Streetwise Professor

May 30, 2014

So Where Are the Emails, Ed?

Filed under: Military,Russia,Snowden — The Professor @ 10:23 am

Snowden gets more farcical-and more tiresome-by the day. In his interview with Brian Williams (who should really reconsider his life choices), Snowden asserted that he had made numerous complaints about violations of the law to his superiors, including the NSA’s General Counsel.

The GC responded by releasing a single, and predictably pedantic, email from Snowden that inquired about the precedence of executive orders over statutes. The GC claims that this is the only email in which Snowden raises any questions about NSA programs. It claims that it has searched not just its own records, but other NSA departments’ records as well, and found nothing.

Predictably Snowden has responded that the GC’s release was incomplete.

Well, this is easily solved, you’d think. After all, it stands to reason that someone who vacuumed up a reported 1.7 million highly classified NSA documents and shared many of them with the world would have kept a complete archive of his (alleged) whistle blowing correspondence with the NSA, and would have no problems releasing it. This is Ed’s perfect opportunity for a Gotcha!

So where are the emails? A few of those would be far more persuasive than the interminable, droning retort that Snowden wrote. (I should say “allegedly wrote”: one never knows given his current circumstances as an FSB houseguest.) (And really, Ed, wouldn’t “The NSA is lying. It has more emails than it released” have been sufficient? Did you really need to go on and on and on?)

And if for some unfathomable reason Snowden didn’t keep the emails, he always has another option: a FOIA request. Easily done. And Ed has a lot of time on his hands to do the necessary paperwork. So why hasn’t he?

In addition to the lack of the release of any damning (to the NSA) emails, there are also a couple of statements in Ed’s Epistle to the World that really strike a jarring chord:

Ultimately, whether my disclosures were justified does not depend on whether I raised these concerns previously. That’s because the system is designed to ensure that even the most valid concerns are suppressed and ignored, not acted upon.

That sounds like a weaseling. An escape hatch. It sounds like an admission that he can’t prove he blew the whistle, so he’s trying to dismiss the importance of that. “Even if I had blown the whistle internally, it was irrelevant. My concerns would have been rejected anyways. So it doesn’t matter that I didn’t. Let’s not discuss that subject again.”

But it is very important. Because if Snowden did not exhaust all opportunities to make the competent authorities aware of violations of the law, his decision to take matters into his own hands and release documents without authorization looks all the more suspicious. All the more the actions of a grandiose, self-appointed savior -or traitor-than of a genuinely public spirited individual with legitimate concerns.

The word “previously” also jumps out. Previously to what? His stealing the documents?

Note the date on the email that NSA released: April, 2013. Well after Snowden had contacted Greenwald and Poitras. Well after he had started to steal documents. Mere weeks before he fled to Hong Kong, and then Russia. It suggests that he raised concerns-and then only obliquely-after his operation was well advanced, and almost complete, as a sort of cover story or ex post rationalization. But in Snowden’s telling, that he did it after he set his scraper to work doesn’t matter, because his complaints would have been rejected anyways. The insertion of the word “previously” in a prepared, written document (rather than an extemporaneous answer to a question) suggests that Snowden is being Clintonesque here: strictly correct, but deliberately creating a misleading impression.

One other interesting thing. The email that Snowden wrote that the NSA released refers to mandatory USSID 18 training that Snowden took. The subject matter referred to is very basic, almost Schoolhouse Rock-level material about the legal framework in which the NSA operates. Would a trained spy who had previously operated undercover (as Snowden claims he had) have been required to take such training after going to work for an NSA contractor? Trained spies would presumably have to take such training. Why would he have to take it again? Maybe he did: maybe this is just Mickey Mouse bureaucracy at work. But it does strike me as odd that someone who claims to have held an extremely sensitive position would be taking such a basic course again.

Merkel Remembers the Past, But Seems Intent on Repeating It

Filed under: History,Military,Politics,Russia — The Professor @ 9:38 am

Frau Merkel claims that she has taken a firm stand on Russia and Crimea, based on her fears of history repeating itself:

German Chancellor Angela Merkel said on Wednesday she had taken a firm stance against Russia’s annexation of Crimea in part due to the lessons of two world wars, but added it was vital to keep talking with Moscow.

Speaking to students at the opening of an exhibition on World War One, Merkel said her insistence that Russian President Vladimir Putin join her and other Western leaders in Normandy, France on June 6 for ceremonies marking the 70th anniversary of the D-Day landings was to avoid past mistakes.

“There are times where you have no desire to talk any more, such as with Russia now,” said Merkel, who speaks Russian and regularly talks to Putin on the phone. “I force myself to talk. I’m surprised every time to see the other side’s point of view.”

Merkel said Russia’s annexation of the Crimea was an unacceptable move because it upset Europe’s postwar order – even though a 54-percent majority of Germans expressed understanding, in a March opinion poll, for the annexation.

“That’s why I’m so strict when it comes to the Crimea issue,” she said.

“Territorial integrity is the foundation pillar of our postwar European order. If you start saying things like ‘it’s my right’ and then just take something, you’ll end up with an incredible calamity. That doesn’t work.”

The sad thing is that Merkel probably truly believes she’s been strict on Crimea. The sadder thing is that by German standards that’s definitely true: Siemens and Adidas and BASF and RWE and numerous smaller companies have been importuning her to accommodate Putin, as has a vast swathe of the German political elite, including her own foreign minister, the execrable Steinmeier. Sadder still is that Merkel’s simulacrum of strictness gives Obama the multilateralist cover to avoid taking real action against Russia. But the saddest thing is that for all her self-perceived strictness, Crimea remains in Putin’s hands, and there is no move to force him to disgorge it.

Merkel says the right things, but doesn’t follow them up with action. Meaning that her invocation of the lessons of the World Wars is so much cheap talk, more likely to be fulfilled through the repetition of these experiences, than their prevention. She gets the first part of Satayana: she remembers the past. But despite this, she seems intent on fulfilling the second part: repeating it.

May 29, 2014

Snowden’s Narcissism on Full Display

Filed under: Music,Politics,Russia,Snowden — The Professor @ 9:49 am

Snowden was interviewed by NBC’s Brian Williams. There was nothing in the way of real information, except that the interview confirmed Eddie’s rampant narcissism and grandiosity. His insistence that he was a trained “spy” rather than some low level system administrator was a classic. One thing that narcissists can’t handle is to have their delicate, fragile self-esteem challenged. Sometimes they react with rage. Other times with haughty assertions of their own talents and achievements. Snowden’s answer was definitely in the latter category. Blathering on about how he was a trained “intelligence operative” pretty much betrayed that he was in fact not a trained intelligence operative.

The most amusing portion of the interview was when Snowden insisted that has no relationship with the Russian government.

And I am Anastasia Romanoff.

Even if he’s not a trained intelligence operative, he is a natural for the FSB, for he has Putin’s ability to utter patently-and obviously-untrue statements that spindle, mutilate and fold credulity (“there are no Russian troops in Crimea”) without batting an eye.

Obama Gives a Speech, Meaning That No Straw Man is Safe

Filed under: China,History,Military,Politics,Russia — The Professor @ 5:07 am

Reading about Obama’s commencement speech at West Point took me back years, to 1978 when Jimmy Carter spoke at the USNA graduation.

Not that I remember anything that Carter droned on about. Not a word. And that’s part of the reason Obama’s speech brought me back to Annapolis, 36 years ago: I wouldn’t be surprised if that’s the case of those in attendance at USMA yesterday.

Some things have stuck in my mind. Like my classmates getting booted from their room at 0600 by a man wearing sunglasses and carrying a long black case who proceeded to lock himself in: their room overlooked the field where Marine 1 was going to land. I remember the march over to Memorial Stadium. I remember my classmates and I heckling Sam Donaldson before he did a standup in advance of Carter’s speech.

But as for what Carter said, in one ear and out the other, if it made it in the one ear at all. And the assembled WooPoos (sorry-as an ex-Squid I couldn’t resist) will probably have similar non-memories of Obama’s banal, vacuous, and totally predictable foreign policy speech.

I knew what he was going to say and how he was going to say it before he said it because the man is utterly incapable of originality, and stubbornly clings to both his rigid and narrow perspective on policy (a view apparently invulnerable to the reality of repeated failures) and his mental and rhetorical tics. I knew that he would justify his own positions by reference to those of his opponents, and do so by outrageously mischaracterizing them. For the most notable of his tics are the false choice and the mass murder of straw men. And I was not disappointed. In these expectations, anyways.

Obama portrayed himself as the realist and the peacemaker, and his opponents as troglodyte warmongers who advocate a military solution to every foreign policy challenge. He said that because the US has the world’s premier military hammer, his political foes see every problem as a nail to be driven by it. Yes. He said every.

He was at his most outrageous in his discussion of Syria, where he peevishly and pridefully congratulated himself for his calm wisdom in not committing US ground troops to the country. Which absolutely no one was calling for in the first place, or ever. Well, maybe the chief oped writer and head of classified advertising for the Back of Buggery Bugle was shouting Geronimo and calling for the deployment of the 82d Airborne, but no major politician or policy figure, or A, B, C, or even D-list conservative opinion leader was advocating any such thing.

In point of fact, in Syria Republicans and even people in his own administration presented a variety of different policy alternatives, including arming the rebels to airstrikes. None advocated insertion of ground forces, and indeed almost all who even mentioned it did so only to disclaim that intent. Pretty much the entire security establishment in his own administration pressed for arming the rebels, but Obama demurred. Obama and Kerry themselves threatened air strikes before backing down.

And here we are, years after the war began, and the carnage and misery drags on day after day. But Obama is giving himself bursitis patting himself on the back for a job well done in fending off those baying for battle in Damascus.

200,000 dead Syrians could not be reached for comment.

Insofar as Ukraine is concerned, Obama said it brought back memories of Soviet tanks rolling into eastern Europe after WWII. I said to myself: yeah, we didn’t do anything about it then, and we sure ain’t going to do anything about it now. Obama has gone full auto-Yalta.

And again, no one except the chemtrail set and Russian propaganda shills (there is a large overlap between the two) even suggest the possibility of US military action. Many advocate far more robust financial measures against Russia, but (a) Obama has shied away from those despite Russia’s attempt to disrupt the election (which Obama said was a trigger for more sanctions, but what’s another red line anyways?), and (b) Obama pretends as if his critics never mention measures short of war to confront Putin.

There was stiff competition, but these were the dumbest bits:

“We can’t call on others to make commitments to combat climate change if so many of our political leaders deny that it is taking place,” Obama said. “It’s a lot harder to call on China to resolve its maritime disputes under the Law of the Sea Convention when the United States Senate has refused to ratify it. – despite the repeated insistence of our top military leaders that the treaty advances our national security. That’s not leadership; that’s retreat.”

Translation: How can I ram idiotic policies down your throats if some uppity people insist on pointing out that they’re idiotic? The LOST part is particularly outrageous. What China is doing violates maritime rights and laws and obligations that far pre-date LOST. Moreover, even putting the legalisms aside, China is engaged in aggressive acts that greatly raise the risk of serious confrontation or even conflict.

Obama did throw in a few stock lines. If the US doesn’t lead, who will. I believe in American exceptionalism to the last fiber of my being. Cheerleader media outlets, notably Bloomberg, dutifully led with this boob bait in their headlines. But every substantive part of the speech contradicted those assertions.


This was billed as a major foreign policy speech and a ringing defense of his policies. The scary thing is that Obama and his minions probably believe that. But given the tiresome predictability of the speech, you have to wonder what they are thinking. Any slightly self-aware speechwriters, not to mention a slightly self-aware president reading what’s going on the teleprompter, should have realized that critics would be ready to pounce on the resort to Obama’s standard rhetorical tricks, and that this would greatly diminish the impact of the speech. And diminish it has. The impact is pretty much zero, from what I can tell from reading a rather wide range of sources.

Reading through the transcript, it struck me that Talleyrand’s characterization of the Bourbons fits Obama well too. He has learned nothing, and he has forgotten nothing. In his mind, despite the wreckage of policies in the Middle East, Asia, and Russia/FSU strewn all around him, it’s still Berlin 2008 or Cairo 2009. He rationalizes the criticism by mischaracterizing the critics and their arguments, in a profoundly unfair way.

With a never forgetting, never learning Bourbon in charge, we are condemned to 2.5 more years of foreign policy fiascos. Get used to it, if you haven’t already.


May 27, 2014

Gazprom Down, Rosneft Up: Cutting the Oil Link, Sucking Up to Sechin

Filed under: Energy,Politics,Russia — The Professor @ 4:23 am

The news and commentary pages have been filled for days with big stories claiming that the (alleged) China-Russia gas deal represents a seismic change not just in energy markets, but in international relations.

I remain skeptical because I still remain unconvinced there is a real deal with price and financing terms nailed down. What’s more, some of the more sober commentary casts doubt about how favorable the economics of the deal are for Russia, even if the reported contours of the deal are correct. Gazprom must develop green fields in east Siberia, and build the pipes to China. This will be quite expensive, and the reported pricing terms may border on the break even. This should not be surprising because the Chinese are hard bargainers, and Putin needed a deal more than they. (Probably the biggest beneficiaries will be the tunnelers at Gazprom, and companies to whom money is tunneled, like the pipe making Rotenberg brothers.)  So I don’t see this deal-if it exists-being the triumph for Russia and Gazprom as the commentariat is trumpeting.

Here is a piece of hard information that is very bad news for Gazprom: Eni has negotiated an end to oil-linked pricing, and the adoption of European hub pricing. This undermines Gazprom’s pricing model, and for this customer alone costs the Russian company about $650 million off the bat. There is a virtuous cycle here that will make the oil-link progressively less defensible. More hub based pricing tends to enhance the liquidity at the hubs, which makes the hub prices more reliable, and thereby reduces the cost of indexing contract prices to hub prices.

On the Rosneft side of the house things are much cheerier. Western company after western company trooped to St. Petersburg to pay court to the sanctioned Igor Sechin. They signed dozens of deals, and ladled on sick making praise for Sechin, Rosneft, and Russia. Bob Dudley from BP was the worst (go figure, given how Sechin has him by the short ones), but he had a lot of competition. Decent people would get a room to engage in such sucking up, but Dudley et al did it in full public view.

BP (and other companies) were obviously undeterred by the US sanctions on Sechin. They said they can deal with Rosneft, and meet with Sechin personally: they just can’t do deals with Sechin personally. Or something. Meaning the sanctions are a joke.

So I would score things Rosneft up, Gazprom down. Would that they were both down, and hard.

La Plus Ca Change, German Sellout/See No Evil Edition

Filed under: Economics,History,Military,Politics,Russia — The Professor @ 1:02 am

Re-reading Pipes’s account of the Russian Revolution. I’m at the part where he is discussing Brest-Litovsk, and the relations between Germany and the Bolshevik regime.  The more things change, the more they stay the same. Large German firms succeeded in pressuring the government then, as they do now, to turn a blind eye to the true nature of the regime in Russia, all in order to facilitate German business with that regime.

Soviet ambassador to Imperial Germany Ioffe had three missions, one of which was to cultivate German business by holding out “dazzling prospects of profits in Soviet Russia.” Despite the fact that Ioffe was also fomenting unrest among German workers, German businesses fell for the transparent lie that this was the work of the “private” Communist Party, rather than the Soviet government. According to Pipes:

Hard-headed businessmen fell for this ploy in part because they wanted to believe it and in part because they could not conceive that anyone in his right mind could take Bolshevik slogans seriously. The Krupps, the Thyssens and the Stinneses, all future supporters of Hitler, pressured their government to maintain good relations with the new rulers of Russia in order to secure German hegemony over the country. The coalition of diplomats, industrialists, and bankers managed to neutralize the military.

Later Pipes discusses post-War relations between the German government and the USSR. Again, very much a see-no-evil, go along to get along, cynical and amoral approach.

Fast forward to the present. The entire German elite is now bending over backwards in order to appease Putin. Merkel makes some scolding noises now and again, but (a) never takes action, and (b) completely undercuts those messages with conciliatory remarks about needing to extend an “open hand” with Putin. Even normally sensible figures like Schaeubel counsel cooperation at all costs. The German business community is pulling out all the stops to make sure that Germany derails any attempt to impose costs on Putin.

But as Pipes shows, such attitudes have a long pedigree. The Germans like to claim that they are different. In very crucial ways, and in very unattractive ways, they are not.

May 26, 2014

Still Crazy After All These Years

Filed under: Economics,Politics,Russia — The Professor @ 1:48 pm

I have been going through an extremely high variance travel experience, hence the light posting. And no, the crazy in the title does not refer to me and what United Airlines has done to me over the last 3 days.

Instead, I am referring to Putin, who has been on a major roll at the St. Petersburg International Economic Forum.

Where to begin? One statement is loonier than the next.

A lot of it is whining about how Russia doesn’t get any respect.

Note to Vova: respect has to be earned. Cleptocratic autocracies that annex the territory of other countries and foment rebellion in other countries often come up short in the respect department. Just sayin’.

Putin justified the annexation of Crimea by saying that if he hadn’t, Ukraine could have joined NATO and Sevastapol would have become a NATO base.

First of all, Ukraine was and is decades away from any possibility of being in NATO. Any belief that Ukraine’s ascension to NATO was or is imminent is the raving of a paranoid mind. Not to mention that never during Maidan or post-February 22 had breaking the Russian lease to Sevastapol been mooted.

Second, raising NATO as a bogeyman is also the raving of a paranoid mind. Other than the US, and maybe France and UK on good days, NATO couldn’t fight its way out of a piss soaked paper bag (as Patton used to phrase it). It is militarily shambolic, spending well under 2 pct of GDP on defense, and most of that is on waste and militarized welfare rather than weapons. But Schaeuble says no, no, no, NATO nations should raise defense spending in response to Ukraine or any of Vlad’s other adventures.

To illustrate how toothless NATO is, consider the fact that when the Russians sent the carrier Kustnetsov through the Channel (rather than around Ireland, per usual), the Dutch navy did not have a single ship to dispatch to follow it, and also has no maritime patrol aircraft to shadow any vessel sailing of its shores.

All this stuff about big, bad NATO is so much hot air. Militarily, NATO is the US, and as anyone following things knows, in the era of Obama and sequestration, US military capability is extremely stretched. And the prospects for Sevastapol becoming some sort of NATO outpost are somewhere between zero and as if.

Another of Vlad’s wacko statements was that the only reason the US wants to impose sanctions on Russia is to achieve competitive advantages over the EU. Or something:

“By insisting on sanctions against Russia, I suspect that our American friends, and they are shrewd guys, may wish to gain certain competitive advantages in their trade and economic relations with Europe,” Putin said at the St. Petersburg Economic Forum on Friday.

Exactly how that works is beyond me.  The US is going to replace Russia as a supplier of gas to Europe and accelerate that process through sanctions? Really?

This is part of Putin’s plan-which has been all to successful-to sow discord between Europe and the US.

In the same conversation, Putin said this about Ukraine:

“A civil war is starting in Ukraine, but what do we have to do with that?” the Russian president asked.

Try “everything” for an answer.

Relatedly, Putin had the chutzpah to demand of Ukraine: “Where’s our money?” [for natural gas]. To which Ukraine should reply: “Where’s our Crimea?”

But as stiff as the competition was, this had to be Putin’s most outlandish uttering:

“Russia is not the type of country that gives up fighters for human rights,” Putin said during the plenary session of the St. Petersburg International Economic Forum.

Actually, I sort of agree with that. When the fighters for human rights happen to be Russians, the country doesn’t give them up: it imprisons them, beats them, or kills them. Because Russia is not the beacon for human rights, as Putin outrageously suggests: but because it is the enemy of human rights.

Face it. The world is dealing with someone who either is believes the most insane things, or is willing to say the most insane things even when he knows they are crazy. Either way, this man is a menace. Not someone before whom it is necessary to cringe, or to extend a hand. Indeed, what Merkel says is as crazy, or crazier, than anything Putin has been saying. And that is saying something.


May 21, 2014

Still as Clear as Mud

Filed under: China,Energy,Politics,Russia — The Professor @ 3:21 pm

We all know the real reason Putin did a last hour gas deal with China: he wanted to make me look bad.

For yes, mere hours after I declared my perspicacity in doubting that the widely expected deal would get done, the Russians and Chinese announced that they had reached an agreement. So my powers of prognostication were short-lived. Don’t gloat too much, Vova.

That said, I believe that there is less here than meets the eye. Or at least, there are many outstanding questions.

Although the deal supposedly agrees on pricing, the pricing structure is very opaque. Gazprom’s Miller said the pricing was set, but a “commercial secret.” In other words, he would tell us, but he’d have to kill us.

People are widely quoting a number for the price, based on Gazprom leaks and back of the envelope calculations based on announcements of the notional value of the deal ($400 billion over 30 years) and the quantity (38bcm/year). But as I noted in the post a couple of days ago, there is no way that the parties would set a fixed price for the 30 year term. Instead, they would agree to some indexing formula. Gazprom said that a “base price” had been established, and Putin said that the contract utilizes oil indexing. (In my original post I said this was an important thing to look for. On its own, this is a win for Gazprom, which has been a diehard advocate of oil indexing. But given the lack of any gas hubs in Asia, it’s hard to see what other alternative there is. Perhaps indexing off a European hub, but this would present real problems for Gazprom.)

But all that said, the devil is in the details. Since the price is indexed, any statements about a flat price (e.g., $350/mcm) are based on a huge number of assumptions on the indexing formula. Since nobody knows what that formula is, they have no clue on what the real price is. (And since the oil forward curve doesn’t really go out much beyond 10 years, there would still be incredible uncertainty about the revenues that Russia will realize or could lock in by hedging even if the formula was known: given that the gas will not flow for another 6-7 years, the forward prices that would be input into the formula for the last 20+ years of the 30 year term of the deal can’t be known with any precision.)

And the devil is indeed in the details of these assumptions. There are infinitely many ways to create an oil-indexed formula, and the economic outcomes vary crucially with the exact parameters that are chosen as inputs to the indexing formula. (Indeed, the weights can be made to vary over time.)

Moreover, there are some clues that things aren’t quite as final as the public crowing suggests. Putin says that the Chinese have agreed to front $20 billion towards the construction of new infrastructure, with Russia ponying up $50+ billion. But Gazprom’s Miller says that the “two sides were still in talks over any advance.”

Well wait one cotton picking minute. Upfront payments have to be offset by favorable prices over the life of the deal, to compensate the Chinese for the principal amount of the advance and the interest on it. If the upfront payments haven’t been set there is no bleeping way that all of the pricing terms are set. These terms are interdependent.

That little slip by Miller is, my friends, a huge red flag that this deal isn’t as done as the principals claim. Huge. If that part is still under discussion, the entire thing is still under discussion.

Here is my cynical interpretation (and when Russia is involved, and China is involved, cynicism is the order of the day-and when both are involved, oi!). The failure to reach a deal was so embarrassing to Putin that he was desperate to leave Shanghai with his signature on something. So the parties basically memorialized what they had already agreed to, but there are crucial gaps to be filled, and the negotiations to fill these gaps continue. The basic contours of the deal (e.g., some sort of oil link) are known, but the exact parameters, and the upfront payment, are still TBD. The Chinese accommodated, because letting Putin save face cost them nothing, and could benefit them later.

Gazprom stock popped a couple of percent on the announcement, but given the continued ambiguity, and the past fading of these deals after the initial fanfare, I consider that market reaction to be optimistic. I won’t be convinced that this is real until I see pipe being laid. Talk is cheap, and all we have now is still just talk.

So as far as I am concerned, there are still substantial doubts over the solidity of this deal. The admitted lack of agreement over the upfront payment is telling. Until the parties agree on that, they haven’t really agreed on anything.

In other words, things are still as clear as mud.


May 20, 2014

Don’t Be a Sucker: Sell, Don’t Buy, Russian/Gazprom Hype

Filed under: China,Economics,Energy,Russia — The Professor @ 7:16 pm

I told you to ignore the hype (all of which originated from the Russian side) about an impending Russia-China gas deal. Despite being 98 percent done! Down to one digit! Putin left China with no deal to sell gas to China.

Again: don’t believe it until you see it.

There was the same old-same old blah, blah, blah to rationalize the failure:

According to Xinhua, the Chinese state news agency, after meeting Mr. Xi in Shanghai, Mr. Putin said, “I’m glad to be informed that the two sides have made significant progress in the price negotiation of the east route of the natural gas project.”

A joint statement said that Russian natural gas supplies would start flowing “as soon as possible,” a phrase used after many previous negotiations between Gazprom and the China National Petroleum Corporation, and an indication that the two sides could not close the gap on price in time for the two leaders to announce the deal at their meeting.

The linked NYT article quotes several people who are surprised at the outcome. I really need their contact information. I have some bridges to sell. These people are apparently afflicted with this time it’s different syndrome. But it never is.Yes, there are some differences now, but it’s really not that different.

The most telling thing (which I alluded to in yesterday’s post) is that all of the hype emanated from the Russian side. The Chinese were noticeably silent. Since it takes two to make a contract, this asymmetry was a major tip-off.

One wonders what the Russians hoped to gain by exaggerating the imminence and certainty of a deal.

Did they think that they would embarrass the Chinese into giving in? Why would they think that? That the Chinese would lose face if their guests left empty handed? As if the Chinese care. This is a commercial transaction, and the Chinese realize the Russians need the deal more than they do.  If anything, by trading them like obsequious hosts cringingly sensitive to world opinion, such a strategy would be more likely to tick off the Chinese and make them less likely to deal. If anything, the Chinese want to cultivate a reputation for being hard bargainers and actually expect to benefit from walking away.

Didn’t the Russians think that another failure would make them less likely to believed next time? Apparently not. But as the whole Ukraine episode demonstrates, they say outlandish things that are sure to be disproved with no apparent shame.

Actually, the most plausible explanation is that the Russians were pumping and dumping Gazprom stock. The price moved up as the market became convinced that a deal was impending, and then fell about 3 percent when the sure thing turned out to be not so sure . If Gazprom management and regime figures sold into the rally, they could have covered quite profitably on the selloff.

I say that only half in jest. Because otherwise I am at a loss to explain why the Russians would repeatedly over-hype the prospect for a China deal.

But I am also at a loss to understand how the stock would have rallied on the Russian pumping of the likelihood of a deal. This requires a lot of suckers to believe it.  After 10 years of this farce, you’d think people would wise up and heavily discount Russian assurances.  I guess there are a lot of suckers who want to believe. Charlie Brown lives.

Next time around don’t be a sucker. Sell rumors that Russians are peddling, and maybe-maybe-buy facts of an actual deal.

May 19, 2014

Deja Dit: Clearing My Spindle on . . . Clearing

Filed under: Clearing,Financial crisis,Politics,Regulation — The Professor @ 7:47 pm

Several clearing related stories, each of which gives me a sense of deja vu. Or deja dit, to be more accurate.

The Bank of England just released a paper warning about the potential pro-cyclicality of CCP initial margin methodologies. I have expressed concern about this for some time.

BofE expresses concern that pro-cyclicality threatens to cause a measure intended to reduce credit risk create liquidity risk instead. This is another Clearing Cassandra theme. (Speaking of Cassandra, I will be returning to the old stomping grounds of Troy next week. And I don’t mean a city in upstate NY.)

BofE recommends that CCPs make public their margin methodologies, something that sends the clearinghouses into paroxysms of rage. But it makes sense to do that. And not just to reveal to the marketplace the potential liquidity demands that these methodologies can create, thereby allowing them to prepare accordingly. But to permit clearing participants to estimate their exposure to CCPs.

Clearing member exposure to CCPs depends on the likelihood that initial margins are sufficient to cover losses. Estimation of this exposure requires CMs to be able to evaluate margin calculations under a variety of market scenarios. If CCPs keep their methodologies secret, this is not possible. Discriminating choice among CCPs also requires market participants to understand margin costs and exposure under different scenarios. Such choice is not possible if CCPs keep secret their calculations.

CCPs are the beneficiaries of clearing mandates. Due to margin spirals and other feedback effects, margin calculations have external effects. There is therefore a strong efficiency case favoring disclosure to mitigate the externality, and any commercial/competitive inconvenience CCPs suffer as a result is more than compensated for by the fact that government mandates force huge quantities of business their way.

Another story that has come to my attention is that RBS is cutting back its rate clearing business, in large part due to the substantial capital commitment required, and the operational overhead.

This is another long-time SWP theme. The regulatory burdens of being a clearing member create scale economies that will result-and is resulting-in substantial consolidation of the clearing business. Thus, the systemic risks associated with clearing arise not only because of concentration of risk in CCPs, but in concentration of risks in a dwindling number of clearing firms who participate in multiple CCPs. Concentration of risks in a small number of CMs is, in my view, actually more systemically worrisome than concentration of risks in a small number of CCPs. Indeed, it is precisely the concentration of risks in CMs that makes failure of a systemically important CCP more likely.

Recall the good old days, when Gensler fought to reduce the minimum capital requirement for CMs to $25 million in order to spur competition in the supply of clearing services? Good times, good times. Little did he recognize that the other myriad burdens of Franendodd and Emir would inevitably lead to consolidation, making the minimum capital requirement irrelevant.

But this was only one of Gensler’s delusions (or was it lies?) about clearing. I was therefore pleased, and admittedly somewhat shocked, to see his (interim) replacement, Mark Wetjen, (implicitly) call bull on Gensler’s Panglossian propaganda on clearing:

He made an interesting and refreshingly blunt departure from the superseded Gensler script, by referring to Clearing Houses as potential sources of systemic risk.

“A clearinghouse’s failure to adhere to rigorous risk management practices established by the Commission’s regulations, now more than ever, could have significant economic consequences.”

His predecessor’s evangelical belief in CCPs as universal risk-mitigants, refused to countenance the heresy that central clearing may at best merely transfer credit risk, and may actually result in concentration of and increase in systemic risk. Fundamentalism should have no place in regulation, especially the more fundamental reforms; Wetjen’s implied recognition that a central pillar of the Dodd-Frank reforms is open for objective discussion, represents an important and consequential change in the Agency’s culture and governance.

That last part is the opinion of Nick Railton-Edwards (a somewhat Pythonesque handle, eh?), who wrote the piece, rather than Wetjen. (He sounds like a like-minded, not to say right-minded, bloke.) But it is a realistic characterization of the implications of Wetjen’s remarks. I would add that this evangelism is exactly what I hammered Gensler for repeatedly in 2009-2013: Indeed, I repeatedly used the term evangelist to refer to Gensler and his allies. (And that hammering is why he banned me from the CFTC building-something that I have on unimpeachable authority.)

The sad thing about all this is that all of these things were foreseeable before legislators and regulators* went all in on clearing as The Solution. Certain Cassandras did foresee it. But now this is where we are, and some adults like the BofE and Wetjen are trying to mitigate the dangers that this rash and thoughtless plunge created.

Would that this had occurred at the front end of the process rather than the back. Better late than never, perhaps. But better early than late.

*Timmah! was Gensler’s partner in crime on this. Geithner has just released his memoirs, and is flogging the book. I will give him another flogging in due course. For old times’ sake.

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