salary. The new FCA rules require a 3 year period for traders and risk managers have to wait 5 years for performance awards in full. Top executives have a ten year wait to be certain claw back provisions do not go into effect. Andrey Bailey at the PRA says the rule is designed so "that people in positions of responsibility are rewarded for behaviour which fosters a culture of effective risk management and thus promotes the safety and soundness of individual institutions. "

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Berkshire Hathaway's deal in Nov. 2012 to pay $780 million for claiming the future cash flows of life insurance portfolio of Caixabank in Spain. Caixabank will claim a pretax profit of $680 million which it will use to increase reserves.

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Irwin says about the revised Basel III rules in Jan. 2013- one hopes that Mervyn King of the Bank of England and Basel regulators are doing the right thing, striking the right balance between pushing for higher capital requirements and adjusting this to take into account the stalling economies of Europe and the U.S. Banks were given till 2019 to meet capital requirements. More assets are now eligible to meet capital requirements (including lower rated corporate bonds) under revised Basel III rules. The large legal settlements and speculative losses of large banks in Europe and the U.S. in 2012 put more pressure on banks with the risk of reduced lending.

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President Obama proposes changes in taxes to fund programs to aid students such as free 2 years of community college, aid for student loans, and financial help for middle class families. Senate Majority Leader McConnell says the proposals to raise income taxes for high income Americans with $320 billion in new revenues over 10 years, reduced prospects for changes in the tax system. He said the Obama proposals were designed " to excite the base but not designed to pass." Obama says "the shadow of crisis has passed," and calls for "middle class economics," and improving incomes for anyone making the effort. The call comes as inequality widened during the long recession and some of the Obama administration's policies such as on homeowner foreclosure, and lack of focus on unemployment during the first term, may have actually worsened inequality. The call also comes late in the second term in Jan 2015- with presidential elections in 2016- after the Republicans gain control of both Houses of Congress, which is why Republicans dismiss this as mere political talking points for the base....

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The Social Democrats leader Sigmar Gabriel is Economics Minister in the coalition government of Angela Merkel in Germany. He is sympathetic to French premier Manuel Valls effort to reduce austerity in the 2015 French budget now being reviewed by Brussels. Here he takes the initiative to call for discussion on the issue of growth and austerity facing the European Union, by joining French Economics minister Emmanuel Macron in asking two economists Pisani-Ferry and Enderlein at the Berlin Institute of Governance for advice on generating growth. The process started in late summer with the defeat of the centre right government in Sweden which supported Merkel's strict austerity policies for balanced budgets. The elections to the European parliament showed the dire situation facing Cameron in Britain and Hollande in France with the unpopularity of austerity policies, higher taxes and cutbacks. The Socialist Hollande government has the lowest public opinion ratings of any postwar government in France, at 18%, and it is unwilling to go further down the road with austerity. At the same time Valls has found a partner in Italy with the growing popularity of Matteo Renzi in Italy who won 40% of the vote in Italy for the EU parliamentary elections of 2014. ECB president Mario Draghi, has generated the debate by saying at a October 2014 Brookings Institution conference in Washington D.C. that countries that have fiscal space (referring to Germany) should use it. He added that governments that did not take action in the economic crisis facing the eurozone of no growth will be swept away by public opinion. IMF president Lagarde, a former French Finance Minister under Sarkozy, has also questioned policy of strict austerity. For the first time since the start of the eurozone crisis in 2010 there is an opportunity for open discussion on future policies for renewal in the eurozone....

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This Wall Street Journal editorial comes out in favor of higher capital reserve requirements similiar to that suggested by Federal Reserve Board governor Daniel Tarullo. The Journal says that if regulators are serious in the U.S. about controlling systemic risk, then the 14% rule or a 15% rule for assets held in reserve by banks should be adopted. Daniel Tarullo had suggested a 14% capital reserve requirement. These requirements would be phased in gradually over several years. Basel III requirements require only a 7% requirement and is phased in over many years. Capital standards are likely to be gamed. For this reason the requirement for only Tier 1 capital to be eligible is essential. What about the Basel III standards and the European banks? Would this put them in a better position to earn higher returns. This should be a problem left for European taxpayers to tackle says the Journal. As long as U.S. taxpayers are supporting U.S. banks with an implicit subsidy to take on larger amounts of risk -because they will be saved in a crisis with taxpayer dollars- the Journal says it makes sense to require 10-14% in capital reserves. It cites the Japanese banks which were highly overleveraged with lower capital reserves compared to American banks, and fared poorly. The Dodd-Frank bill imposes a complicated set of regulatory requirements with regulators required to write new sets of rules. The editorial concludes that it is far better to tackle the problems in the banking system with a sufficiently high requirement for capital reserves to manage risks than to have the detailed rule making on every subject that Dodd-Frank suggests....

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The language and tone of the leaders says something about what is likely to be the outcome of the G20 summit. Its a first for significant participation, as countries as diverse as Russia, China, India, Indonesia, Saudi Arabia, and the Netherlands are represented. The credible positions of both sides, the US, UK and Japan, and the European side of France, Germany and the Czech Republic, well presented, provide for some serious discussion and negotiations. France's Sarkozy and Germany's Merkel want to see a global regulator that would reach inside the borders of the US with stricter regulation. Sarkozy calls this "nonnegotiable." And he said that he would reject an agreement that puts off stringent new regulations on banks, tax havens, and hedge funds. He said "the compromise has to come from all countries around the world." US President Obama said that if there is going to be renewed growth it can't just be the US as the engine, everybody is going to have to pick up the pace," at the same time saying that the US had to be concerned about its own deficits. The fact is that the US stimulus will mostly help a severely impacted domestic economy recover with social safey net payments to local and state governments and unemployment insurance, as well as targeted investments in infrastructure, education, energy and health care. It will not mean anywhere near the kinds of imports the US made from other countries, especially China. And Obama made that clear when he said the US will never return to that situation, where the US had become a "voracious consumer market." For the Germans the major market for their middle companies is China, and China has its own stimulus spending on infrastructure spending, which should provide for continued imports of machinery from Germany at a much lower level. Thus Germany and France see a strong tendency to call the source of the crisis and repeat that call till the US listens, and refer to the failure of free market capitalism in its unregulated form. And to insist on fixing it through a global regulator with strict and systemwide rules. So you hear this in Merkel's words, "the foundation for this finacial architecture must be laid now, that is why we seem to be so tough." While the vivacious Sarkozy talks of compromise, and a US gesture in regulation in return for Franc's gesture of joining NATO, the mild mannered Merkel is clear and focussed about her concern. She rejects the idea of linking stimulus spending demands of the Anglo-Americans with the Franco-German demands for global systemwide regulation. "This is not a bargaining chip," she says. The media may mistakenly report lack of consensus as a failure of the summit. But in the long run in the presence of good positions on both sides, it could lead to some tough negotiations even if continued at another meeting. And result in something serious, credible and lasting in its impact, rather than something that was easy and did not in Andy Grove's useful words involve "constructive confrontation." ...

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Of 21 reader comments to this piece on banker pay, all except for 4-5, were very critical of the bankers behaviour, including many of their colleagues in the financial industry who commented. The lack of any response from the FSA on the grounds that its not the FSA's job, or from the Treasury, is disconcerting. Treasury is said to have not said a word, when RBS hired a head trader for a rumored 7 million pounds. All this coming on the heels of the RBS and Lloyds debacle, makes the Labor government open to attack from the Conservatives under Osborne and Cameron. and from Mervyn King of the Bank of England. They have expressed strong disapproval of the busines as usual attitude of bankers.

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A study by Sentier Research from Census data shows people in the U.S. age 55-64 years make 10% less in June 2012 compared to June 2009. Every demographic has suffered income losses in this period. Median household income declined by 4.8% in these three years. Using December 2007 as astarting point shows a decline of 7.2%- $50,964 vs. $54,916. Blacks, those with some education like a high school diploma but no degree, the older Americans, and younger Americans were hit hard. Long term unemployment was the cause of the decline among older Americans. Even college graduates suffered a decline of 5.9% from $88,570 to $83,378.