Streetwise Professor

May 30, 2017

Clearing Fragmentation Follies: We’re From the European Commission, and We’re Here to Help You

Filed under: Clearing,Derivatives,Economics,Financial Crisis II,Politics,Regulation — The Professor @ 6:33 am

Earlier this month came news that the European Commission was preparing legislation that would require clearing of Euro derivatives to take place in the Eurozone, rather than in the UK, which presently dominates. This has been an obsession with the Euros since before Brexit: Brexit has only intensified the efforts, and provided a convenient rationalization for doing so.

The stated rationale is that the EU (and the ECB) need regulatory control over clearing of Euro-denominated derivatives because a problem at the CCP that clears them could have destabilizing effects on the Eurozone, and could necessitate the ECB providing liquidity support to the CCP in the event of trouble. If they are going to support it in extremis, they are going to need to have oversight, they claim.

Several things to note here. First, it is possible to have a regulatory line of sight without having jurisdiction. Note that the USD clearing business at LCH is substantially larger than the € clearing business there, yet the Fed, the Treasury, and Congress are fine with that, and are not insisting that all USD clearing be done stateside. They realize that there are other considerations (which I discuss more below): to simplify, they realize that London has become a dominant clearing center for good economic reasons, and that the economies of scale and scope clearing mean that concentration of clearing produces some efficiencies. Further, they realize that it is possible to have sufficient information to ensure that the foreign-domiciled CCP is acting prudently and not taking undue risks.

Canada is another example. A few years ago I wrote a white paper (under the aegis of the Canadian Market Infrastructure Committee) that argued that it would be efficient for Canada to permit clearing of C$ derivatives in London, rather than to require the establishment and use of a Canadian CCP. The Bank of Canada and the Canadian government agreed, and did not mandate the creation of a maple leaf CCP.

Second, if the Europeans think that by moving € clearing away from LCH that they will be immune from any problems there, they are sadly mistaken. The clearing firms that dominate in LCH will also be dominant in any Europe-domiciled € CCP, and a problem at LCH will be shared with the Euro CCP, either because the problem arises because of a problem at a firm that is a clearing member of both, or because an issue at LCH not originally arising from a CM problem will adversely affect all its CMs, and hence be communicated to other CCPs.  Consider, for example, the self-preserving way that LCH acted in the immediate aftermath of Brexit: this put liquidity demands on all its clearing members. With fragmented clearing, these strains would have been communicated to a Eurozone CCP.

When risks are independent, diversification and redundancy tend to reduce risk of catastrophic failure: when risks are not independent, they can either fail to reduce the risk substantially, or actually increase it. For instance, if the failure of CCP 1 likely causes the failure of CCP 2, having two CCPs actually increases the probability of a catastrophe (given a probability of CCP failure). CCP risks are not independent, but highly dependent. This means that fragmentation could well increase the problem of a clearing crisis, and is unlikely to reduce it.

This raises another issue: dealing with a crisis will be more complicated, the more fragmented is clearing. Two self-preserving CCPs have an incentive to take actions that may well hurt the other. Relatedly, managing the positions of a defaulted CM will be more complicated because this requires coordination across self-interested CCPs. Due to the breaking of netting sets, liquidity strains during a crisis are likely to be greater in a crisis with multiple CCPs (and here is where the self-preservation instincts of the two CCPs are likely to present the biggest problems).

Thus, (a) it is quite likely that fragmentation of clearing does not reduce, and may increase, the probability of a systemic shock involving CCPs, and (b) conditional on some systemic event, fragmented CCPs will respond less effectively than a single one.

The foregoing relates to how CCP fragmentation will affect markets during a systemic event. Fragmentation also affects the day-to-day economics of clearing. The breaking of netting sets resulting from the splitting off of € will increase collateral requirements. Perverse regulations, such as Basel III’s insistence on treating customer collateral as a CM asset against which capital must be held per the leverage requirement, will cause the collateral increase to increase substantially of providing clearing services.

Fragmentation will also result in costly duplication of activities, both across CCPs, and across CMs. For instance, it will entail duplicative oversight of CMs that clear both at LCH and the Eurozone CCP, and CMs that are members of both will have to staff separate interfaces with each. There will also be duplicative investments in IT (and the greater the number of IT potential points of failure, the greater the likelihood of at least one failure, which is almost certain to have deleterious consequences for CMs, and the other CCP). Fragmentation will also interfere with information flows, and make it likely that each CCP has less information than an integrated CCP would have.

This article raises another real concern: a Eurozone clearer is more likely to be subject to political pressure than the LCH. It notes that the Continentals were upset about the LCH raising haircuts on Eurozone sovereigns during the PIIGS crisis. In some future crisis (and there is likely to be one) the political pressure to avoid such moves will be intense, even in the face of a real deterioration of the creditworthiness of one or more EU states. Further upon a point made above, political pressures in the EU and the UK could exacerbate the self-preserving actions that could lead to a failure to achieve efficient cooperation in a crisis, and indeed, could lead to a catastrophic coordination failure.

In sum, it’s hard to find an upside to the forced repatriation of € clearing from LCH to some Eurozone entity. Both in wartime (i.e., a crisis) and in peacetime, there are strong economies of scale and scope in clearing. A forced breakup will sacrifice these economies. Indeed, since breaking up CCPs is unlikely to reduce the probability of a clearing-related crisis, but will make the crisis worse when it does occur, it is particularly perverse to dress this up as a way of protecting the stability of the financial system.

I also consider it sickly ironic that the Euros say, well, if we are expected to provide a liquidity backstop to a big financial entity, we need to have regulatory control. Um, just who was supplying all that dollar liquidity via swap lines to desperate European banks during the 2008-2009 crisis? Without the Fed, European banks would have failed to obtain the dollar funding they needed to survive. By the logic of the EC in demanding control of € clearing, the Fed should require that the US have regulatory authority over all banks borrowing and lending USD.

Can you imagine the squealing in Brussels and every European capital in response to any such demand?

Speaking of European capitals, there is another irony. One thing that may derail the EC’s clearing grab is a disagreement over who should have primary regulatory responsibility over a Eurozone CCP. The ECB and ESMA think the job should be theirs: Germany, France, and Italy say nope, this should be the job of national central banks  (e.g., the Bundesbank) or national financial regulators (e.g., Bafin).

So, hilariously, what may prevent (or at least delay) the fragmentation of clearing is a lack of political unity in the EU.  This is as good an illustration as any of the fundamental tensions within the EU. Everybody wants a superstate. As long as they are in control.

Ronald Reagan famously said that the nine scariest words in the English language are: “I’m from the government and I’m here to help.” I can top that: “I’m from the EC, and I’m here to help.” When it comes to demanding control of clearing, the EC’s “help” will be about as welcome as a hole in the head.


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May 28, 2017

Calling Out the Free Riding Euroweenies

Filed under: Economics,History,Military,Russia — The Professor @ 4:26 pm

Trump’s continued insistence that Europe pony up to pay for its own defense–by living up to its commitment to spend 2 pct of GDP on the military–sent the Euros into a tizzy during the recent Nato and G-7 meetings. Ironically, given that the UK is leaving Europe, the FT has been particularly obnoxious in its defense of the decided lack of Euro defense spending. Two opeds from last week are perfect cases in point.

In this one, Ivo Daalder, former US permanent representative to Nato, and diehard foreign policy establishmentarian, opines that defense expenditures are not the measure of a defense alliance. Instead, “[t]he heart of the alliance lies in the commitment of each member to defend the others.”

That this is retarded is self-evident. What, pray tell, is the commitment to defend worth if those making the “commitment” do not have the means to live up to it?

It is worth exactly nothing. If, for instance, the Russians invaded the Baltics or Poland: what could the Europeans do? They could no doubt issue stirring statements expressing solidarity with their eastern brethren. But as for actually doing something–fat chance.

Belgium has committed to defend other Nato members. Belgium has zero main battle tanks. The Netherlands has committed to defend other Nato members. The Netherlands has 18 MBTs. Germany has committed to defend other Nato members. Germany–an economic colossus–has a grand total of 250 MBTs.

Furthermore, not only do these nations have little actual combat power, they have virtually no strategic mobility. God only knows how the 18 Dutch MBTs would actually make it to Nato’s eastern marches.

When the Europeans intervened in Libya, they depended almost exclusively on the US for reconnaissance, intelligence, and aerial refueling.

In brief, non-US Nato countries have little combat power, and no ability to sustain what little power they have outside of their own countries.

Meaning that the hallowed commitment is worth exactly squat.

The second oped, by a Princeton poli sci prof, claims that Europe pays its fair share because measuring contributions to security by looking at military expenditure alone “rests on an outdated notion of global power.”

Pray tell, Professor Moravcsik, how is that “civilian power” is working out in Syria, Iraq, Libya, Ukraine, etc.? Besides, I thought that the reason that Putin was such a grave threat is precisely that he clings to “outdated notions of global power”, for which the Europeans have no answer.

Moravcsik and others who make the same argument also present a false choice: “civilian power” and military power are not mutually exclusive. In fact they are highly complementary. As the Al Capone line goes, you can get much farther with a kind word and a gun than you can with a kind word alone. That’s especially true when those you are dealing with do not embrace the same post-modern conceits as you.

This last point is of particular importance. “Civilian power” may work in a world where there are only sheep: it is not a feasible strategy when there are wolves, too. Moreover, playing the sheep strategy makes it quite advantageous for others to adopt the wolf strategy. If you declare force to be an “outmoded measure of global power,” and disarm yourself accordingly, as sure as night follows day, a nation or nations will find such “outmoded” notions work quite fine, thank you. Indeed, by disarming you make it quite affordable for economic basket cases that could not compete otherwise (e.g., Russia) to obtain a relative advantage in conventional military power–and a relative advantage is all that they need.  By disdaining “outmoded measures of global power” you make it eminently affordable for less edified nations to achieve an advantage.

Today Angela Merkel said that Europe can no longer rely on the US. That’s projection, Angie baby: the US has not been able to rely on Germany for decades. Well, we can rely on them for pretentious preening, carping, and ankle biting. But for actual contributions to mutual defense, not so much.

Trump is right to continue to pound of the Euros about this. If it hurts their tender little feelings, oh well. Free riders need to be called out.

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May 27, 2017

Comey Channels Maxwell Smart

Filed under: Politics — The Professor @ 6:24 pm

So, the new version of the Comey rationale for dropping the Hillary investigation is that he knew the document claiming that Loretta Lynch had promised a Clinton staffer that the email investigation would go away was disinformation, but it didn’t matter! He had no choice but to drop the investigation lest the disinformation be leaked in order to discredit Lynch if she dropped the investigation. Or something:

Sources close to Comey tell CNN he felt that it didn’t matter if the information was accurate, because his big fear was that if the Russians released the information publicly, there would be no way for law enforcement and intelligence officials to discredit it without burning intelligence sources and methods. There were other factors behind Comey’s decision, sources say.

What complete and utter bullshit.

The I’d-tell-you-but-then-I’d-have-to-kill-you-because-the-information-is-from-super-secret-sources dodge is getting so, so tiresome, especially when the people who tell us this leak like sieves. Such a convenient way of telling partial truths.

But it gets better! Come on, think about it: the Russians would only plant disinformation where they knew it would be found, that is, in communications they already knew were compromised.  What’s the point of passing disinformation through a super-secure channel? You WANT the disinformation to be uncovered, and hence will broadcast it over channels you know the target is monitoring. So revealing this information would have compromised exactly nothing.

Meaning that the new story is inherently contradictory, and an insult to our intelligence.

And please: you think there is no way for the FBI to show that a document is disinformation through independent means? Especially when they knew of its existence in advance of any leak?

Comey (and/or his leaky mouthpieces) remind me of Maxwell Smart. When one stupid story implodes, they try another: “Would you believe . . . ?”

“Would you believe, I knew the story was disinformation, but because of its existence I had to torpedo the Hillary investigation anyways?”

No. We find that hard to believe, Mr. Smart, I mean Mr. Comey.




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May 25, 2017

OPEC and Inventories: An Exercise in Game Theoretic Futility

Filed under: Commodities,Economics,Energy — The Professor @ 11:37 am

OPEC met today, and agreed to extend its output cuts for another nine months. OPEC’s focus is on “rebalancing the market,” that is, on inducing a decline in world oil stocks to a level well below their current inflated value. This is far easier said than done, and indeed may be impossible because of the inability of OPEC to commit to a path of future output. This is because inventory changes result from changes in the temporal supply and demand balance.

In a competitive market, stocks accumulate when there are unexpected increases in supply or declines in demand, and crucially, these shocks are expected to be highly transitory. Similarly, market participants draw down on stocks when there are unexpected declines in supply or increases in demand that are expected to be highly transitory.

The “transitory” part of the story is very important. It makes sense to store when expected future supply is less than current supply, i.e., when future scarcity is greater than current scarcity. It makes sense to draw down on storage when future scarcity is expected to be low relative to today: why carry inventory to a time of greater abundance? Markets move things from where/when they are abundant to where/when they are scarce. Highly persistent shocks to supply and demand don’t affect the temporal balance, and hence to don’t lead to temporal reallocations. Temporary shocks (or shocks to future supply/demand) also change the temporal balance, and lead to inventory changes.

In my empirical work on the copper market (where inventory data is pretty good), I document that a net supply shock with a half-life of about 1 month drives inventory changes. Much more persistent shocks (e.g., those with a half-life of a year) have virtually no impact on inventory.

Inventories can also decline if expected future supply rises, or expected future demand declines. An increase in expected future supply reduces the future value of oil, and makes it less valuable to hold oil today for future use. Or to put it another way, it is desirable to smooth consumption, so if expected future supply (and hence future consumption) goes up, it makes sense to increase consumption today. This can only be done by drawing down on inventory. (Time travel that would allow bringing the abundant future supply back to the present would do the same thing, but alas, that’s impossible.)

OPEC’s desire to cause a drawdown in inventory would therefore require it to commit to a path of output. Further, this path would involve bigger cuts today than in the future in order to cause a temporal imbalance involving an increase in future supply relative to current supply.

But it is unlikely that this commitment could be credible, precisely because of the reason that OPEC gives for fretting about inventories: that they constrain its pricing power. Assume that inventories do drop substantially. According to its own logic, OPEC would feel less constrained about cutting output even further because non-OPEC supplies (in the form of stocks) have declined. Thus, if inventories indeed fall, OPEC’s logic implies that it would cut output further in the future.

But this path is inconsistent with the path that would be necessary to induce the inventory decline in the first place. Indeed, market participants, looking forward to what OPEC would do in the event that stocks were to decline substantially, would choose to hold on to inventories rather than consume them. Meaning that OPEC would fail in its objective of reducing stocks. In the game between OPEC and other market participants, OPEC’s own rhetoric about inventories and supply/demand balance severely undercuts its ability to cause others to consume inventories rather than continue to hold them.

In sum, OPEC is likely to have little if any ability to influence inventories. To influence inventories, it would have to commit to an output path, but that commitment is not subgame perfect/time consistent.

Instead, inventories will be driven by factors outside of OPEC’s control, namely, unexpected transitory changes in supply and demand. But the effect of even those shocks will depend on how market participants believe OPEC will behave when inventories are low. The supply changes will mainly result from shocks to non-OPEC producers (e.g., US shale producers) and to politically unstable OPEC nations like Libya, Nigeria, and Venezuela. Inventory changes may also result from information about the durability of output cut agreements and cheating: a surprise increase in the estimates of future cheating would tend to cause inventories to decline today. Thus, perversely from OPEC’s perspective, its wish of lower inventories may come true only when it is widely believed that OPEC output discipline will soon collapse.

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Maxine Waters Plays Six Degrees of Donald Trump, With Hilarious Results

Filed under: Politics,Russia — The Professor @ 10:48 am

The Six Degrees of Donald Trump/Russia game has reached new peaks of hilarity. Let by noted genius Maxine Waters (when the stupid stick hit Maxine, the stick got stupider), a group of Congressional Democrats are demanding release of Deutsche Bank records relating to Trump loans because . . . Deutsche Bank has been implicated in a money laundering scheme in which billions were tunneled out of Russia. QED!

For the record, Deutsche Bank has about 100,000 employees, and operations all over the world. The people handling commercial banking transactions in the US for Donald Trump were definitely not also manning the DB equities desk in Moscow, or the Russia equities operations in New York and London–which is where the money laundering scheme was executed. And what is the connection between the beneficiaries of the money laundering scheme and the Kremlin?

Deutsche Bank is a sprawling operation with loose controls, as its involvement in virtually every financial scandal in recent years (gold and silver fixings; IBOR manipulation; sanctions violations; mortgage violations; tax evasion) attests. The scheme bouncing around in the void of Maxine’s skull would require centralized coordination and control and oversight across completely unrelated lines of business that Deutsche Bank has conspicuously lacked for a very long time.

Also, Deutsche Bank does business in every major country of the world–and some not so major ones. Its lending and trading operations touch myriad corporations, governments, and individuals. Some of those touches are of dubious legality (as witnessed by the sanctions violations). To connect two dots of the millions in the Deutsche Bank orbit, and ignore the rest, is beyond absurd.

The ostensible plot took place in 2012-2015. Um, in 2012-2014, Trump was not a candidate: he was not part of the political conversation at all then. Even when he declared in 2015, it was considered something of a joke. Actually, strike “something of.” A 2012-2014 Trump trade would have been about a .01 delta call. If that. Deep, deep out of the money.

Maxine suggests that the Russian government may have guaranteed Trump loans. Hilarious! For a big part of this period, Russia was facing a financial crisis and deep recession, and was having to worry about its own companies, rather than cultivate Trump. In 2014 sanctions were followed by an oil price collapse. I remember the joke that 62 was the magic number for Russia: Putin would turn 62, the ruble would hit 62, and oil would trade at 62. That was wildly optimistic. Yes, Putin turned 62 but the ruble hit 80 and oil went under $30. All major Russian companies were feeling the strain, and Putin was only showing love to his buddies like Timchenko and the Rotenbergs, who were hit by sanctions.

These are not serious people, Maxine et al. Using the fact that they gargantuan financial institution like DB dealt with Trump and dirty Russians to claim a nexus between Putin and Trump shows how completely unserious they are.


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May 24, 2017

Just When You Think the Comey Saga Couldn’t Be More Bizarre

Filed under: Politics — The Professor @ 8:04 pm

Today the WaPoop ran what I think is supposed to be a defense of James Comey’s absolution of Hillary in July 2016. You see, Comey supposedly learned of a clandestinely obtained Russian document purporting to disclose the contents of an email between Debbie Wasserman Schultz and a member of Soros’ Open Society Foundation in which DWS related a conversation between Attorney General Lynch and a Clinton campaign staffer in which Lynch said that the FBI investigation of the Hillary emails would go nowhere.

Oh my God! A third hand representation (with Russians at the third remove, no less) of a conversation in which the nation’s chief law enforcement officer discusses subverting the investigation of Hillary Clinton that Comey was leading. What to do? What to do? Well, it’s obvious, isn’t it? Terminate the Hillary investigation!

No. I am not making that up:

Current and former officials have argued that the secret document gave Comey good reason to take the extraordinary step over the summer of announcing the findings of the Clinton investigation himself without Justice Department involvement.

Comey had little choice, these people have said, because he feared that if Lynch announced no charges against Clinton, and then the secret document leaked, the legitimacy of the entire case would be questioned.

. . . .

“It was a very powerful factor in the decision to go forward in July with the statement that there shouldn’t be a prosecution,” said a person familiar with the matter. “The point is that the bureau picked up hacked material that hadn’t been dumped by the bad guys [the Russians] involving Lynch. And that would have pulled the rug out of any authoritative announcement.”

So let me get this straight. If there were no charges, and the document leaked, people would suspect the investigation was tainted, so dammit, just better shut the whole investigation down. He had no choice! No choice! Free will is dead!

The article says that the veracity of the document was fiercely debated within the FBI. Well I would hope so! Does the FBI usually rely heavily on 3d hand stories retailed by those the Bureau claims suborn American democracy daily?

But let’s take the claim that Comey took the document seriously at face value. If so, rather than shut down the investigation of Hillary, he should have opened a no-holds-barred investigation of the Attorney General. Schultz, the Open Society person, and the Clinton staffer should have been put under intense scrutiny with all the tools at the FBI’s disposal, culminating in surprise questioning of those named in the Russian document. Comey should have found some way of preventing Lynch from shutting him down in the event she was tipped. This supposed paragon of rectitude (which he says he is, repeatedly) should have recognized this allegation for the brazen affront to the American polity that it represented, and investigated fearlessly (he also tells us he’s fearless, you know), and let the chips fall where they may.

The last thing he should have done is to do Lynch’s supposed dirty work of stonewalling the investigation for her. But per the WP, that’s exactly what he did.

Or, if he didn’t believe the document, he should have disregarded it in evaluating his course of action regarding Hillary, except to prepare a strong analysis detailing the document’s deficiencies, in order to answer the charge of coverup in the event that the document was leaked.

I see no possible reason why he should have done what he allegedly did, regardless of his opinion about the veracity of the document. This late-in-the day explanation makes no sense whatsoever.

Since it makes zero sense, one wonders why this defense is being proffered now, and by whom. If it is Comey or his surrogates or “friend”, he’s an even bigger douchenozzle than even I had imagined possible. Because it makes him look stupid, or craven, or both under any assumption about the truth of the document at issue, and his beliefs about the truth of the document.

If he believed it true, and it wasn’t: (a) he was credulous in believing such a dubious source, and (b) he was beyond derelict in his duty by failing to investigate the attorney general given his beliefs: if the document was false, the investigation would likely have shown that, and the Hillary investigation could have taken its course.

If he believed it to be true, and it was, he was beyond derelict in his duty by failing to investigate the attorney general: if the document was true, his dereliction let a rogue AG derail an important inquiry, and was in fact the instrument of that derailing.

If he believed it to be false, he was derelict in his duty by dropping the investigation of Hillary on such flimsy grounds. Indeed, he should have undertaken a thorough examination of its veracity, which would have necessarily involved an investigation of those identified in it.

Indeed, Comey looks so bad here the most logical explanation is that it came from his enemies, either in the Bureau, or in the administration (relying on people in the Bureau).

But regardless of where it came from, the story could be true. Given its explosive implications, Mr. James Comey should be questioned closely and indeed ferociously about it. If what the WaPoop reports is even remotely close to the truth, Trump vastly understated the man’s deficiencies when he allegedly called Comey a “nut job.” For if the story is remotely close to the truth, Comey is a nut job who turned a blind eye to what he believed to be a colorable case of obstruction of justice by the Attorney General of the United States, and essentially ensured that obstruction of justice would succeed by his own doing. And if Comey now has grave concerns about Trump asking him (again, allegedly) to let the Flynn matter pass, how could he have any less grave concerns about Lynch promising that the Hillary email matter would indeed pass?

I didn’t think the entire Comey-Hillary-Lynch-Trump story could get more bizarre. I was wrong. Very wrong.



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May 23, 2017

A Bilious Harpy Gets Trump’s Riyadh Adventure Exactly Wrong

Filed under: Politics — The Professor @ 11:10 am

There are things to criticize about Trump’s recent extravaganza in Saudi Arabia. Most notably, the good vs. evil rhetoric regarding Iran was redolent of Bush’s Axis of Evil approach, and sits uneasily with the president’s claimed commitment to foreign policy realism. On that, in the end, I will judge more on the basis of actions than words, especially given the frequent disconnect between Trump’s words and deeds.

There’s criticism and skepticism, and then there is the drivel emanating from Anne Applebaum and her ilk. The bilious harpy could barely contain herself in attacking Trump’s trip in a WaPoop doped (pronounced “dope ed”). She shrieked out six criticisms.


It was a very strange choice for a first trip abroad. The past four American presidents, two Republicans and two Democrats, made their first trips to either Mexico and Canada, countries that are close trading partners, close allies, compatible democracies and of course neighbors. Trump chose, instead, to make his first presidential visit to an oligarchic kleptocracy which forces women to hide their faces and forbids them to travel without a male guardian’s permission.

Annie, babe: this is your best shot? This is what you led off with? Seriously. For one thing, previous presidents could be criticized for timidity, not to say political cowardice, by making a safe, conventional first trip. Trump, conversely, scorned the training wheels and dove right into the US’s most vexing foreign policy challenge.

As for the unsavory nature of the Saudi regime, well the oil ticks are indeed repulsive in many ways, but enlightened states are rather in short supply in the region–which is exactly why it is the US’s most vexing foreign policy challenge. We have to deal with the present realities, rather than stand aloof and let oligarchic kleptocrats have free rein. As for Saudi culture, (a) it is quite beyond the capability of the US to change in the slightest, (b) any attempt to do so will only stir up trouble (and terrorism), and (c) it is not our place to do so even if we could or there wouldn’t be blowback. But perhaps Anne is making an argument for restricting Muslim immigration into the US.


It was a very strange place to speak out against Islamist extremism. Although Saudi Arabia is afraid of some forms of Islamist extremism, it supports others. Saudi Arabia sponsors extremist Wahabi mosques and imams all over the world; Osama bin Laden was a Saudi citizen, as were 15 of the 19 9/11 hijackers.

Bravo, Anne. 180 degrees from reality! No: Saudis are exactly who need to hear stern talk about terrorism, and the US commitment to fight it. Trump actually uttered the words “Islamist extremism” in his speech as delivered, and his prepared remarks included “Islamic extremism”: supposedly exhaustion accounts for the slightly different (though potentially crucial) distinction. This is about as close as one can imagine a president calling out the sponsors of terrorism on their home turf, and is a welcome change from Obama’s reluctance to utter anything similar even from the comfort of US soil. This is also an important signal that the bonhomie–and billions in arms sales–of the Riyadh meetings do not reflect a denial of important truths. There is an implicit conditionality here, which is important.


The sword dance. Every American president has met with his Saudi counterparts, and of course the stability of Saudi Arabia, as well as its oil, is an important U.S. security concern. But until now American presidents made it clear that, while we have to deal with Saudi leaders, we don’t endorse their culture. Trump, Secretary of State Rex Tillerson and others in the delegation did exactly that, by participating in this sinister all-male dance.

Ever heard the phrase “when in Rome,” Anne? Participating in a farcical (decidedly non-aquatic) ceremony involving strange men (no women!) distributing swords is hardly an endorsement of Saudi culture–or of the basis of their government. It’s a trivial indulgence which can grease the wheels in down-to-business bargaining. Note that Tillerson said this wasn’t his first sword dance: he knows that’s how it’s done. When Trump holds an all male cast sword dance in the Oval Office, wake me.

And by the way, doesn’t this cut against the narrative that Trump is an anti-Muslim hater?


Ivanka Trump’s “outreach” to women entrepreneuers. Saudi women must cover their heads and often their faces. They cannot drive cars, cannot (see above) travel without the permission of male guardians and are deprived of legal rights and education. In that context, Ivanka Trump’s promotion of female “entrepreneurs” looked like a cynical public relations gambit, which of course it was. The announcement that Saudi Arabia and the United Arab Emirates will donate money to her fund was a “pay to play” far more blatant than anything Hillary Clinton ever dreamed of.

Note that this isn’t “her fund”: this is a World Bank initiative. Further, and more importantly, would it be better that we completely ignore the issue of women in KSA? Yes, it is a small step, especially in light of the retrograde treatment of women not just in Saudi Arabia but the Muslim world generally. But it is something, and in particular it is something that contradicts Annie’s claims about endorsing Saudi culture. Again, we ain’t gonna change it, and it ain’t our place to change it.


Tillerson talking about human rights in Iran. Yes, Americans are often hypocritical about where and when they promote human rights. But to denounce human rights in Iran while standing in Saudi Arabia, a place where there is no political freedom and no religious freedom, brought hypocrisy to a whole new level. Better not to have said anything at all.

It’s called realpolitik. There are books about it. Read one, Anne. And yet again, it is futile, and indeed counterproductive, to make major strategic decisions on the basis of human rights in the ME. Because there ain’t any, anywhere. This should be about advancing American interests, and hold the iPhone, but hypocrisy is the essence of diplomacy, especially in the Middle East.

It’s also interesting that Anne and her ilk don’t point out how this flatly contradicts the Trump-is-Putin’s-bitch narrative. Russia and the Saudis are adversaries in the Middle East. Russia and Iran are allied in the Middle East. Trump taking a hard line against Iran and siding with the Saudis is diametrically opposed to Russian policy in the Middle East.

Sixth, my favorite:

Tillerson holding a news conference for foreign press only.The U.S. press corps was not invited. Presumably this was because the White House doesn’t want Americans to find out what the president was doing in Saudi Arabia?

Good! This is a welcome, and well-deserved “fuck you!” It never ceases to amaze me that the media engages in unrelentingly hostile coverage of the administration–coverage that ranges from the tendentious to the libelous–and yet expects to be indulged and pampered. Yes, Trump (and Tillerson) are breaking the Washington rules–great! The rules are stacked in favor of the sleep deprived, dehydrated, over-caffeinated, boozy, junk-food eating, low-brain function narcissists who call themselves “journalists,” and bore us with their conceit that they are the guardians of the republic. They deserve a good smacking, and their wails and laments are music to my ears. I hope they get another. And another.

And as for finding out what happened, um, if we were kept in the dark then how did Anne know about items 1-5 of her screed? Believe me, we lost nothing–and probably gained–by the inability of aforementioned sleep-deprived, dehydrated, etc., journalists to ask some snarky questions. They can fuck off presently, and kudos to Tillerson for telling them to do so in not so many words.

Anne Applebaum is the poster child for the elite whose serial failures and utter cluelessness made Trump president. What happened in November was first and foremost a reaction to that elite. And Anne shows daily that like the Bourbons, she has learned nothing and forgotten nothing. There are substantive grounds to criticize Trump on most things, including his Middle East policy but all Anne Applebaum has done is rant dishonestly about the least objectionable, and often praiseworthy, things that Trump did in Riyadh.


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May 17, 2017

Another IC Kneecapping

Filed under: Politics — The Professor @ 3:31 pm

In signal processing, if the signal to noise ratio is small, one puts very little weight on a particular noisy signal. Similarly, in regression analysis, when the independent variable is very noisy, one reduces sharply the coefficient towards zero.

These things are worth keeping in mind in the current political environment. Alleged “bombshell” stories are so noisy that they shouldn’t be emphasized: they should be interpreted with great skepticism.

Case in point: the “Trump disclosed intelligence to the Russians story.” Regardless of what Trump told the Russians, one thing is sure: whatever ISIS would have learned had the allegation not been leaked, it learned vastly more as the result of the leaking of the details of the intelligence that (per McMaster) Trump discussed with Lavrov in fairly general terms. Indeed, this is one situation where US and Russian interests are fairly aligned: even if Trump said “an Israelis spy in an ISIS cell in Raqqa [or wherever] told us about a plot to put bombs in laptops” what incentive would the Russians have to pass along that information to ISIS? I also note that Russia and Israel have been in close communication for months now, making it not unreasonable to assume that Israel may have provided similar intelligence to Russia independently. So the odds that information that was contained in the WaPo would have made it to ISIS was about zero . . . until the WaPo ran the story. At which point the probability became 100 percent.

Regardless of whether Trump’s disclosure was prudent, it was almost certainly legal. The leak was both grotesquely imprudent and illegal.

This is another intelligence community kneecapping. No doubt about it. And it is sick and perverse that the supposed justification for leaking–that Trump endangered national security–resulted in far more damage to national security than whatever Trump revealed to Lavrov. But perhaps in the mind of some IC jackass, Trump is such a grave threat to national security that any means necessary are acceptable if he is driven from office. But that is not the call of the jackass to make.

Another case in point: the Comey memo. First, apropos my earlier post, there is no reason to believe that Comey is an a disinterested actor here. Since this is he said/he said, Comey’s alleged representation should be treated with skepticism. Second, and relatedly, context matters. A clip quote could have very different interpretations depending on the conversation that led up to it, and which followed. So a selective leak from one memo could give an impression that is 180 degrees from what actually happened.

Both stories–as well as many more–lead me to another conclusion. I will put virtually no weight on any story that relies on anonymous sources, and particularly on anonymous sources quoting selectively from documents. If these matters are so grave, and the allegations are so damning, the party in possession of the information should reveal it publicly. Particularly if s/he is a “public servant.” Fine–perform a public duty and make a public allegation on which you can be questioned.

Indeed, the very nature of anonymous leaks casts doubt on my initial analogy to signal processing. In that context, the noisy signal differs from the true one by noise that could be positive or negative. In the current situation, it is highly unlikely that the errors are random: they are chosen to distort. They are more likely deliberate, and strongly negatively correlated with the truth. So in the random noise case you believe the direction of the signal, but reduce your estimate of its magnitude: in the negative correlation case, you actually believe the opposite.

Maybe all this stuff about Trump is true. If so, I would like to know. If so, those in the possession of the information have nothing to lose by going public with it: indeed, they would likely be lionized as heroes and saviors of the Republic. The fact that they choose to backshoot from the bushes instead strongly suggests that what they are leaking cannot withstand a full and fair airing.

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May 14, 2017

Imperial Bureaucracy vs. Imperial Presidency

Filed under: Politics — The Professor @ 6:43 pm

For the non-partisan, an evaluation of the Comey firing depends crucially on one’s views of the independence, probity, and politicization of the FBI generally and Comey specifically, and of the intelligence bureaucracy. (Anti-Trump partisans, contrary to the previously stated views of many, adamantly say that the FBI is independent, upright, and apolitical in its search for justice. Those latter day conversions may be discounted.) There is sufficient reason to have doubts on all scores to make judgment difficult.

Watergate analogies, notably Nixon’s firing of Archibald Cox, are all the rage these last few days. This serves mainly to demonstrate the left’s impoverished historical palette. Other episodes from that era and somewhat before demonstrate clearly that the powers of the FBI, and individual FBI personnel, can be put to malign purposes, or misused. J. Edgar Hoover maintained confidential files on most important politicians, including the Kennedys, and is widely believed to have used this information to intimidate–blackmail–people into doing his bidding. Mark Felt, associate director of the FBI, was Deep Throat–leaking information to the Washington Post that culminated in Nixon’s resignation, for motives unknown.

So if one wants to appeal to historical precedents, there is plenty of reason to believe that the FBI is capable of dirty dealing in pursuit of the political or personal agendas of its leadership.

To which some might object that Comey is no J. Edgar Hoover, but is instead a straight shooter intent on seeing justice done. Well, that’s exactly how Hoover saw himself. Indeed, such a crusading mindset, and an excessive self-regard in the righteousness of one’s motives, are dangerous precisely because they make it quite easy to rationalize that violating procedures, norms, and even laws is acceptable, if done in pursuit of a higher cause.

The stream of leaks from the intelligence community of which the FBI is a part–which, interestingly, subsided to a trickle in the aftermath of Trump’s incendiary “wiretapping” tweets in March–also provides grounds for suspicion about whether the IC is pursuing its own agenda (or agendas).

Today’s appearance of the execrable James Clapper on Jake Tapper’s State of the Union provides yet further reason to be skeptical of the objectivity of the IC:

CLAPPER: Well, I will just say that the developments of the past week are very bothersome, very disturbing to me.

I think, in many ways, our institutions are under assault, both externally — and that’s the big news here, is the Russian interference in our election system. And I think as well our institutions are under assault internally.

TAPPER: Internally from the president?

CLAPPER: Exactly.

TAPPER: Because he’s firing the checks and balances?

CLAPPER: Well, I think, you know, the founding fathers, in their genius, created a system of three co-equal branches of government and a built-in system of checks and balances.

And I feel as though that’s under assault and is eroding.

Is Clapper that ignorant, or is he just mendacious? (“Both” is the likely answer.) For that answer is not just wrong, but outrageously so. This came up in the context of Comey’s firing. The FBI is part of the executive branch, and even Comey acknowledged that he served at the president’s pleasure. Meaning that Comey’s axing raises no separation of powers issues whatsoever: zero, zip, nada. Further, time and again in the hundred days plus of his administration, Trump has been checked and balanced by other branches of the government, as the “founding fathers, in their genius” intended. Indeed, if there has been a violation of separation of powers, it has come from federal district judges and the Ninth Circuit, in their rulings on the travel ban.

And before Clapper presumes to lecture about violations of the separation of powers, he should acknowledge that an executive branch officer lying to Congress (which he was, and did) is a pretty clearcut violation of the system of checks and balances. He has absolutely no standing to make judgments on this matter.

But perhaps Clapper believes that the bureaucracy is a co-equal branch of government, even though in their genius the founders never conceived of such a thing. And such a mindset is quite prevalent in the swamp, and which is why although there is reason to  have deep reservations about Trump–as there were reasons to have deep reservations about Obama, and Bush, and [insert some president’s name here]–we should be deeply suspicious about the motives (and the competence) of a largely unaccountable part of the government which is in near rebellion in part because the president held one of its leading lights accountable. It may be politically expedient to pretend that the FBI and the intelligence bureaucracies are beyond reproach when they are at odds with Trump: it is also a a historically idiotic belief. History shows that the FBI specifically, and the bureaucracy in general, is capable of abusing its powers. Indeed, an imperial bureaucracy is more to be feared than an imperial presidency.


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May 12, 2017

Trump Axes Comey, But Hillary (and Bill) Put His Head on the Block

Filed under: Politics — The Professor @ 9:37 am

Trump’s firing of FBI director James Comey has released yet another frenzy of hysteria in The Swamp. One has to take one’s amusement where one finds it these days, and in this episode that would be from watching Democrats and anti-Trumpers who only days ago were calling for Comey’s head in a basket, now shrieking laments and rending garments because . . . Comey’s head is in a basket. If I roll my eyes any more I am going to detach a retina.

One other source of amusement is that Hillary, who couldn’t shut up about Comey since the election, has been silent since he got it in the neck.

The reigning narrative is that Trump is attempting to subvert justice by impeding the investigation of his ties with Russia. If this is what he was thinking, he is sadly deluded. Congressional investigations continue, and if anything, firing Comey will galvanize them. Further, the FBI personnel actually doing the investigation are likely to continue to do so, and if they are indeed onto something the firing will only make them more suspicious and motivated.

Trump being Trump, I think the truth is probably very different. Two things stand out to me. First, Trump stated in his letter that Comey had personally absolved him of the Russian accusations on three separate occasions. (Today Trump doubled down on that, saying Comey better hope there are no “tapes” of their conversations if he was thinking of leaking a denial.) Second, Trump is/was reportedly furious at the way Comey absolved Hillary last summer. Putting those pieces together, my guess is that it went down something like the following. Comey tells Trump that he is not under investigation and/or that there is no evidence of Russo-Trump collusion. Trump demands that Comey state that publicly. Comey demurs, saying that would be a violation of procedure. Trump loses it, and says “you did it for Hillary!” Comey mumbles something about how that was different, and then goes in front of Congress and refuses to admit that he erred in his handling of Hillary’s email. Trump figures that the guy is an untrustworthy political hack, and goes into Apprentice mode.

Truth be told, regardless of the political advisability of the firing, Comey had justly earned his termination. Comey’s investigation of Clinton was very irregular from the first: he violated standard procedures at every turn, which in addition to being wrong in itself, would make a mockery of any appeal to the need to be scrupulous in following them now. Further, he had arrogated to himself the responsibilities of the Attorney General by deciding not to prosecute Clinton. He sucked up to the Lynch (and Obama and Clinton) by taking her off the hook of making the prosecutorial call. When that unleashed a political storm from the right, he tacked and released his eve-of-the-election letter. Then he crowned this series of misadventures by mis-stating the basis for the renewed investigation in testimony before Congress: Huma shared only a handful of emails with Anthony Wiener, not the hundreds or thousands Comey claimed in his testimony.

Richard Epstein, hardly a Trumpophile summarizes well:

But, if anything, he [AAG Rod Rosenstein] understated the case against Comey. First, he treated the initial investigation of Hillary Clinton back in March 2015 with kid gloves. There were the inexcusable decisions to grant immunities to key Clinton backers without first serving them with a subpoena that would have allowed the FBI to extract a quid pro quo for any immunity that thereafter might be granted. Second, the FBI allowed Clinton’s key aide Cheryl Mills, Clinton’s former chief of staff, to act as her legal counsel, even though she herself was a legitimate target of investigation who could have faced charges. And they did not conduct any of the ambush interviews that are commonly given in cases where criminal prosecution is warranted. The obvious inference is that Comey was kowtowing to his superiors in the Obama White House.

Next, of course, was his public statement on July 5, 2016, in which he gave a thoroughly unsatisfactory explanation as to why he chose not to prosecute Clinton for her use of an unauthorized server that, in a case involving lesser persons, would have resulted in serious criminal charges, wholly without regard as to whether unauthorized persons hacked into the site (which they surely did).

Once Attorney General Loretta Lynch, as Judge Laurence Silberman wrote, “sort of half-recused herself” from the case, any charging decision should have been made by or at the direction of Sally Yates, the deputy attorney general. As Rosenstein rightly said in his memo, no experienced law enforcement figure thought that Comey acted correctly in issuing a public statement that explained his point of view.

Finally, his late October surprise, rightly castigated by none other than the New Yorker’s Cassidy, that he was conducting another investigation of Clinton, one that went nowhere, was likewise a breach of his duties.

The common response to this line of attack is that criticisms of Comey’s conduct in the Clinton investigation had nothing to do with the president’s decision, which was made, we are confidently told (on the basis of no firm evidence), because Comey was hot on the trail of information about possible ties between Trump, his supporters, and the Russians during the campaign. But it is also the case that Comey has made no effort to distance himself from this earlier conduct, and indeed affirmed in his Senate testimony of May 3, 2017, that with respect to his October 28 letter on Clinton, even though the episode had made him “mildly nauseous,” he would do it all over again.

The past events thus are linked closely to the future events. If the mistakes Comey made could have justified his firing in either 2015 or 2016, the passage of time does not cure those improper decisions.

Comey played the part of political weasel throughout, and his fate was the one the like usually suffer.

As for this being a “Constitutional crisis” or a “coup” (as David Frum and others hyperventilated), puh-lease. Trump is Chief Executive, and the FBI is in the executive branch. QED. Even Comey acknowledged that he serves at the president’s pleasure. As for a coup. Er, it would be a coup if the FBI Director removed the president, not the other way around.

Although Comey wove the basket in which his head now lies, ultimately  Hillary Clinton is the one who put his head on the block. Her grotesque misjudgment and malfeasance in using private email and lying about it repeatedly set in train the events that culminated in Comey’s firing. But this is nothing new, is it? Recall what Jim McDougall said, years ago: “I think the Clintons are really sort of like tornadoes moving through people’s lives. I’m just one of the people left in the wake of their passing by, but I have no whining or complaining to do, because I have lots of company.” Though departed from this  vale of tears, Mr. McDougall has yet more company, in the form of one James Comey.

Update: I should add that Bill Clinton is culpable as well. His meeting with Lynch on the tarmac in Phoenix “forced” her sort-of-half-recusal (to paraphrase Lawrence Silberman). I put “forced” in quotes because that may have been Lynch’s intention in meeting Clinton. Regardless of whether it was a blunder, or planned, the meeting with Clinton is what prompted the self-perceived Dudley Do-Right Comey to determine that he had to do Lynch’s job for her in order to maintain the public’s faith in the justice system. (Ha!) He shouldn’t have given her the out. (Calling him Dudley Do-Right gives him the benefit of the doubt, by the way. There are other more cynical interpretations that are observationally equivalent.) Regardless, Bill played a role in Comey’s decision to assume responsibilities that were not his, which was a legitimate reason to fire him. And note that McDougall referred to the Clintons plural: they usually are both involved in wrecking lives.

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