On Thursday president Obama came up with a tough message on the future of banks. The Paul Volker inspired plan was leaked from CNBC before the actual speech and that sent the equity markets on a downward race. On Friday evening all major US indices stood on their biggest losses since the Lehman collapse.

What might have scared off investors was a two-parts plan that involved a ban on banks’ proprietary trading (that is trading for their own profit or via a hedge fund) and a cap on the financial assets of banks. Obama was scarce on details but the new rules resemble the Framework for Financial Stability published by the group of 30 (all the big names in monetary policy and banking) chaired by the very same Paul Volker.

And while the exact text of the proposed legislation is still a mystery, the motivation behind the timing and the speech itself were more than obvious. The very same week all the major banks (and receivers of government help) announced their Q4 earnings and the bonuses for their employees. That was infuriating for most Americans who were still facing rising foreclosures and a tough job market. Their anger was expressed in the Massachusetts state election won by Scott Brown (a political unknown) in a rear victory for the Republicans in the traditionally Democrat’s state. That put a new twist in the Health Reform bill soap opera being played in the American Senate. That would further shorten the list of achievements of the Obama administration and put his party in a tight spot for the coming elections for Congress. Hence the tough talk last week that would prove to be very popular among Americans.

Politics aside, some of the details of the “Volker” plan that were discussed in the background press meeting, left some other questions hang in the air:

Q I have a follow-up to something earlier where you said that these authorities are included in the Frank bill. So there would be no additional legislation beyond what that is for this to take effect. So is there some official rulemaking or some directive the President has to make, or is this just a statement saying regulators should do this?

SENIOR ADMINISTRATION OFFICIAL: No, no, I’m sorry. I want to be clear. We want to put in the legislation — there’s legislative authority, there’s discretion for the regulators to take on risky activities with respect to the largest financial firms. We want to take legislative steps. We will ask Chairman Dodd and Chairman Frank to supplement what is already in their bills with legislative steps that don’t just authorize but actually require regulators to prohibit one form of that risky activity, and that’s proprietary trading by firms that own banks. So it is a legislative step. It is moving what is a discretionary authority that Chairman Frank provides in his bill to a requirement on the regulators to act in this particular area where we have a special kind of concern.

Now that’s a bummer. We have all witnessed the difficulty for the Dems to put forward any kind of legislation. The financial reform bill was the most recent example when Senator Dodd expressed his views on dropping the financial consumer protection agency championed by Obama. Not to mention the Supreme Court ruling against the cap on corporate spending for political adds the very same day. It is hard to believe that all those politicians fighting for re-election will bite the corporate hand that feeds them. Although I am certain that a plan named “Volker” will be added to the bill, I am also sure that legislative loopholes and ambiguity will be the main characteristics of it.

… It’s designed to make sure that we don’t end up with a system that some other countries have in the world, in which there’s enormous concentration in their financial sector. So it’s designed to constrain future growth…

Moreover, the cap mentioned by Obama will be on the future growth of the banks only, and will not require “slimming down” for anyone in the “too big to fail” club. It seems that the unprecedented growth of the financial industry in the last 30 years is the new “normal”. If any two charts could summarize the financial crisis it would be these two:

I don’t see why no one is stepping up to actually curb the excess in the financial system. Let me just remind the reader that last month Congress removed all limits to the money provided to Fannie Mae and Freddie Mac (previously set to

$300bln), which in effect allowed the Fed to purchase unlimited amounts of mortgage garbage from the banks that will amount to a lot more losses for the taxpayer than the bank levy would ever be able to return. All that is pure case of moral hazard but we should not be surprised. In 1998 (with Glass-Steagall still in place) the Fed stepped up to save Long Term Capital Management, a highly profitable hedge-fund that included two Economics Nobel prize winners in the list of founders.

Q Why would separating proprietary trading operations convince anybody that those units wouldn’t have access to the safety net? Bear Stearns had access. AIG had access. And you guys have also insured Fannie Mae and Freddie Mac. None of these institutions had access to the discount window.

SENIOR ADMINISTRATION OFFICIAL: All of that looks at a time when there was no comprehensive regulatory reform effort. I mean, I think what my colleague said at the outset he said for a reason, which was this is a part of a comprehensive effort where we must have resolution authority, we must end “too big to fail,” we must take all of the steps to rein in the risks of contagion and systemic risk that plagued us in this crisis. So there’s no doubt that in the last crisis we just went through there were a whole bunch of entities that were of forms that were perceived as too big to fail and threatened the system with their collapse, and that’s exactly what we’re trying to end.

If you were only doing these two reforms today and that was your only regulatory reform plan, that would be very problematic. But this is one component of a broad effort that we’ve described in other places…

…Now, this is not, as I mentioned at the outset, the whole answer to ending “too big to fail” or basic reforms of our system. As we’ve said all along, and I reiterated this morning, this is part of a comprehensive package of reforms that we have put forward, that Chairman Frank has championed and successfully gotten enacted in the House, that Chairman Dodd is working with Senator Shelby in the Senate. It’s part of tough new rules on the largest firms, whether or not they own a bank; comprehensive consolidated supervision. You can’t have a firm like Lehman or Bear Stearns outside the basic framework of comprehensive consolidated supervision. They can’t escape appropriate supervision by changing their corporate form, whether or not they own a bank…

It is good that Obama officials recognize the need for further reform. However, their legislative and regulatory vigour is doubtful. We could only hope that this was only the beginning of their reform push, but the probability of populist retorics before important elections seems more plausible.