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The move by Houthi rebels- belonging to an offshoot of Shiite Islam- from the north of Yemen to Sanaa and then to Taiz and Aden in the south of Yemen draws a Saudi response. Yemen borders Saudi Arabia in the south. The Saudis launch airstrikes on Houthi targets in Yemen. The Persian Gulf states, Turkey, Egypt, Jordan, Morocco and Pakistan support the Saudis, creating the potential for a wider sectarian conflict in the region. The withdrawal of U.S. influence in the region under the Obama administration leads to the collapse of the Arab Spring, the Saudis pursuing an independent foreign policy, the rise of Islamic State militants, Turkey following its own policy, emboldening Iran in extending its influence in the Middle East, and creating a situation of wider sectarian Sunni-Shiite conflict throughout the Middle East. It creates a situation in which the U.S. is involved on the Iranian side in support of the government in Baghdad supported by Iran against Islamic State militants, and at the same time on the side of the Sunni coalition in Yemen as the U.S. withdraws from drone bases in Yemen. At the same time the Obama administration finds itself distancing itself from Israel as it negotiates alongside France and Britain with Iran on a nuclear agreement....

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Judge Rakoff is interviewed by Adam Liptak as an essay by Rakoff appears in the December 22 issue of The New York Review of Books. Judge Rakoff is critical of the Justice Department for not prosecuting individuals responsible in the 2008-2009 financial crisis and merely offering excuses. He discounts the Justice Department argument that proving intent is difficult or that proving fraud is hard because of the sophisticated counterparties on both sides. He says assistant attorney general in the criminal division Bauer's assertion that you have to prove the individual involved made a false statement, intended to commit a crime, and that the other side depended on this for what they were doing, is misleading. The government is not required to prove that one party to a transaction relied on another party. On the difficulty to prove wilful criminal intent for individuals several layers above those who made and marketed the bad securities, Rakoff says the legal doctrine of wilfull blindness could have been used. Reflecting on why the Justice Department has not prosecuted individuals for wrongdoing the way Milken, Keating and Skilling were prosecuted in prior financial crises, Rakoff comes up with a explanation. He says the government's own role and the role of firms throughout the financial system is suspect in the 2008-2009 financial crisis unlike prior crises. Not only regulators are failing to to do their job. The financial system offers incentives for the packaging of bad debt securities. Fannie Mae has government backing and its management buys these securities to expand access to housing for low income people. The profits made on these securities brings U.S. and foreign banks into this business and leads to a proliferation of these securities around the globe to the point that small towns near the North Pole end up with these securities in their portfolio. This complicates things for prosecutors who in some situations have themselves worked for banks selling these securities. In its slow deliberative way the Obama administration, the Justice Department, and the S.E.C.'s new head, move to prosecute firms during the administration's second term, but not enough is done and tackling individual responsibility for deterring future wrongdoing in the interests of a safe and fair financial system seems a long way off....

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The $6.3 billion settlement of Bank of America for mortgage securities and acquisition of Merrill Lynch under Ken Lewis. This settlement is for a lawsuit for troubled mortgage securities sold to Fannie Mae and Freddie Mac before the 2008 financial crisis. It was filed by the regulator Federal Housing Finance Agency.

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The Christian Democrats coalition with the Free Democrats fails to win in the German state of Lower Saxony by one seat in a close election. The CDU won 36% of the vote, the FDP 9.9%, the SPD 32.6%, the Greens 13.6%. Merkel's CDU and the CSU is showing 40% support nationally, the SPD 23%. The next election is in Berlin.

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High on the agenda for the G-20 Feb. 2013 meeting in Moscow is how to fund infrastructure projects in emerging market countries. About $191 billion in infrastructure investment is needed annually in South Asia alone, according to the World Bank. India's Economic Affairs Secretary, Arvind Mayaram, points to the need for finding innovative ways of funding and reducing the risks for private companies by some kind of joint effort from developed and emerging market countries. The needs are extensive especially in transportation, water, electricity, sanitation. Growth lower than potential is facing India- with estimates of growth at just around 5% for the fiscal year ending in 2013. This affects Europe and the U.S. as there is less demand for exports of developed countries. Transportation projects critical to easing congested overloaded rail lines in Jakarta and Manila could not get financing under existing arrangements, making this problem a serious priority.

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Stephen Friedman's positions at Goldman Sachs and the New York Federal Reserve.

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Jeffrey Sonnenfeld sees the largest blunder of Roger Smith and Rich Wagoner at GM, as that of packing the Board of Directors with people who were friendly to him and likely to back him, so that few independent voices were heard during their entire time running GM. Both Smith and Wagoner were protected by staffers. Their opportunities to see and hear what was happening in the the outside world was limited, even as the world around them was changing rapidly. See the links to the incompetence of the Board at GM.

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The Fed announced that it will review compensation policies of 28 of the large complex banking organizations in the USA. The review will be an horizontal one that compares them to each other. The other significant move is that the Fed wants to see employees who take greater risks and use large amounts of borrowed money, to receive negative points in evaluating how well they have done, and consequently to be compensated less than other employees who earn money for banking firms while controlling the risks associated with transactions. This ties in with the discussions at the G-20 meeting in Pittsburgh, where the Europeans pushed for tighter regulation on bonuses and pay, to control the excessive risktaking of banking firms. This is because the prevailing culture in global financial institutions is a high risk high return culture, which ignores the social consequences of bad decisions. There is no cost to individuals taking the risks on other people's money, and regulations discouraging risk are not in place. The question remains, is this an adequate response to prevent future crises, or too little too late? If the banking community does not see it this way, and financial regulation is watered down in Congress- see the links to this- then it will much like Don Quixote swinging at windmills. In this sense the title of this piece is a misnomer, as the Fed has not hit banks with sweeping pay limits. It only said it would review pay practices. It is jawboning of the mild kind to show the public something is done. See Paul Volcker's point that pay practices would adjust and desirable goal of less risktaking and reasonable salaries would be achieved by separating deposit taking banks from banks engaged in trading activities. Similiarly, the governor of the Bank of England, Mervyn King, made the point recently that the biggest banks should be broken up. That is supported by the intuitive sense of experts that banks engaged with depositors should be engaged in the social functions of society, lending and supporting economic activity, and the trading desks of investment banks should operate entirely separately from this. One should be insulated from the other. In this sense there is a bit of evasion in these actions. A Wall Street capture of regulatory activity continues, of regulators and senior economic advisors in the administration, as the coziness between the two lingers on from a previous era of deregulation. This has the potential to cost the country and the global economy dearly in another crisis, and the jobless and young jobless people especially. In this economy both in Europe and the USA, the jobless young have been left with the least hope. ...

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U.S. President Obama's speech at the General Assembly of the United Nations, Sept. 25, 2012, in which he praised the work of Ambassador Stevens in Libya. He defended First Amendment rights in the U.S. of free speech to an audience that was not fully convinced that the "anti-Muslim video" designed from the start as a provocation, produced as a violation of probation rulings by the individual, and being given the distribution channel of a vast internet audience by Google owned YouTube, falls neatly into free speech. The German government is reported to be looking into banning the video from distribution in Germany, and Germany also protects free speech under its constitution. He cited the "voices that rally against bigotry and blasphemy," as the way a First Amendment democracy protects against this type of abuse; which would suggest that Google as one of these voices has the responsibility to treat such content similiar to other extreme content of a pornographic nature or other such provocative material inducing violence, which it routinely excludes from distribution. The ultimate protection of First Amendment rights comes not from the U.S. constitution itself, but from the responsible exericize of wisdom, vigilance and common sense. During the long years of drafting of the Constitution when Madison, Jefferson and others who drafted the document took pains to include every protection so that basic rights would be preserved, George Washington pointed out that one could do this only upto a point, because it was upto the wisdom of future generations to preserve these rights, and this could never be done completely....

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Jackson Diehl, deputy editorial page editor of the Washington Post, says its hard not to conclude that Obama is really not engaged with the struggle for democracy and democratic process in the countries of the Middle East and the Arab World. His voice is only heard sporadically, and is missing altogether at crucial times, as the people of Egypt, Libya, and other countries express their democratic aspirations. This has been the case from the beginning of this struggle and continues today. He cites an Arab opinion poll, from Shibley Telhami of the University of Maryland with Zogby International, which shows a positive view of Obama at 34%, compared with 39% in 2009. When asked which countries have played a positive role, France and Turkey are given first place and the U.S. is close to China. This is because France's Sarkozy and Turkey have been actively engaged, and Obama has been silent for most of the time. Diehl says most Egyptians he talked to in Cairo in a recent visit, think that Obama's focus is on going along with the military and Israel. ...

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February 1, 2011, the day when a million demonstrators were expected to come out on Tahrir Square in Cairo, the Washington Post makes a call for a democratic transition in Egypt. The Post says unfortunately the debate has been affected by considerable misinformation and mistaken ideas. It singles out three for correction. The protestors have no platform, that the radical Islamists are likely to assume power, and that the US has little power to influence the change. The April 6 Movement is a principal organizer of the protests and is run by young people. The party of Mohamed El-Baradei and the Muslim Brotherhood have joined together with the young protestors movement to have a common platform. And in a country where an estimated two thirds of the population is under 30 years, the older leaders in the El-Baradei party and the Muslim Brotherhood are deferring to the younger leaders. The movement is middle class, centrist, and its main grievance is the yearning for liberty. Eliott Abrams, the deputy national security advisor to former President George W. Bush, and Mr Bush on C-SPAN, have come out in favor of the Egyptian people's struggle for freedom. See Abrams column in the Post. The Muslim Brotherhood is unlikely to win anything more than a minority of seats in any elections, because the overwhelming influence in the protests is secular, middle class, and seeks the democratization and modernization of Egypt. For the American people this is an opportunity to support the aspirations to freedom and a modernized economy for the Egyptian people....

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In a program of gradual change the new leadership under premier Li Keqiang steers China's economy in the new direction set by the DRC Report: China 2030 and the Third Plenum in Nov. 2013. New priorities listed under major Tasks in the annual work report by Li Keqiang place setting up deposit insurance at the top of the list. Policy changes include allowing cities to issue bonds directly to increase transparency in construction spending and control burgeoning debt.

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The Afghan government says the U.S. helicopters took off from Jalalabad 170 miles away. But this cannot be verified as the helicopters would have to go through Pakistani airspace.