Streetwise Professor

January 15, 2018

Holegate

Filed under: Economics,Politics,Uncategorized — The Professor @ 8:30 pm

A few comments on ShitholeGate.

First, I dunno if Trump said it. It sounds in character, but the sources for it (being anonymous and/or Dick Durbin) are hardly unimpeachable.

Second, there must be a shortage of fainting couches, smelling salts, and pearls for clutching in DC and media land, given the collective swooning and shock at the thought that a president used a four letter word.

Uhm, LBJ anybody? Nixon?

Third, there are logically coherent and logically incoherent objections to what Trump allegedly said about questioning the wisdom of admitting more people from shitholes than non-shitholes (e.g., Norway–though at one time, my ancestors apparently disagreed!)

The logically coherent objection is: “Yes, these are horrible, abjectly miserable places, which is why we should take in people from them, on humanitarian grounds.”

The logically incoherent objection is: “How dare you call them shitholes! They are wonderful places full of wonderful people! But we are rescuing people from lives of misery by taking in the poor and huddled masses from these places.” If they’re so great, why the intense desire to leave?

Suffice it to say, the logically incoherent objection has been the dominant narrative on the left.

The logically coherent objection creates its own issues: logical coherence is necessary for it to be a reasonable policy position, but by no means sufficient.

One of the issues is: what is the limiting principle? Or is there none?: do you favor no restrictions on immigration whatsoever? If that’s your position–be open about your support for open borders. Don’t try to have it all ways.

If you do favor restrictions, what criteria will you apply for determining who can immigrate to the US? What are the benefits? The costs? What is the incidence of those costs and benefits? Again, be open about it–speaking in gauzy generalities is dishonest, and makes it impossible to evaluate your position.

A related issue is that those who object to, or even have reservations about, open borders or even relatively liberal immigration policy are routinely excoriated as racists and bigots. Yes, some are. But many are not, even though they have a strong preference for traditional American culture which is deeply rooted in European cultures and ethnicity. Do you believe that is a legitimate preference?  If not, do you advocate the rejection of democratic means to decide immigration matters because those with illegitimate views might prevail? Further, African Americans are to a large extent more opposed to immigration than white Americans. Is that due to racism? Or is it a telling indication that the views on immigration also (and arguably primarily) fall along economic/class lines?

This touches upon another element of incoherence in the immigration debate: assimilation. Many (and arguably most, now) advocates of liberal immigration policies are hostile to the notion of assimilation, again imputing racist motives and cultural bigotry to those who believe that current immigrants should assimilate the way that their grandparents and great-grandparents and generations before them did. But hostility to assimilation and hostility to those who favor assimilation means that it’s OK for some (immigrants) to prefer their own culture, ethnicity or race, but it’s not OK for others (the native born) to do so.

This is another variation on the incoherence of identity politics. The most ardent advocates of identity politics scorn intensely those who feel that their identity is threatened by mass immigration, especially mass immigration without assimilation. In the identity politics animal farm, all identities are equal, but some are more equal than others.

Along these lines, it is pretty apparent that the political elites who are most ardent in support of very liberal immigration policies are those who are least likely to be disclocated by large flows of immigrants, and may indeed benefit from it. Those they scorn–many of whom voted for Trump–are the ones most likely to be adversely impacted, either economically or socially/culturally.  Ironic coming from people who are also likely to claim that they favor redistribution in order to reduce economic inequality.

Personally, I confess to some ambivalence on these matters. The libertarian in me favors free movement of people. At the same time, I recognize the Friedman/Richard Epstein point that the welfare state means that immigration is not the result of mutually beneficial bargains entered into without coercion: immigration attracted by the potential to obtain benefits funded by coercive taxation is problematic indeed. (Friedman and Epstein object to the welfare state in large part because it makes unrestricted immigration infeasible.) Furthermore, I understand the importance of social trust and communication and coordination due to shared assumptions and beliefs, and how those can be facilitated by some homogeneity in ideals and culture and background. Relatedly, a democratic polity operating on a principle of consent has to give preference to current citizens.

Immigration has always been a fraught issue in the US, although the intensity of views about it has waxed and waned over time. Our handling of the issue has never been perfect, but I think that (a) the US historically did a better job of it than any country in history (certainly modern history), and (b) we handled immigration best prior to the rise of the welfare state, and when assimilation was a widely shared ideal. Those conditions do not prevail now, which makes me much more cautious, and indeed skeptical, about relatively untrammeled immigration. As a result, I think it’s fair to ask: how many should we accept from where?, and shouldn’t we be more skeptical about mass immigration from countries that are vastly different economically, culturally, and socially?

January 10, 2018

Red on Red: Simpson vs. Browder

Filed under: Politics,Russia — The Professor @ 7:02 pm

Some time back I promised a post on Bill Browder. A hectic schedule and the holidays intervened, so though I’d collected loads of material, I didn’t have time to write a post. Events from yesterday–namely the release of the transcript of Fusion GPS head Glenn Simpson’s interview with Congressional investigators–make this timely, so I’ll try to summarize what I have concluded. Oddly, one conclusion is that when it comes to Bill Browder, Simpson and I are of like mind. On other matters no–but even there Simpson’s Browder testimony shows precisely why his opinions on Trump are suspect.

As for Browder, here are my conclusions in somewhat abbreviated form.

First, Browder assiduously cultivates the image that Diogenes’ search for an honest man would have ended had the old Greek met one Bill Browder. But in fact, his honesty, integrity, and scruples are highly questionable indeed.

The essence of the Browder as Hero narrative is that he was a lone crusader for honest business practices in Russia, and that he fought a corrupt and brutal establishment. In retribution, the establishment stole one of his companies in order to defraud the Russian government, and killed Browder’s loyal employee, Sergei Magnitsky when he had the temerity to challenge them. Bill Browder, martyr by proxy.

A review of his actual business dealings in Russia strongly suggests a very, very different story.

For one thing, Browder was engaged in the voucher privatizations of the 1990s. These were, without cavil, among the most monstrous acts of mass theft and fraud in modern economic history. They were the primitive capitalist accumulation that built many modern Russian fortunes (and filled more than a few graveyards). Any Dudley Do-Right who tried to operate in that environment would have been ground to dust within weeks, if not days. It was an extreme Darwinian environment in which the most unscrupulous and often most brutal prevailed. If Browder survived that–and indeed thrived–draw your own conclusions.

For another, Browder’s initial partner in Hermitage Capital Management (his investment vehicle in Russia) was Edmund Safra. Safra’s sketchy dealings are legendary. He always dismissed allegations about his shady business practices as antisemitic, but there are many other Jewish financiers who have not attracted the same criticism. Further, Safra was involved (through his Republic Bank) in a mysterious scheme to jet billions of dollars in cash to Russia during the 1990s–it was dubbed “the money plane.” Just what went on there is unknown, but it doesn’t pass the smell test.

Safra died under bizarre circumstances in Monaco in 1999. An ex-Marine who served as his nurse was convicted of murder, but few find that story plausible, or complete. One of the competing theories is that he was killed by the Russian mob. (There are so many suspects, that maybe the true story is something along the lines of Murder on the Orient Express–everybody did it.)

Regardless, voucher privatizations plus Safra is hardly the CV of a commercial saint.

Browder also claims that he tried to bring honest corporate governance to Russia. He points to his attempts to change Gazprom as an example.

A different story is far more plausible: Browder’s investment in Gazprom was an arbitrage play, pure and simple. Due to restrictions on foreign ownership of Gazprom’s Russian shares, those shares sold at a substantial discount to the ADRs traded outside of Russia. Browder found a way–legal he says, illegal say the Russians–to buy Gazprom Russian shares. This allowed him to capture the big discount.

Putting the legality of the structure that he used to buy the shares aside, making an arb trade like that can be very profitable, and thus very attractive. That’s why Browder and his investors wanted in. Given the farcical prospects for actually changing Gazprom’s governance, I’m pretty sure that the Corporate Crusader act that Browder put on was just a cover for his more mercenary motives.

And this is a general impression that I come away with after reading a lot about him. The whole Last Honest Man in Russian Investing shtick was a canny PR ploy that allowed his backers to distance themselves from the tawdry (and worse) reputation that investing in Russia had at the time. Browder was their beard that allowed them to pretend that they were in an honest relationship.

Browder has been prosecuted by the Russian government, both for tax violations and his purchase of Gazprom shares. He portrays these prosecutions as vengeance for his crossing the wrong people in his crusade for honest business practices in Russia. I have no doubt that his prosecution might have been selective, and indeed driven by vengeance–but maybe not as revenge for his honesty, but for his taking from the wrong people. Further, even if the prosecutions were selective (i.e., others doing the same but not prosecuted) and driven by vengeance, that doesn’t mean they weren’t justified–and perhaps even just.

I don’t have the basis to opine on the legality of the structure of his Gazprom purchases. But I can say that the Russian accusations regarding tax violations seem very plausible. These involved setting up companies that received tax breaks for hiring disabled veterans, but the Russians colorably show that he did no such thing.

The Russians also allege that he was in fact involved in the tax fraud that resulted in Magnitsky’s death. This allegation is far more speculative, and perhaps libelous–but it is not totally lacking in plausibility, especially in light of Browder’s track record.

Since getting kicked out of Russia in 2005, and since Magnitsky’s death, Browder has spent his life crusading against Putin and the Russian government. The centerpiece of his campaign is the alleged involvement of Russian government officials (tax officials mainly) in the theft of $230 million in tax refunds fraudulently obtained from a Hermitage company seized by the Russians, and the death of Magnitsky while in custody in an investigation of the theft.

Here it is evident that Browder’s relationship with the truth is, well, situational and transactional. The best evidence of this is his deposition in the Prevezon case in New York. Browder tried mightily to avoid being served, and here is one place where Browder and Simpson intersect: Simpson was part of the effort to serve Browder, on behalf of his (indirect) client, Prevezon CEO Denis Katsyv.

During that deposition, Browder admitted repeatedly that he had no evidence whatsoever to back some of his most lurid and damning allegations against those he alleges were complicit in the Russian tax fraud and the death of Magnitsky. For instance, he has claimed repeatedly that he could trace the ill-gotten gains from the tax fraud to specific individuals. In the deposition, he admitted he could not.

(Here Browder has something in common with dossier assembler Christopher Steele. Once in court testifying under the penalty of perjury, Steele was at pains to admit that the claims in the dossier were unsubstantiated, in contrast to his hair on fire representations to the FBI.)

This is particularly outrageous given the fury with which Browder attacks anyone who questions his dealings or veracity.

So my conclusion is: Browder is a con-man and a liar. If he tells you the sun rises in the east, buy a compass and wait for sunrise.

Glenn Simpson of dossier infamy is of the same opinion. Simpson did a deep documentary dive on Browder for Prevezon’s lawyers, Baker Hostetler, and came to many of the conclusions I outline above, and some more to boot. If you read the transcript of Simpson’s interview (not testimony) before Senate Judiciary Committee investigators, you’ll see what Simpson dug up and the basis for his conclusions.

Well, doesn’t this mean that I therefore have to give credence to Fusion GPS’s research on Trump? Quite to the contrary: the difference in the methods in the Browder and Trump matters is striking. When investigating Browder, Fusion GPS did a deep dive on documentary evidence in the US, Russia, and presumably Cyprus (where Browder registered companies). (See pp. 41-49 of the transcript. Simpson is so detailed in his description of what he did in the Browder investigation that the lawyer questioning him said “Thank you for the narrative answer.” LOL.)

In contrast, with regards to Trump, Simpson et al (a) read some books, and (b) commissioned the Steele investigation, which apparently just involved in talking to people (just who is a complete mystery) who passed on unverified and unverifiable gossip. The basis for Simpson’s claim that Trump had Russian mafia connections is that Trump had connections with Felix Sater who allegedly had connections with the Russian mob: similarly Paul Manafort.

Thus, whereas the foundation for Simpson’s opinions on Browder is rock-solid, that for his opinions on Trump are charitably described as quicksand.

Simpson’s statements also call into question his honesty. When asked when he had any Russian-speaking employees, he mentioned one guy–who happened NOT to be Nellie H. Ohr, wife of ex-DOJ Associate Deputy AG. We now know that Mrs. Ohr worked for Fusion. Sean Davis said on Twitter that this was an “interesting omission.” I said it was an interesting perjury.

Simpson also insinuated that the FBI had an independent source to justify FISA-ing Trump campaign personnel–and that this guy was a walk-in. When the transcript was released, a “source close to Fusion GPS” said nope. Never happened. He was referring to Papalopolous. Another strike for his credibility.

Simpson strains credulity past its breaking point when he claims that even though he had dinner with Natalia Veselnitskaya the night before and the night after her meeting with Trump Jr., the subject never came up (she was at the other end of the table, he doesn’t speak Russian and she doesn’t speak English–even though they apparently could communicate well enough for her to get him to help her obtain a visa). Simpson claims to have been shocked at the news. Please. Big investigative reporter turned PI/opposition researcher has no clue about a bombshell meeting even after spending hours with some of the principals? He didn’t even bother to ask through a translator (who Veselnitskaya must have had along) “hey, Natalia, whatcha been doing in New York?” Please.

So my rule for Simpson is the same as for Browder: unless he has the documents to prove it, don’t believe a word he says. He will distort the truth to advance his agenda.

The most entertaining part of this is the red-on-red nature of the battle. Heretofore Browder has been something of a hero among the anti-Trump set (yeah, I’m looking at you, Michael Weiss) because he is ardently anti-Putin, and Trump is supposedly Putin’s bitch. But Simpson has even better anti-Trump bona fides, for the dossier is directly anti-Trump, whereas Browder’s  anti-Putin stance is anti-Trump only via (an alleged) transitivity.

So given a choice between Browder and Simpson, most of the anti-Trumpers are going with Simpson, and either explicitly or implicitly dumping and dissing Browder.

Karma, Bill. Karma.

Browder being Browder, he will no doubt go after Simpson with all guns blazing.

I’m stocking up on the popcorn.

The left and the media (I repeat myself, yet again) may end up ruing their choice. Given the extremely dubious nature of the dossier and those who funded, created, and disseminated it, and the very great likelihood that it was used as the basis to engage in counterintelligence surveillance of Trump campaign personnel, I believe that the dossier will likely prove the greatest political boomerang in modern political history, and will end up braining those who threw it (which includes the Clinton campaign, Fusion GPS/Simpson, the FBI and other US intelligence agencies, the media, and the “Resistance”). And if this happens, Bill Browder will be little more than collateral damage.

January 2, 2018

Buyer Beware: Bart Does Crypto

Filed under: Commodities,Derivatives,Economics,Energy,Regulation — The Professor @ 8:08 pm

Back in the day, Bart Chilton was my #2 whipping boy at the CFTC (after Gary Gensler AKA GiGi). Bart took umbrage (via email) at some of my posts, notably this one. Snort.

Bart was the comedian in that dynamic duo. He coined (alert: pun foreshadowing!) such memorable phrases as “cheetah” to criticize high frequency traders (cheetah-fast cheater–get it? Har!) and “massive passives” to snark at index funds and ETFs. Apparently Goldilocks could never find a trading entity whose speed was just right: they were either too fast or too slow. He blamed cheetahs for causing the Flash Crash, among other sins, and knocked the massive passives for speculating excessively and distorting prices.

But then Bart left the CFTC, and proceeded to sell out. He took a job flacking for HFT firms. And now he is lending his name (I won’t say reputation) to an endeavor to create a new massive passive. This gives new meaning to the phrase sell out.

Bart’s massive passive initiative hitches a ride on the crypto craze, which makes it all the more dubious. It is called “OilCoin.” This endeavor will issue said coins, and invest the proceeds in “reserve barrels” of oil. Indeed, the more you examine it, the more dubious it looks.

In some ways this is very much like an ETF. Although OilCoin’s backers say it will be “regulatory compliant,” but even though it resembles an ETF in many ways, it will not have to meet (nor will it meet, based on my reading of its materials) listing requirements for ETFs. Furthermore, one of the main selling points emphasized by the backers is its alleged tax advantages over standard ETFs. So despite the other argle bargle in the OilCon–excuse me, OilCoin–White Paper, it’s primarily a regulatory and tax arb.

Not that there’s necessarily anything wrong with that, just that it’s a bit rich that the former stalwart advocate of harsher regulation of passive commodity investment vehicles is part of the “team” launching this effort.

I should also note some differences that make it worse than a standard ETF, and worse than other pooled investment vehicles like closed end funds. Most notably, ETFs have an issue and redemption mechanism that ensures that the ETF market price tracks the value of the assets it holds. If an ETF’s price exceeds the value of the assets the ETF holds, an “Authorized Participant” can buy a basket of assets that mirrors what the ETF holds, deliver them to the ETF, and receive ETF shares in return. If an ETF’s price is below the market value of the assets, the AP can buy the ETF shares on the market, tender them to the ETF, and receive an equivalent share of the assets that the ETF holds. This mechanism ties the ETF market price to the market prices of its assets.

The OilCoin will not have any such tight tie to the assets its operators invest in. Insofar as investment policy is concerned:

In addition to investing in oil futures, the assets supporting OilCoin will also be invested in physical oil and interests in oil producing properties in various jurisdictions in order to hold a diversified pool of assets and avoid the risk of holding a single, concentrated position in exchange traded futures contracts. As a result, OilCoin’s investment returns will approximate but not precisely track the price movement of a spot barrel of crude oil.

I note the potential illiquidity in “physical oil” and in particular “interests in oil producing properties.” It will almost certainly be very difficult to value this portfolio. And although the White Paper suggests a one barrel of oil to one OilCoin ratio, it is not at all clear how “interests in oil producing properties” will figure into that calculation. A barrel of oil in the ground is a totally different thing, with a totally different value, than a barrel of oil in storage above ground, or an oil futures contract that is a claim on oil in store. This actually has more of a private equity feel than an ETF feel to it. Moreover, even above ground barrels can differ dramatically in price based on quality and location.

Given the illiquidity and heterogeneity of the “oil” that backs OilCoin, it is not surprising that the mechanism to keep the price of the OilCoin in line with “the” price of “oil” is rather, er, elastic, especially in comparison to a standard ETF: the motto of OilCoin should be “Trust Us!” (Pretty funny for crypto, no?) (Hopefully it won’t end up like this, but methinks it might.)

Here’s what the White Paper says about the mechanism (which is a generous way of characterizing it):

OilCoin’s investment returns will approximate but not precisely track the price movement of a spot barrel of crude oil.

. . . .

In order to ensure measurable intrinsic value and price stability, each OilCoin will maintain an approximate one-to-one ratio with a single reserve barrel of oil. [Note that a “reserve barrel of oil” is not a barrel of any particular type of oil at any particular location.] This equilibrium will be achieved through management of the oil reserves and the number of OilCoin in circulation.

As demand for OilCoin causes the price of a single OilCoin to rise above the spot price of a barrel of oil on global markets [what barrel? WTI? Brent? Mayan? Whatever they feel like on a particular day?], additional OilCoin may be issued in private or open market transactions and the proceeds will be invested in additional oil reserves. Similarly, if the price of an OilCoin falls below the price of a barrel of oil, oil reserves may be liquidated with the proceeds used to purchase OilCoin privately or in the open market. This method of issuing or repurchasing OilCoin and the corresponding investment in or liquidation of oil reserves will provide stability to the market price of OilCoin relative to the spot price of a barrel of crude oil and will provide verifiable assurances that the value of oil reserves will approximate the aggregate value of all issued OilCoin.

OilCoin’s price stability program will be managed by the OilCoin management team with a view to supporting the liquidity and functional operation of the OilCoin marketplace and to maintaining an approximate but not precise correlation between the price of a single OilCoin and the spot price of a single barrel of oil [What type of barrel? Where? For delivery when?]. While maintaining price stability of digital currencies through algorithmic purchase and sale may be appropriate in certain circumstances, and while it is possible as a technical matter to link such an algorithm to a programmed purchase and sale of oil assets, such an approach would be likely to result in (i) the decoupling of the number of OilCoin in circulation from an approximately equivalent number of reserve barrels of oil, and (ii) a highly volatile stock of oil reserve assets adding unnecessary and avoidable transaction costs which would reduce the value of OilCoin’s supporting oil reserve assets. Accordingly, it is expected that purchases and sales of OilCoin and oil reserves to support price stability will be made on a periodic basis [Monthly? Annually? When the spirit moves them?] as the price of OilCoin and the price of a single barrel of oil [Again. What type of barrel? Where? For delivery when?] diverge by more than a specified margin [Specified where? Surely not in this White Paper.]

[Emphasis added.]

Note the huge discretion granted the managers. (“May be issued.” “May be liquidated.” Whenever they fell like it, apparently, as long as there is a vague connection between their actions and “the spot price of crude oil “–and remember there is no such thing as “the” spot price) A much less precise mechanism than in the standard ETF. Also note the shell game aspect here. This refers to “the” price of “a barrel of oil,” but then talks about “diversified holdings” of oil. The document goes back and forth between referring about “reserve barrels” and “barrels of oil on the global market.”

Note further that there is no third party mechanism akin to an Authorized Party that can arb the underlying assets against the OilCoin to make sure that it tracks the price of any particular barrel of oil, or even a portfolio of oil holdings. This means that OilCoin is really more like a closed end fund, but one  that is not subject to the same kind of regulation as closed end funds, and which can apparently invest in things other than securities (e.g., interests in oil producing properties), some of which may be quite illiquid and hard to value and trade. One other crucial difference from a closed end fund is that OilCoin states it may issue new coins, whereas closed end funds typically cannot have secondary offerings of common shares.

Closed end funds can trade at substantial premiums and discounts to the underlying NAV, and I would wager that OilCoin will as well. Relating to the secondary issue point, unlike a closed end fund, OilCoin can issue new coins if they are at a premium–or if the managers feel like it. Again, the amount of discretion possessed by OilCoin’s managers is substantially greater than for a closed end fund or ETF (or an open ended fund for that matter). (There is also no indication that the managers will be precluded from investing the funds in their own “oil producing interests.” That potential for self-dealing is very concerning.)

There is also no indication in the White Paper as to just what an OilCoin gives a claim on, or who has the control rights over the assets, and how these control rights can be obtained. My reading of the White Paper does not find any disclosure, implicit or explicit, that OilCoin owners have any claim on the assets, or that someone could buy 50 percent plus one of the OilCoins, boot the existing management, and get control of the operation of the investments, or any mechanism that would allow acquisition of a controlling interest, and liquidation of the thing’s assets. (I say “thing” because what legal form it takes is not stated in the White Paper.)  These are other differences from a closed end fund or ETF–and mean that OilCoin is not subject to the typical mechanisms that protect investors from the depredations of promoters and managers.

A lot of crypto is all about separating fools from their money. OilCoin certainly has that potential. What is even more insidious about it is that the backers state that it is a different kind of crypto currency because it is backed by something: in the words of the White Paper, OilCoin is “supported” by the “substantial intrinsic value of assets” it holds. The only problem is that there is no indication whatsoever that the holder of the cryptocurrency can actually get their hands on what backs it. The “support” is more chimerical than real.

So my basic take away from this is that OilCoin is a venture that allows the managers to use the issue of cryptocurrency to fund totally unconstrained speculations in oil subject to virtually none of the investor protections extended to the purchasers of securities in corporations, investors of closed end funds, or buyers of ETFs. All sickeningly ironic given the very public participation of a guy who inveighed against speculation in oil and the need for strict regulation of those investing other people’s money.

My suggestion is that if you are really hot for an ICO backed by a blonde, buy whatever Paris Hilton is touting these days, and avoid BartCoin like the plague.

 

 

 

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