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As Dave covered yesterday, Paul Volcker finally emerged from his (large) broom closet in the White House as the major force behind Obama's new banking sector reforms. To recap, the US president proposed two new reforms to end 'too big to fail' and limit the proprietary trading operations of banks. His proposals will: 1) prohibit banks from owning, sponsoring or investing hedge funds, private equity funds or proprietary trading operations for their own profit, unrelated to servicing their customers- the so-called 'Volcker Rule;' and 2) prevent the further consolidation of the financial industry.

On the surface these reforms mark a dramatic departure from the administration's standing approach to financial sector reform (fairly benign). But before we get ahead of ourselves with excitement, it is important to recognize the considerable obstacles to these proposals ever becoming law, and examine whether what sounds good in theory is actually inadequate in practice. A few thoughts:

-Obviously we are a bit light on the very critical details. For instance, how exactly will the administration prevent further consolidation in the industry, or end 'too big to fail' as we know it? By limiting the size of individual firms through a cap on assets under management or deposits? Or by applying robust anti-trust scrutiny to any future mergers and acquisitions of financial firms? It seems the administration has collapsed two very different and tricky issues into one concept: limiting systemic risk. You can cap a bank's size, and therefore risk to the system, through higher capital adequacy requirements, but this doesn't address the off-balance sheet activities that were the real systemic threat during the crisis. You might reply that the Volcker Rule would largely resolve the off-balance sheet problem, but it seems the administration has very consciously linked the prohibition on these activities to the prevailing bank-holding company model. Remember, all the big investment banks converted into bank-holding companies during the crisis to access Fed funding, which then entailed setting up retail banking, or deposit-taking, operations. Under the Volcker Rule, these banks would now be unable to de-link retail and trading operations, even conceptually, thus prohibiting every major bank from engaging in proprietary trading unrelated to traditional brokerage (think boring mutual funds instead of exotic securities). There goes almost ALL the profit-making activities the banks currently have.

But what if banks like Goldman Sachs and Morgan Stanley simply converted into a different legal entity once they no longer relied on easy Fed funding for their trading operations? By ditching the small retail operations they have built, they could theoretically return to the old model once they are self-sustainable, thereby bypassing the Volcker Rule all together. This would put banks with huge depository operations like JPMorgan Chase and Bank of America at a competitive disadvantage. Everyone joked before the crisis that Goldman Sachs was the biggest hedge fund in the world: what prevents them from becoming something like an alternative asset management firm? It's customers would in theory possess a higher risk-tolerance and proprietary trading operations could be justified on serving this investor profile. Without formally resurrecting Glass-Steagall, which doesn't appear to be on the table, I am unclear how the administration can put in place a regulatory apparatus that stays two-steps ahead of financial and legal innovation.

-These reforms are an important step in the right direction, but they are also blatantly political, which makes them vulnerable on a number of levels. The administration is claiming that the proposals have been under serious discussion for months, they just needed to be refined and introduced at the appropriate time. This is plausible, as they were proposed on the very day that health care reform 'died.' The administration may have simply been planning a big financial reform push following health care's conclusion, which they expected this month. And surely the posture of bank execs before Congress last week, not to mention record bonus announcements, didn't do themselves or their industry any favors. 'Keep it cool' Obama seems genuinely furious.

But its timing on the heels of the Massachusetts primary in which a Republican candidate won the seat held by Ted Kennedy for four decades smacks of calculated populism. The FT said as much in its editorial. This leaves it subject to political horse-trading, both within Congress and between legislators and the administration. Could it become a bargaining chip in preserving the controversial consumer financial protection agency, Obama's centerpiece reform? Obama could pick off a few Republican supporters for the banking proposals; John McCain has expressed some similar sentiments recently, and the issue taps right into the anti-Wall Street fervor that shows no signs of abating. But he could also lose votes on his side, like Joe Lieberman or the chairman-in-waiting of the Senate Banking Committee Tim Johnson, who is a 'friend' of the financial services industry, to put it diplomatically. If financial reform gets held up until after the mid-terms (when Chris Dodd, current chairman of the Senate Banking Committee, retires) a Johnson chairmanship could pose real problems for the administration.

-Finally, let's say that the reforms get enacted in some form or another. The big winners are then the hedge fund and private equity industries. A lot of people predicted that they would increasingly fill the risk-taking space vacated by the big banks. But with Goldman trading the daylights out of essentially free loans from the Fed, the current status-quo retains plenty of risk-taking in the big institutions. But if prop desks are truly scaled down at these firms, suddenly hedge funds become the major traders in a range of instruments and markets, providing a goldmine to the industry. This raises a whole host of unresolved problems, including systemic risk considerations (remember Long Term Capital Management?). Reform of the hedge fund industry has proven surprisingly difficult in Europe, and limited reforms have thus far been proposed in the US.

So in conclusion, I am left with two basic questions: will the reforms be precise enough to achieve their objectives in an innovative marketplace, and what are the most effective tools in limiting the systemic risk posed by individual firms? I'm eager to see the details of the proposals.

Everyone knows that the prospect of a binding international agreement to reduce the emission of greenhouse gases rests in part on the potential for ratification by the US Congress. The failure to ratify Kyoto gave the Bush administration the opening to pull out of the agreement, while the inability of the Obama administration to get a cap-and-trade bill through a Senate absorbed by the health care debate is a big reason why a 'political agreement' is being debated today in Copenhagen.

In fact, given the political capital expended by Obama in the health care fight, and heading into an election year dogged by stubbornly high unemployment, its unlikely that Senate Democrats will risk being labeled 'job-killers' in tight reelection battles.

But what if Obama could take the global lead on climate change by skirting the US Congress all together? What if he was unable to get an international agreement ratified after the Bonn summit next year, but implemented a regulatory policy that in practice reduced emissions just as much? Cap-and-trade is needed, but saving the planet is necessary, and the Obama administration might have found a way to do its a part in achieving this goal.

Today, the Environmental Protection Agency (EPA), an executive branch agency under the authority of the US president, issued an historic finding that carbon-dioxide emissions are a 'public threat,' which paves the way for the EPA to directly regulate emissions under the Clean Air Act. This would require neither congressional approval nor enforcement, and the finding follows the 2007 Supreme Court ruling that greenhouse gases fit the Clean Air Act's definition of air pollutants, which means that a legal challenge to the EPA's authority is all but impossible. The EPA says it will now issue technical guidelines and work with the states to implement them.

This is a really big deal in the United States, and strengthens Obama's hand in Copenhagen. For the first time in over a decade, a US president can credibly claim that he is actively fighting the emission of greenhouse gases. And until the political will forms in Congress to ratify an international, legally-binding agreement, the US president can do the dirty work of cleaning up the environment.

Who knew that the biggest headline on the first day of the conference would come out of Washington and not Copenhagen?

Does anyone think its hilarious that Obama won the Nobel Peace Prize on the day we are... bombing the moon?!?

The US has reportedly decided to scrap its controversial missile-defense plans in Europe. This is a really big deal.

Despite the incredibly unfortunate timing of making the announcement on the 70th anniversary of the Soviet invasion of Poland (you always wonder why officials don't know these things, and cant wait ONE EXTRA DAY to make such a sensitive announcement; after all, isnt this what public relations/communications officials are paid to do, know these kind of things?).

Anyway, the implications of this decision are immense, positive and negative, but I for one applaud the US president. This is a really bold move that hits the 'reset' button with full force. But, more urgently, it is all about Iran, and I cannot imagine this decision was reached without some concrete assurances from Moscow that they will squeeze Iran in return.

These are the kind of major shifts in foreign policy we have been waiting for from the Obama administration. The ball is now is Moscow's court, and the Obama administration may come to find that the destiny of its foreign policy is now controlled less by itself, and more by the Kremlin.

A few weeks back I looked at the prospects for meaningful financial sector reform in the US, and ended on a decidedly pessimistic note. To recap, health care and climate change will soak the congressional agenda and shrink Obama's political capital, leaving an overhaul of the nation's financial regulatory structure for a less accommodating political environment in 2010.

The Politico agrees, in a wonky kinda way, with this interesting look at the impact of Ted Kennedy's death on the prospects for financial sector reform. Senator Chris Dodd, current chair of the Senate Banking, Housing and Urban Development Committee (financial sector reform), is next in line for the chair of the Senate Health, Education, Labor and Pensions Committee (health care reform). Following Kennedy's death, and in need of high-profile achievements in the midst of an uphill reelection bid, Dodd might jump ship from financial to health reform.

If Dodd does switch chairs, what would be the implications for the reform effort? Most importantly, the financial services industry would gain a major ally in Senator Tim Johnson, the next Dem in line for the Banking chair. By one account he has been a vigorous opponent of capping credit card fees/rates, proponent of 'voluntary' industry standards, and anti-mortgage renegotiation. The financial industry is also a major financial backer of the Senator.

Dodd has also been a big proponent of the proposed consumer protection agency, something Johnson, as a friend of credit card and mortgage lenders, would likely attempt to kill or diminish beyond recognition.

Dodd is often accused of being too close to the financial services industry, which he undoubtedly is, but to his credit he has been a driving force behind the president's reform proposals and instrumental in reforming the credit card industry. Switching committees would be a blow to the reform agenda.

Stay tuned...

US President Obama will reportedly nominate Fed chief Bernanke to a second term this week, ending intense speculation over the reappointment.

Bernanke still has to gain the approval of a not-so-friendly Congress, but after the obligatory grandstanding that will undoubtedly come.

This is the right choice in my opinion; I've often expressed here my admiration for the Fed's response to the crisis. But Bernanke's second term will be anything but a victory lap following his central role in preventing another depression. The challenges he will face in unwinding the Fed's extraordinary response to the crisis, exercising some measure of systemic oversight, and defending monetary policy autonomy may be no less difficult than the challenges his first term brought.

I know that when I am roughing it in the wilderness I always travel with my photographers in tow. Nothing says 'macho father of the Russian nation' like arranged shirtless photo-ops.

Your move Obama...

Video and text of US President Barack Obama's speech in Cairo, Egypt.

-Iraq's Commission on Public Integrity has announced that it is issuing approximately 1,000 arrest-warrants for government officials on corruption-related offenses. This massive purge is said to include upwards of 53 senior officials (director-general level or above), and is largely centered around the Ministry of Trade. The trade minister, Abdul Falah Sudani, resigned on Monday ahead of a no-confidence vote in parliament. Obviously, warrants and investigations are far easier to announce than actual convictions, particularly of high-ranking officials. But I find this announcement stunning on two levels: for one, its sheer scale is incredible. Never mind the anti-corruption records of (post-sectarian conflict) developing countries; in what developed country can you find such broad accountability in government? Britain is the only country that comes to mind in recent years, and even there the current expenses scandal is defined by public shame and resignation, rather than actual corruption charges (remember, MPs never actually "broke the law"). Second, the Ministry of Trade is dominated by the Dalawi faction of Prime Minister Nuri al-Malaki; the Iraqi PM is leading a massive anti-corruption investigation centered on his own political fiefdom. That is perhaps the most remarkable aspect of all.

-How concerned should we be that Russia is currently preparing for nuclear conflict on the Korean peninsula?

-Hizbollah is reportedly in talks with both the IMF and EU to safeguard Lebanon's external funding in the event of an election victory by the Shia group on June 7.

-The Economist examines the Obama Administration's first climate-change bill.

-The next big foreign target of Chinese investors is...LeBron James?

Politico has published exclusive details of the meeting last week between US President Obama and major financial institution CEOs. Despite the cordial public face put on the meeting, the president reportedly made every possible effort to put these former masters of the universe in their place, including providing the CEOs with a single glass of water, no ice, no refills. How's that for perks!

As the bankers offered various justifications for bonus payments and executive compensation, the president reportedly responded, “Be careful how you make those statements, gentlemen. The public isn’t buying that.” He followed by letting them know exactly where they stood in the current crisis,

"My administration is only thing between you and the pitchforks."

And boom goes the dynamite.

Details are starting to trickle out of how close the French/Chinese fault line was to sinking the London summit. The Guardian is reporting that, remarkably, Tibet was the key issue linkage bringing the Chinese to the table on tax havens.

Read the article, its worth all the details, but I'll sum it up by saying it ultimately took a late night meeting between Sarkozy and Hu at the French president's hotel, and a last minute intervention by Obama, to smooth over the differences.

All sides are backing the account of Obama's last minute intervention; it seems the young US president is making good on his promise of a new era of US leadership.

A fascinating read from the New York Magazine. It's a long piece, but well written. It also has some great quotables from high-level officials and Wall St. execs.

I'll bet some members of Obama's team would kill for the level of control offered by a Westminster system of government right about now.

Politique
-Obama unveiled his massive 2010 budget proposal, much of which breaks with the conservative consensus that governed US policy for much of the past 30 years. $634bn in health care spending will be, in theory, offset by tax increases on American's earning over $250,000 a year. The US president also vowed to cut the deficit in half by 2012. More than a few people questioned the likelihood, and math, of this plan.

-Obama fulfilled a core campaign pledge by announcing a withdrawal date for US combat troops in Iraq (August 2010). He aims to have all troops out by 2011. Oddly, congressional Republicans embraced the president's announcement. Didn't their candidate for the oval office just run on not "cutting and running"? I guess after seeing their poll numbers plummet in the wake of their stimulus obstructionism, they latched on to a sure political winner.

-In Pakistan, Taleban leaders in Bajaur province declared a unilateral ceasefire, a week after a negotiated truce was reached in the Swat valley. In Islamabad, Nawaz Sharif and his brother Shahbaz, the chief minister of Punjab province, were banned from holding political office by the Supreme Court, causing the Punjab government to collapse and igniting protests. Political instability + balance of payments crisis + losing control of large portions of your territory = failed state.

-In her first foreign trip abroad, US secretary of state Hillary Clinton promoted pragmatism in US-China relations, overlooking human rights in favor of economic and financial cooperation...and US treasuries. Days later, a US State Department report laid the smack-down on China over the very issue Clinton skirted face-to-face. China was not pleased.

-Cracks in the Russian power structure?

Economia
-The central banks of Poland, Czech Republic, Hungary and Romania issued coordinated statements defending their currencies, while a consortium of international institutions announced a loan package for the troubled region.

-The US government increased its stake in Citigroup to as much as 36%, days after Bernanke and Obama sought to calm fears over nationalization. Bernanke said the debate essentially "misses the point." The US Treasury also provided details on its upcoming stress tests.

-ASEAN signed trade agreements with Australia and New Zealand.

-The defense of the rouble appears to have been a success. For now.

The Rest
-In the Champion's League, ManU held Inter to a draw in the San Siro, Arsenal beat Roma on a Van Persie penalty, and Liverpool beat Real Madrid in typical Kop Champion's League fashion. In the UEFA Cup, two of the favorites, AC Milan and Aston Villa, crashed out.

-This. Is. Crazy.

-The Times of London looks at "Japan: the nation that loves robots."

-Slumdog Millionaire was the big winner at the 81st Academy Awards.

Much of the new American president's time and media coverage has been devoted thus far to the economic crisis. Rightfully so. But if you have been paying attention to the items buried behind the headlines of economic Armageddon, you know that the Obama administration has quietly been remaking the US socio-political landscape.

Among the steps taken in his first five weeks in office: passing the Lilly Ledbetter Fair Pay Act, giving notice that he planned to rescind in 30 days a last-minute Bush administration rule that expanded the federal protection for, and scope of, the so-called "conscience clause" for healthcare providers, lifting the federal funding ban for international family planning groups that provide abortion services, expansion of the State Children's Health Insurance program, to name but a few. White House advisor David Axelrod has said Obama will soon lift the federal funding ban on stem-cell research. His 2010 budget includes substantial increases for student loan assistance (in fact, it proposes a complete reform the system by cutting out the private lenders who distribute federal loans) and $634 bn over the next decade for health care reform, to name just two provisions. This list doesn't even begin to include his actions on the foreign policy front (for instance, Iraq withdrawal date or interrogation and detention guidelines) or his intention to let the Bush tax cuts expire in a year's time.

Paul Krugman summed up Obama's actions in his NYT column,

"President Obama’s new budget represents a huge break, not just with the policies of the past eight years, but with policy trends over the past 30 years. If he can get anything like the plan he announced on Thursday through Congress, he will set America on a fundamentally new course."

We are all grabbed by the headlines on the economy, banking system and foreign policy challenges facing his administration. But the US president has quietly implemented an agenda that will transform the US social contract. The so-called Reagan revolution is being drawn back, and I would say, somewhat surprisingly, the majority of the American people are on board. The relationship between Americans and their government is changing; a fundamental sea change is upon us.

Now if only he could figure out how to pay for it all...

All I'm gonna say is: if President Obama and his entourage can stimulate the American economy like they stimulate complete traffic chaos wherever they travel, then the US economy will be humming in no time.

Politique
-US Vice President Joe Biden outlined the foreign policy vision of the young Obama administration in a speech at Munich. He called for a "reset" of US-Russian relations, offered Iran "meaningful incentives" to abandon its nuclear program, and called on America's allies (i.e. Europe/NATO) to shoulder a greater burden in security (Afghanistan, Guantanamo detainees). The speech comes days after Kyrgyzstan, under Kremlin pressure, announced it would close an American military base of great strategic importance. Russia embraced the "reset" concept.

-The US Senate reached a tentative deal on a $827 trillion stimulus package. After fierce political debate that all but shattered Obama's "post-partisan age", the Democrats appear to have picked off three Republican votes by cutting direct aid to states and localities and increasing the percentage of tax incentives in the bill (the bill cuts the size of the so-called 'middle-class tax cut' while increasing incentives to purchase homes and cars). Congress must now reconcile the House and Senate bills before a final package can be sent to Obama's desk.

-Morgan Tsvangirai returned to Zimbabwe to form a coalition government with Robert Mugabe. The president will sign a constitutional amendment allowing Tsvangirai to become prime minister, while a judge threw out treason charges against an important MDC figure.

-Abdul Qadeer Kahn, father of Pakistan's nuclear bomb and prolific nuclear proliferator, was freed from house arrest after 5 years. France and the US immediately criticized the move.

Economia
-The US unemployment rate hit 7.6% and GDP plummeted 3.6% in Q4 2008. According to The Economist, the fall would have been over 5% if not for a sharp rise in inventories. Elsewhere, German industrial output fell by a record 4.6% in December.

-The BoE cut rates to 1%, while the ECB held steady once again.

-Obama imposed a cap on executive compensation at companies receiving "exceptional assistance" from the US government. Politics 101: if you want to appeal to public anger, but have little intention of widely enforcing a rule, insert a vague definition like "exceptional assistance."

-The rouble floor announced by the Russian central bank was tested this week; traders are betting the floor was set too high; oil price and capital flows volatility will continue to weigh on the currency.

The Rest
-In the Prem, Torres fires Liverpool top of the table (for now), Chelsea are in free fall (bye bye Big Phil?), and Arsenal just suck. In Italy, Milan's initial formal offer for Becks was rejected outright by LA Galaxy.

-French street artist JR brought his "28 millimetres: Women" project to Kibera, Kenya. The artist imposes facial images on homes and buildings, providing an identity and voice to the women of one of Africa's largest slums.

-Over 84 people have been killed in Australia's deadliest fire disaster. The state of Victoria has been ravaged by the bushfires, fueled by a prolonged drought and soaring temperatures.

-Scientists have identified a key protein in the process by which the H5N1 virus replicates itself. It is hoped that the discovery will lead to more effective drugs to combat the virus. Egypt confirmed its second human case this year, while both Hong Kong and Vietnam announced new cases in birds.

-As first reported by The Cable last week, the US has been engaged in high level, "Track Two" discussions with Iran for the better part of a year, intensifying in recent months and including a number of individuals close to the Obama administration. The Iranian side has been led by Ali Asghar Soltanieh, ambassador and permanent representative to the IAEA. The talks have been conducted in European cities under the auspices of the Pugwash group. As The Cable notes, back channel talks have always occurred between the two nations (irrespective of public posturing), but these talks are significant in their attendance, timing, and frequency. While the nuclear issue is obviously the most pressing, talks have also focused on "how to move beyond the 1953 coup and 1979 revolution." This strikes me as a recognition by both sides that a window exists for a fundamental transformation of the relationship.

-Political violence is on the rise in South Africa. A string of high profile assassinations in Kwa-Zulu Natal reflect rising tensions in the province between ANC and IFP supporters. Meanwhile, Cope (the party formed out of the ANC split last year) leader Mosiuoa “Terror” Lekota issued his strongest criticism yet of the ANC and Zuma, claiming the party will push through immunity for the presidential favorite after the coming general election.

-Davos utterly failed its agenda: "shaping the post-crisis world". Chris Giles, Peter Thal Larsen, and Gillian Tett of the FT found the attendees united in their lack of confidence and inspiration.

The Pittsburgh Steelers will face the Arizona Cardinals in this Sunday's Super Bowl. To our readers from everywhere but North America, that's the championship game of the sport where the ball bounces funny (no, not rugby).

As everyone knows, Barack Obama is from Chicago. That makes him a Bears fan. But that hasn't stopped the press from asking who he's rooting for in the big game. His answer?

''Other than the (Chicago) Bears,'' Obama said, ''the Steelers are probably the team that's closest to my heart.''

You might be asking yourself, how does a guy who was born in Hawaii, lived in Indonesia, attended college in L.A. and New York, law school in Boston, and spent his adult life in Chicago become such a sentimental Steelers fan?

Well...Pittsburgh=Western Pennsylvania/Eastern Ohio media markets=key electoral battlegrounds=2010/2012 elections=Steelers fans are really, really important in American politics.

If it sounds trivial, you've never met this guy:

Football matters.

Politique
-On Tuesday, Barack Obama became the 44th President of the United States. Or was it Wednesday? He swiftly moved to roll back the Bush years through executive orders on Guantanamo, interrogation, and foreign assistance. The President also named two high profile envoys to the middle east and south Asia, a signal that the State Department and America's "soft power" will lead US foreign policy.

-Israel completed its withdrawal from Gaza, days after both Israel and Hamas declared "unilateral" ceasefires. The death toll from the conflict is estimated at 1,300 Palestinians and 13 Israelis. In related news, the BBC came under intense pressure following its refusal to broadcast a Gaza aid appeal by the Disasters & Emergency Committee.

-The Prime Minister of Iceland, Geir Haarde, called a March general election and will not seek reelection. The Daily Mail (and many others) incorrectly labeled Haarde's government the "first in the world to be effectively brought down by the credit crunch." As Dave noted in December, Belgium's government was the first to fall under pressure directly stemming from the financial crisis.

Economia
-Negotiations over the US stimulus package intensified as Obama met with leaders from both parties to shape a consensus. The stimulus package will undoubtedly pass, but what will it look like: will it hit $1 trillion (many economists believe it must to be effective)? how large are the tax cuts (will Obama bend to his own party by limiting this political manoeuvre)? how many Republicans will ultimately be on board?

-Spain and Portugal were hit with downgrades this week, and the eurozone looks to be on the verge of a serious crisis of confidence. Following its second bail out of the banking sector and the Pound's sharp decline, is the UK in the firing line? Does Britain=Iceland?

-In a written statement to the Senate Finance Committee, US Treasury Secretary designate Timothy Geithner accused China of "manipulating" the renminbi. In a measured response, the Chinese government said Geithner's comments were "out of keeping with the facts", would undermine the global effort to combat the financial crisis, and could fuel protectionism. In other China news, year-on-year GDP growth slowed to 6.8% in the 4th quarter, the slowest pace in 7 years.

The Rest
-Holders Pompey crash out of the FA Cup, Arsenal are held at last year's finalists Cardiff City, and the Merseyside derby ends in a draw, setting up a 4th round replay. In other Prem news, Kaka's megadeal to Man City fell through and a Kuwaiti consortium's proposed takeover of Liverpool has reportedly collapsed.

-In other sporting news, the disturbing balkanization of grand slam tennis.

-Affirming Dave's "political economy theory of fashion", Milan fashion week reflected the economic downturn, with the suit notably absent from many collections.

-The 81st Academy Awards nominations were announced in Los Angeles. The Curious Case of Benjamin Button lead the pack with 13 nominations, followed by Slumdog Millionaire with 10.

-Blackberry addicts the world over are scrambling to get their hands on the "Barackberry", after the US President finally wins his battle to stay connected in the White House. The NSA-enhanced device will have two "modes": one for personal contact with a tiny group of family and friends, another for official communications with a small circle of advisors and officials.

Maybe I'm losing my memory, but somehow I don't remember these parts of the speech...