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From a skate board maker in Zaragoza to other small businesses laying off employees because banks hit by bad loan losses in the housing bubble are calling in their loans, the situation is rippling across Spain in 2012-2013. It will only worsen an already bad unemployment situation with 25% unemployment. Banks are being consolidated and are expected to take bad loan losses under new rules, and increase their capital reserves to account for bad loans. Many of the cajas savings banks are closed or merged with other banks in other regions resulting in loss of contact with local business. Of 45 regional savings banks only 13 remain. The effects of this are being seen across Spain as small and medium sized businesses are seeing banks call in their loans leading to large layoffs. Here a small business owner in Zaragoza with 1.3 million in skateboard sales to 20 countries, sees its bank call in a 250,000 euro loan, and has to layoff all his employees. A childrens shoe company Colores in Zaragoza shuts down for lack of credit. This is happening quickly as banks in the case of Colores are calling the full amount of the loan immediately and the effects may impact Spain for years. About 60% of the economy and 80% of the jobs are from small and medium sized businesses in Spain, and half a million small businesses have closed in the last few years....

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Private equity firm 3G Capital Partners of Brazil innovates its way in cost reduction with the use of 'zero based budgeting' tool to have managers justify budgets each year from scratch. The firm hopes to use these skills in bringing down costs in the merged Heinz-Kraft Foods company. Shifting consumer preferences from packaged foods to fresher foods are pressuring sales and margins in the packaged foods industry, creating the need for new ways to run these companies to improve financial performance.

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Pete Pyhrr is interviewed by the WSJ's David Kesmodel 40 years after his zero based budgeting method became popular in the Carter administration. Pyhrr developed the method as a controller at Texas Instruments in the 1970's, and says it is a great tool in difficult economic times or periods of rapid technological change to make cost reductions. WIth zero based budgeting budget figures are not simply adjusted upwards or downwards from last years numbers, but the budget is developed from scratch to reflect purposes served in the current environment. It brings costs and benefits of each expenditure into focus, so that more profitable projects can be financed over less profitable projects. Pyhrr published "Zero-Based Budgeting: A Practical Management Tool for Evaluating Expenses," in 1977. It was used by President Carter in managing the budget process in the state of Georgia and in the Carter administration, but fell out of favor in the Reagan administration. Pyhrr says he sees the need for using the method in today's budget cost reductions for government agencies to help taxpayers. As with TQC under Deming, which came back to the U.S. following Japan's use of quality control methods developed decades earlier in the U.S., zero based budgeting is coming back to the U.S. through its use by private equity firm 3G Capital Partners of Brazil in its Heinz operation....

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Anshu Jain, co-CEO of Deutsche Bank, will be replaced by John Cryan, a former UBS executive, who has no connections to investment banking. Deutsche Bank's investment banking operations would have to take on more leverage to be competitive with larger investment banks, according to experts. This would put the bank in serious problems with regulators. Another problem evident at the recent shareholders meeting is that the old management is perceived as part of the problem that led to large legal settlements with authorites. Anshu Jain leaves at the end of June, and the other co-CEO Jurgen Fitschen will leave in 2016. This closes a chapter in Deutsche Bank's history in which its image in Germany has suffered badly because of investigations.

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BP makes a final settlement with the states and the U.S. government for the Gulf oil spill. Of the $18.7 billion settlement in July 2015, the Clean Air Water Act penalty is $5.5 billion, the Natural Resource Damages are $7.3 billion, the 400 local government claims are $1 billion, the economic claims to 5 states are $4.9 billion, according to BP. Most of the money goes to the states of Louisiana, Mississippi, Alabama, Texas, Florida, for environmental improvement and economic development. Louisiana gets $6.8 billion. The settlement comes after court rulings went against BP. BP chairman Carl-Henric Svanberg, says it provides -" A path to closure for BP and the Gulf. It resolves the last remaining legal exposures, provides clarity on costs." BP shares were up 5.1%, and Fitch Ratings say this strengthens its ratings. For BP this adds $10 billion in cost to $44 billion already incurred for legal and cleanup costs.

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U.S. Federal Reserve chairman Ben Bernanke tells the House Financial Services Committee hearings that the Fed will give importance to underemployment, not just the unemployment rate, in making decisions about bond purchases. The unemployment rate could be a false indicator of the labor market if the rate falls below the Fed's goal of 6.5% before raising interest rates, and yet labor markets are still weak because of underemployment. Bernanke said: "There are a number of problems with the labor market. Unemployment is one problem, but long term unemployment and underemployment- and by 'underemployment,' I mean people either who are working fewer hours than they would like or possibly working at jobs well below their skill level- is also indicative of a weak labor market." In this situation of high underemployment combined with low inflation the Fed may hold off on raising interest rates when the unemployment rate reach 6.5%. In Bernanke's words: Reaching 6.5% unemployment "would not automatically result in an increase in the federal funds rate target." Since 2010 financial markets in the U.S., and to a lesser extent worldwide, have looked to U.S. Fed policy for raising interest rates, as guidance on the degree of support for the economy and by extension for markets....

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The problems facing first time home buyers of lower credit scores, a member of the household unemployed, and student debt. This lowers prospects in the housing market in 2013-2014.

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Interview with Robert Shiller of Yale University, by Simon Constable of the Wall Street Journal. Shiller tells Constable that the second dip recession is imminent. Shiller senses that when the National Bureau of Economic Research looks at third quarter data for 2010, it will find that the second dip of the recession started here. In other comments Shiller said that the U.S. is standing at the edge of deflation. The view on housing markets of Shiller, who is one of the creators of the Case-Shiller Home Price Index, is that housing prices could decline for the next 5 years. Shiller sees the US's chief concern as unemployment. He suggests that local governments and the federal government create jobs. One idea is to have a teacher's aide in each classroom.

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The terms of the debt restructuring deal with the bond swap in Greece become clear on March 9, 2012. In the deal with private bondholders -using collective action clauses to force remaining bondholders into the deal- about 96% of the 206 billion euros of Greece's bonds will be exchanged. Private bondholders held out throughout most of 2011, delaying the inevitable as Greece's economic situation became increasingly hopeless. This created a logjam with the German government, which insisted on serious private sector participation and bondholder haircut as the cost of poor lending decisions of the French, German and other European banks that made loans to Greece out of proportion of the ability of Greece to payback loans. Charles Dallara of the Institute of International Finance, negotiating for European banks, offered a 10% average loss on the bonds in July 2009. It was not until German Chancellor Merkel told Dallara at a late night meeting on October 27, 2011: "this is my last offer," for a 50% loss on the face value of the bonds, was agreement reached. The Greek debt swap that now takes place will give private bondholders a loss of 53.5% from the face value of 200 billion euros of bonds that they hold. The new Greek bonds issued in place of the old bonds include short-term bonds issued by the eurozone rescue fund at 15% of the face value of the old bonds, and a series of Greek bonds with maturity ranging from 11-30 years valued at 31.5% of the face value of old bonds. That even this 53.5% bondholder loss will not be adequate, as Greece's economy looks irretrievably damaged as it spirals downwards, is shown by the value of these bonds already trading in a hypothetical "gray market." The new 30 year bond is quoted at 17 cents and the 11 year bond at 22 cents. The questions remain about the stalling by the banks in taking the losses earlier- was this the wisest move considering the losses beyond Greece as the eurozone economy as a whole has suffered from the prolonged negotiations stretching through 2011, lurching from one crisis to the next? Even if the stalling was designed to give time for banks to repair their balance sheets, was this the best strategy, considering the damage inflicted on European economic growth. John Taylor of Stanford points out that the European banks delayed the unavoidable serious debt restructuring for too long, when insolvency was the real issue not illiquidity, and exaggerated the effect of contagion from the beginning- in John Taylor, WSJ, 2/22/2012, A Better Grecian Bailout. And John Cochrane of the University of Chicago, points out that French and German governments if they bailout French and German banks should do so openly and frankly rather than cover this up as bailouts of countries, because this would lead to serious questions about the poor lending decisions of the European banks and government supervision of the banks- in Cochrane, WSJ, 12/2/2010, 'Contagion' and other Euro Myths. As early as Feb. 2010, Cochrane was suggesting the forced exchange of new bonds with long debt maturities for exisiting bonds with short debt maturities, as short term debt was the major issue here. ...

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Douglas Peterson, chief operating officer of Citibank, will become the new president of Standard & Poor's. He brings useful experience facing a parliamentary inquiry in Japan, after Citibank ran into trouble with Japan's securities laws. He was also the bank's chief auditor and worked with regulators for the introduction of major accounting rules.

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Jason Zweig interviews John Bogle, founder of the Vanguard Group, in September 2011, after weeks of extreme volatility in the U.S. stock market. He says the index fund concept has been "bastardized" by exchange traded funds and the speculative behaviour in ETF's with insane turnovers approaching 10,000 percent. He considers investing in a balanced portfolio of stocks and bonds a useful way to approach investing even though the last decade has produced medicore results. And predicts a 7% return for the next decade, with money doubling every 10 years. The changes today mean you have to start earlier, save and invest for longer periods, says Bogle, but the returns should still be good. It would be insane to expect the high returns of the 70's and 80's today, says Bogle. In today's market Bogle has 80% of his investments in bonds and 20% in stocks.

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It is too much to expect central bankers to solve the US economy's problems, especially with rates nearly zero, and no agreement between the political parties before mid-term elections. The Federal Reserve by itself cannot fix the economy's problems, with the US economy facing prospects of deflation in 2011; and local governments cutting back as they face revenue shortfalls. Deficit concerns have led to inaction on further stimulus or help to local governments, and the Bush tax cuts are expiring shortly. In 2011 austerity cuts will be the singular theme in the western world, and these cuts are of a magnitude not seen in 40 years. In this situation there is only so much the US Fed can do.

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Reminders of the 6th of May, 2010, when sentiment swung the other way and the Dow Jones averages dropped by 900 points.

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Simon Nixon points to two large capital gaps Spain's government faces for Bankia. Spain was not prepared for the events of the last month as it took control of Bankia. The agreement to convert 4.5 billion of preference shares into equity gives it 100% of Bankia parent, Banco Financiero y de Ahorros, and 45% of Bankia. The capital gaps Spain faces for Bankia comes from expected loan losses which it has been slow to deal with. BFA-Bankia's real estate loan losses are estimated at 52 billion euros. Capital provisions for this are only 11%. J.P. Morgan estimates another 4.9 billion euros will be needed under new government rules. But these rules do not reflect all the losses if real estate loans are written off and and other loans are correctly shown as nonperforming, and other corporate loan provisions are increased. When this is done total losses would in reality be about 12% of the 190 billion euro loans at BFA-Bankia or 22.8 billion euros, according to experts. To correctly deal with this would require $15 billion euros, in addition to the 4.9 billion euros, for a total of 19.9 billion euros. The other capital gap comes from BFA's capital carried on books at 12 billion euros, the pre-IPO value. This has been shrinking rapidly to 5.5 billion euros at 2011 end, and is now down to 2.8 billion euros. This could mean another capital gap of 5 billion euros, depending on to whether shareholders are wiped out. Bankia has 350,000 private shareholders and it will be important to maintain depositor confidence. The total is close to 25 billion euros in capital gap for BFA-Bankia that the Spanish government must face up to quickly. It does not stop there because there are other cajas savings banks and other banks that will have to be taken into account- too large a loss would mean losing market confidence and poorer access to financial markets. ...