Merkel’s remarks make it clear that her primary motive for abandoning Ukraine to Putin is to keep good relations with Russia, and to avoid riling Vlad:
“And if Ukraine says we are going to the Eurasian Union now, the European Union would never make a big conflict out of it, but would insist on a voluntary decision,” Merkel added.
“I want to find a way, as many others do, which does not damage Russia. We [Germany] want to have good trade relations with Russia as well. We want reasonable relations with Russia. We are depending on one another and there are so many other conflicts in the world where we should work together, so I hope we can make progress”
Nauseating. Like my grandfather said about a hostess trying to hint to a guest who had overstayed his welcome that he leave: “Here’s your hat, Bob. Why are you in such a hurry to leave?”
In his public comments, Mr. Putin highlighted the dangers he said Russia faces if Ukraine pursues closer ties to the West. Since the onset of the crisis, Mr. Putin has accused the West of meddling in Ukraine’s internal affairs and trying to spoil its relations with Moscow.
Mr. Putin said that a trade agreement between Kiev and Europe will flood the Ukrainian market with European goods, which may then find their way into Russia. “In this situation Russia cannot stand idle. And we will be prompted…to take retaliatory measures, to protect our market,” Mr. Putin said.
The interesting thing about this is just what it betrays about what Putin thinks about Russian competitiveness. Yes, Russia is so great. Russia is so strong. Russia is a beacon to the world. But it can’t produce things its own people and businesses want.
Note the phrase: “take retaliatory measures, to protect our market.” Remind me again: didn’t Russia join the WTO? Apparently Putin is unclear on the concept.
Further note whom Putin is protecting Russian markets against: Europe. Apparently Angela is unclear on some concepts too.
Putin and many (most?) other Russians inveigh about Russophobia. When he says things like that, it’s hard to think of a bigger Russophobe than Putin. He evidently does believe that Russians are inferior, and in need of protection.
If you just fell off the cabbage truck, you might be stunned to learn that a couple of days after Merkel visited Ukraine to deliver Poroshenko the message that Ukraine needed to back down from its attack on Russian forces in Donbas in order to save Putin’s face, that Putin opened a new front in Russia’s invasion of Ukraine.
Time and again, the hand-wringers in the west, Obama, Cameron, and especially Merkel, have desperately offered Putin ways out of Donbas. And time and again, Putin has taken these offers as a sign of weakness, and an invitation to escalate. The more aggressive he is, the more assiduously the hand-wringers try to appease him. The equilibrium in this game isn’t hard to figure out.
Tell it to the Ukrainians, who are looking at a decline of about 50 times as big.
Merkel just wants the Ukraine crisis to go away. She knows that just washing her hands, Pilot-like, would look bad. So she mouths a few platitudes, and goes through the motion of playing bad cop with Putin, but does nothing serious to aid Ukraine (a piddling 500 mm Euros to support reconstruction of Donbas is a joke, especially when unaccompanied by military support), and through word and deed undermines Poroshenko and gives aid and comfort to Putin.
Putin knows this, which is why he continues to escalate, especially right after Merkel weighs in on Ukraine. She makes it clear to him that he will pay no real price.
Anybody heard anything about MH17 lately? No? Huh.
I’ve said this before. Ukraine, you are on your own, and your ostensible friends are no friends at all.
Although I could, on a very narrow margin, rationalize using force aggressively against Assad to achieve strategic and humanitarian objectives, I cannot abide any military operation in Syria undertaken by this administration. Its painfully obvious lack of any strategic sense and utter incomprehension of the way that people like Assad and the mullahs think means that any military action that this administration devises will be entirely counterproductive.
I am by nature a pugnacious person. (Who knew?) It takes quite something to turn me into a pacifist. But Obama has turned the trick. Quite an achievement.
The need for military action against ISIS is compelling, but I still have grave reservations about any military operations under this commander in chief. In my opinion, he is unsuited for command by his ideology, his lack of any grounding in military or strategic subjects, but most importantly, his temperament.
He is ideologically opposed to the use of force, for any strategic purpose, anyways. He is somewhat comfortable with limited, but strategically barren, military operations such as drone strikes and one-off commando raids.
For President Barack Obama the decision to send in the Night Stalkers was an agonising one. The audacious bin Laden raid in Pakistan had been a success but also preying on his mind was the failed 1980 Delta Force operation to rescue American hostages in Tehran.
Sandstorms and mechanical troubles led the mission to be abandoned and eight American troops were killed when two aircraft collided. The debacle cast a shadow over Jimmy Carter’s presidency.
Pentagon sources said Foley and the others might well have been rescued but Obama, concerned about the ramifications of US troops being killed or captured in Syria, took too long to authorise the mission.
Anthony Shaffer, a former lieutenant-colonel in US military intelligence who worked on covert operations, said: “I’m told it was almost a 30-day delay from when they said they wanted to go to when he finally gave the green light. They were ready to go in June to grab the guy [Foley] and they weren’t permitted.”
Another US defence source said: “The White House constantly goes back and forth on these things. These people are a bunch of academics who endlessly analyse stuff and ordering up another deep-thinking paper but can’t decide what to order for lunch.”
Touche re the academics jibe.
Military operations are inherently risky. Things go wrong. But nothing risked, nothing gained.
No doubt Obama was also wanting better intelligence. Who doesn’t? But someone who is fit for command realizes that intelligence will never be perfect, and waiting for perfect intelligence will often result in the loss of an opportunity. Which was evidently the case here.
So Obama chose the worst option. He could have taken the risk when the intelligence was fresh, and when there was therefore a decent chance of succeeding in snatching Foley away from the head choppers. But he waited, thereby increasing the odds that ISIS would get wise to the operation, or move Foley as an ordinary operational precaution; the risks were as great, and likely greater, as a result of the wait. So by playing General Hamlet, but eventually saying “Go” he reduced the odds of success, without reducing and likely increasing the risks.
Someone fit for command must evaluate risks, but cannot take counsel of his fears, let alone become consumed like them as Obama quite clearly is predisposed to do.
Put differently, Obama says that his foreign policy credo is “don’t do stupid shit.” Sometimes not doing something is the stupidest shit of all.
…I received orders to move against Colonel Thomas Harris, who was said to be encamped at the little town of Florida, some twenty-five miles south of where we then were.
…Harris had been encamped in a creek bottom for the sake of being near water. The hills on either side of the creek extend to a considerable height, possibly more than a hundred feet. As we approached the brow of the hill from which it was expected we could see Harris’ camp, and possibly find his men ready formed to meet us, my heart kept getting higher and higher until it felt to me as though it was in my throat. I would have given anything then to have been back in Illinois, but I had not the moral courage to halt and consider what to do; I kept right on. When we reached a point from which the valley below was in full view I halted. The place where Harris had been encamped a few days before was visible, but the troops were gone. My heart resumed its place. It occurred to me at once that Harris had been as much afraid of me as I had been of him. This was a view of the question I had never taken before; but it was one I never forgot afterwards. From that event to the close of the war, I never experienced trepidation upon confronting an enemy, though I always felt more or less anxiety. I never forgot that he had as much reason to fear my forces as I had his. The lesson was valuable.
A man with Obama’s extremely risk averse temperament is extremely ill-suited to be commander-in-chief. This is extremely distressing, as the threat of ISIS requires a robust, sustained, strategically sensible response. All the leaks, as well as the public statements from the Pentagon, indicate that the military is rather frantic to act. But Obama continues to equivocate. He will continue to do so, because of his character and his ideology.
The U.S. government has no evidence of a current plot by fighters for the Islamic State of Iraq and Greater Syria, or ISIS, to attack the U.S. homeland, White House Press Secretary Josh Earnest said Monday.
Not to go all Rumsfeld on you (and believe me, I have deeply personal reasons not to do anything that would give credit to the man), but absence of evidence is not evidence of absence. We don’t know what we don’t know. Given ISIS’s capabilities (“a plane ticket away from the US” and a large roster of individuals with European and likely US passports) and obviously malign intent, the prudent thing to do is to take precautions, and certainly not say stupid things (or would that be stupid shit?) like “there currently is not an active plot underway.”
You’d think that after the “ISIS is the JV” fiasco they’d know better. You’d think wrong.
Obama and his toadies are obsessed with the message and the next news cycle, rather than operational and intelligence imperatives, and designing and implementing an effective strategy.
Talk about cognitive dissonance. I am convinced of the need for military action, but totally distrustful of the competence of the man to carry it out. Very difficult choice. In the end, I guess I have confidence in the ability of the armed military to overcome the grave handicaps imposed by an intellectually, temperamentally, and ideologically unsuitable commander in chief. The strategic threat is great enough that doing something far less effective than would be possible under different leadership is better than doing nothing at all.
Merkel visited Ukraine yesterday, on the 75th anniversary of the Nazi-Soviet pact. She did not quite play the role of Frau Ribbentrop, but she, and the German government, are greatly assisting Putin.
Yes, she said that Germany cannot accept Russian control over Crimea. But this is cheap posturing, because, in fact, it does. Germany refuses to accept the seizure de jure, but it does accept it, through its deeds, de facto.
Beyond those words, Merkel and the German government say things that Putin finds very congenial. She called for an unconditional cease-fire in eastern Ukraine. So has Putin. He wants this to give his battered forces in Ukraine relief so that he can regroup, reinforce, and adjust his tactics. Merkel wants to oblige him, even though her ostensible subjective reasons are different: but objectively, she is pro-Putin. Then, her Vice Chancellor (of the SPD) Sigmar Gabriel said that the only solution to the conflict in Ukraine was federalization. That’s the Russian line. (Merkel quickly said he had misspoke, and meant “decentralization”, but it is clear that he committed a Kinseyesque gaffe: he had spoken the truth.)
So the top two officials in the German government have endorsed the measures called for by the Russian government, and opposed by the Ukrainian government.
After months of ratcheting up pressure on Vladimir Putin, concern is mounting in Berlin and other European capitals that an emboldened Ukraine’s military successes in the east are reducing the chances of a face-saving way out of the crisis for the Russian leader.
As a result, the focus of German-led diplomatic efforts has shifted, according to senior officials, towards urging restraint from Ukrainian President Petro Poroshenko and averting a humiliating defeat for pro-Russian rebels, a development that Berlin fears could elicit a strong response from Putin.
If followed, this advice will create another frozen conflict that Putin will use to eat away at Ukraine, to continue to bleed it and prevent it from reforming, and growing, and most importantly (from Putin’s perspective) keep it from moving closer to Europe. A persistent conflict in the region will also result in mounting civilian casualties and misery, things that Merkel claims to want to stop.
Frau Merkel gives the impression of someone who is willing to consign Ukraine to purgatory, to avoid dealing with Putin today. This is foolish, because it’s not as if Putin is going to go away satisfied. He will continue to pressure Ukraine, perhaps attempting to expand his covert and ambiguous military operations to other parts of the country. He will turn his attention to the Baltics. Merkel is just delaying the inevitable, and there is little certainty that the west will be in better shape to confront Putin later than now.
Merkel went to Ukraine proclaiming friendship. With friends like her, Ukraine-and the rest of Eastern Europe-don’t have to go looking for enemies.
So ISIL speaks for no religion. Their victims are overwhelmingly Muslim, and no faith teaches people to massacre innocents. No just god would stand for what they did yesterday and what they do every single day. ISIL has no ideology of any value to human beings. Their ideology is bankrupt. They may claim out of expediency that they are at war with the United States or the West, but the fact is they terrorize their neighbors and offer them nothing but an endless slavery to their empty vision and the collapse of any definition of civilized behavior.
People like this ultimately fail. They fail because the future is won by those who build and not destroy. The world is shaped by people like Jim Foley and the overwhelming majority of humanity who are appalled by those who killed him. The United States of America will continue to do what we must do to protect our people. We will be vigilant and we will be relentless. When people harm Americans anywhere, we do what’s necessary to see that justice is done and we act against ISIL, standing alongside others. The people of Iraq, who with our support are taking the fight to ISIL must continue coming together to expel these terrorists from their community. The people of Syria, whose story Jim Foley told, do not deserve to live under the shadow of a tyrant or terrorists. They have our support in their pursuit of a future rooted in dignity.
From governments and peoples across the Middle East, there has to be a common effort to extract this cancer so that it does not spread. There has to be a clear rejection of this kind of nihilistic ideologies. One thing we can all agree on is that a group like ISIL has no place in the 21st century. Friends and allies around the world, we share a common security and a common set of values that are rooted in the opposite of what we saw yesterday. And we will continue to confront this hateful terrorism and replace it with a sense of hope and civility.
A few quick comments.
Obama’s progressivism, in many senses of the word, shines through here. According to Obama, ISIS is an atavism that is destined for extinction, because it does not fit into the 21st century. Through some sort of (unstated) dialectical process, such people “ultimately fail.” Humanitarians prevail, as the world progresses to higher and higher states of development and consciousness. This is profoundly ahistorical. Atavistic forces have repeatedly toppled far superior civilizations. The barbarian invasions of Rome. The Mongols in China and the Middle East (Tamerlane, anyone?) The Arab/Muslim onslaught in the Middle East and North Africa. I could go on. The very single-minded primitiveness of these peoples allows them to triumph over far more civilized and productive cultures that have lost the will to defend themselves, or whose societies are suffering from internal division and political disarray. Dark Ages have occurred throughout history precisely because of the triumphs of nihilistic but highly motivated peoples. The bankruptcy of ISIS’s ideology is rather beside the point: eye-rolling in the faculty lounge won’t defeat it. If it is sufficiently motivational to lead people to overthrow more constructive and creative ideologies, it can do incredible harm. Yes, such peoples “fail” in the sense that they are incapable of creating anything. But the problem is that their failure occurs only after they’ve destroyed societies that can create. Their ultimate barrenness is cold comfort to the lives and societies that they destroy. Which is why they must be confronted and defeated.
Note that this atavism trope is one of Obama’s favorites. He says the same about Putin and Russia. The message implicit in this trope is that since these atavistic forces are doomed to extinction, we don’t need to do anything. Again, given the profound damage that these people can do before they collapse, this is a dangerous, destructive illusion.
Whether it is Tony Blair, George Bush, or Barack Obama, few things are more grating than western leaders presuming to say what is, and what isn’t Islam. There isn’t an Islamic Pope, and if there was, his name wouldn’t be Tony, George, or even Barack Hussein, born in Hawaii. Islam isn’t any one thing, any more than Christianity is. There is no official scorecard. People energized by their visions of the teachings of Mohammed are wreaking havoc, especially in the Middle East. I can only imagine the snorts of derision among the adherents of ISIS, or other Salafists, at the presumption of kaffirs like Tony, George, or Barry to pontificate on what “true” Islam is. One can imagine them saying: tell it to the knife.
The insistence on collective action (“standing alongside others”-note the passivity of “standing alongside”). The implied deference to others-in Obama’s remarks here, as elsewhere-suggests that if others don’t rally to the cause, the US will not act unilaterally. This betrays a complete ignorance of the frailties of collective action-notably, the incentive to free ride. The failure of others to pull their weight provides a justification for American inaction.
The return of the law enforcement model: “ When people harm Americans anywhere, we do what’s necessary to see that justice is done.” ISIS is a military organization that poses a military threat to American interests. Confronting ISIS is not a matter of serving a warrant and putting those who hacked off Foley’s head on trial. It is a matter of destroying its military capacity with military means.
All in all, there is an odd passivity: ISIS will fall either due to the Progress of History, or the collective disapproval of outraged humanity. The only American action even suggested is a law enforcement action, or at most a punitive expedition mounted against a few brigands. At most something along the lines of “Pedicaris alive, or Rasuli dead.”
In this vein, consider related news: that the US attempted a rescue operation by Special Forces that overpowered the ISIS forces at the target, but which failed because Foley had been moved before the raid.* Yes, it is good that Obama is not entirely allergic to the use of military force, but the type of military force he is willing to use (evidently after some hesitation) is also disturbing for what it reveals. One-off Special Forces raids of this type are inherently limited in their objective and duration. They are totally tactical, with no strategic purpose or effect. Yet this raid was mounted at a time when it had become evident beyond cavil that ISIS was a serious threat to strategic American interests, and when Obama stubbornly refused to acknowledge, let alone address, that threat. The most charitable thing that could be said is that by freeing Foley Obama would have eliminated an obstacle that limited American freedom of action. But this too would be disturbing, as it would imply that taking a single hostage can forestall American action. We may not pay cash ransom (most of the time anyways, with Bergdahl and Iran-Contra being prominent counterexamples), but such knowledge is priceless to a terrorist-and very ominous for any American in their reach.
Obama’s cramped and bloodless remarks are all the more striking, when contrasted with the alarms his own administration is raising. Today, Hagel-Chuck Hagel!-stated that ISIS is “beyond anything we’ve ever seen” and is “imminent threat to every interest we have, whether it’s in Iraq or anywhere else.” That would seem to call for something more than waiting for history, or the collective disapproval of civilized humanity, to consign ISIS to oblivion.
What’s more, it’s not like this should be news. It should have been known in June, when ISIS irrupted into central Iraq and advanced to the gates of Baghdad. It should have been known in January and February, when it conquered Fallujah and Ramadi-precisely when Obama dismissed it as the junior varsity. It should have been known earlier, when ISIS was battering other opposition forces in Syria (though perhaps I should not say “other” because it is not clear that ISIS was in opposition to Assad: more likely, he facilitated its growth).
Even if the invasion of Iraq in 2003 was a necessary condition for the emergence of ISIS, this was not a sufficient condition. ISIS’s predecessor had been thoroughly beaten down, but for a variety of reasons, Obama created the conditions in which it metastasized to the threat it has become, a threat his own military and diplomatic officials recognize. Yet he still resists doing anything beyond the most limited air strikes.
Obama’s post-statement rush to the links, complete with big smiles and fist-bumps with his buds was also very disturbing. Given all the criticism of his golfing-while-the-world-burns, he had to have known that this would attract attention. But he did it anyways. I get the impression that this was a big FU: “Yeah, I know my golf gets criticism. Well, you know what, I don’t give a damn what you think. And just to show you, I’ll pivot from giving a statement about the slaughter of an American to yukking it up on the links.”
*Such a failure is not unprecedented. In 1970, the US mounted a raid to free prisoners at the Son Tay prison in North Viet Nam. The special forces troops succeeded in securing the camp, and killing 200 NVA, all the while suffering a single casualty: a helo pilot who suffered a broken ankle. But the prisoners had been moved prior to the raid, so it failed in its object. Intelligence is extremely hard to come by in these circumstances, and hence it is very difficult to know that the would-be rescue-es are at the target.
Back when I started to blog about Russia in 2006-2007, I often pointed out that Russia under Putin was an archaic “natural state” rather than a modern one. The idea of the natural state was set out in work by North, Wallis and Weingast. In essence, it is a state with a distributed and diffuse potential for violence that is prone to break down into internecine conflict between armed factions. The only way this is avoided is to bribe the various factions with rents and privileges granted by the state (to give them a stake in maintaining the status quo rather than grasping for total control), and to keep them in an unsteady equipoise by pitting each against the other.
An article in the Moscow Times provides a very good description that brings home that point. This description of Putin’s version of the natural state cannot be bettered:
Putin’s staffing policies are based on the principle of ”loyalty in return for corruption.” Bureaucrats in the government, law enforcement and military are practically granted the right to steal and forbidden just one thing: criticism of the president.
The greatest enabler of Putin’s natural state is Germany, and most notably its appalling foreign minister, Steinmeier.
Back in January, on a TV interview, naturally, Obama denigrated ISIS as the junior varsity. Even after ISIS ran amok in Iraq and Syria in June, the administration (or I should say Obama, because we know from many sources that he often completely disregards the recommendations of the Pentagon, intelligence community, and State Department) decided to abjure from taking action against the terrorist group, apparently out of pique at Maliki and the dysfunctions of the Iraqi government. That’ll learn ‘em, Barry apparently believed.
So here we are. ISIS has secured a foothold over an area the size of Jordan. What’s more, although its brutality (more on this below) is extreme, it has apparently enough sense and state building capacity to “combine the fighting capabilities of al Qaeda with the administrative capabilities of Hezbollah.” Thus, the hopes that its extreme brutality would lead to its overthrow are likely to be just another self-delusion by the Smart People in High Places.
Great. I hope they keep the varsity on the bench. Otherwise we’d really be screwed. (Or more accurately, everyone in Iraq, Syria, and bordering states would be truly screwed.)
Recall that the administration mulishly held to the position that it had correctly prioritized Islamist groups, and in particular held out Al Qaeda on the Arab Peninsula as far more of a threat to the US than ISIS. And actions spoke louder than words. Obama has been droning the crap out of AQAP for years, while he has held aloof from doing anything against ISIS.
Many observers note that AQAP and ISIL are using similar tactics and are exchanging strategy and advice.
Which would seem to totally smash to pieces Obama’s justification for drawing a distinction between the two groups.
As if to emphasize its bestiality and opposition to the US, today ISIS slaughtered an American reporter, James Foley. Per usual jihadi fashion, they filmed the heinous act, and distributed via social media along with a declaration that this was revenge for the US attacks on the group in Iraq.
This is the kind of evil bastards we are dealing with. The kind of evil bastards that our inattention permitted to flourish. Which makes it our responsibility to extirpate them.
Note that the voice on the video of Foley’s ritual killing has been identified as a Londoner. There are clearly many others in the group that hail from England and other western countries, including almost certainly Americans. The most serious fear since 9/12/2001 has been terrorists with western passports who can commit terrorism more readily than Middle Eastern natives.
But I am sure this is just the JV. So what, me worry?
To give some credit, Obama has loosened the leash on American airpower against ISIS. I deliberately didn’t say “unleashed”, because the air strikes have been extremely limited.
But even given the limited nature of the attacks, they have had an effect on the battlefield. So why not crank it up to 11? Moderation in war is idiocy, especially when fighting the extreme of the extreme, like ISIS. They have demonstrated that their ambitions are anything but regional, and that it is foolish (not to mention callous and amoral) to rely on their self-destruction and being thrown back by those whom they oppress.
The butchering of Foley should only demonstrate the folly of exquisitely calibrated (in Obama’s mind, anyways) use of force. They’ll kill for a ha’penny, never mind a pound. The price (in life, anyways) that Americans pay is unlikely to depend, in the slightest on the number of bombs we drop: nothing short of abject surrender will satisfy ISIS (and even that is unlikely to sate their blood lust). So since they’ve decided to go all medieval on us, and anyone less extreme than they, let’s go all modern on them and see how that works out for them.
ISIS is already whining about the unfairness of our air campaign. We should show them what unfair is really all about. Hit hard, hit fast, hit often (to quote Halsey), and get it over with quickly. I really cannot fathom why Obama would, at this juncture, consider any other alternative.
The decline in the price of oil-Brent is down almost to $100/bbl, and Urals-Med is below that level-puts pressure on an already stressed Russian economy. And it especially puts pressure on a stressed Russian government budget, which balances at about $110+. What’s more, Russia is looking to replace private western funding with state support for its banks, and some corporations: recall my post yesterday which described how Sechin is panting after tens of billions of government money to replace western creditors. Further, Putin has made all sorts of promises, including lavish spending on the military and on infrastructure (e.g., a hugely expensive bridge over the Kerch Strait to Crimea). All of these add to the strains on the Russian budget.
Some of this is due to a weakening of the Russian economy for independent factors. Some of it is due to the sanctions.
The effectiveness of the sanctions could be enhanced by putting even further pressures on the Russian government. The most direct means of doing so would be through the price of oil, and short of persuading the Saudis to do a reprise of their 1986 act of flooding the market with oil, the best way to do that would be to release oil from the Strategic Petroleum Reserve.
Especially given the burst in US domestic oil production, the already weak case for maintaining a large reserve is even weaker. Moreover, since much of the oil in the SPR is Brent, and thus could presumably be exported, this would be a way of mitigating the distortions associated with the existing crude export ban.
The number of barrels that would actually flow to the market would presumably be somewhat lower than the amount released from the SPR, because some of the public storage would be replaced by private storage. (As I argued in 2011, this effect depends on market expectations regarding how the SPR would be used.) But the direction of the price effect is clear, and the price impact would not be trivial.
Putin is waging asymmetric war in Ukraine. (Though it is becoming less asymmetric, and more conventional, by the day.) Sanctions are an asymmetric form of warfare. A release of the SPR would be another asymmetric move that would impact Russia directly, and indirectly by enhancing the financial strains produced by the sanctions. There’s no substantive economic case for retaining the SPR at its current levels. Seems like an obvious move. Will Obama make it?
Regulators are pushing ISDA and derivatives market participants really hard to incorporate a stay on derivatives trades of failing SIFIs. As I wrote a couple of weeks ago, this is a problem if bankruptcy law involving derivatives is not changed because the prospect of having contracts stayed, and thus the right of termination abridged, could lead counterparties to run from a weak counterparty before it actually defaults. This is possible if derivatives remain immune from fraudulent conveyance or preference claims.
Silla Brush, who co-wrote an article about the issue in Bloomberg, asked me a good question via Twitter: why should derivatives counterparties run, if they are confident that their positions with the failing bank will be transferred to a solvent one during the resolution process?
I didn’t think of the answer on the fly, but upon reflection it’s pretty clear. If counterparties were so confident that such a transfer will occur, a stay would be unnecessary: they would not terminate their contracts, but would breathe a sigh of relief and wait patiently while the transfer takes place.
If regulators think a stay is necessary, it is because they fear that counterparties would prefer to terminate their contracts than await their fate in a resolution.
So a stay is either a superfluous addition to the resolution process, or imposes costs on derivatives counterparties who lack confidence in that process.
If this is true, the logic I laid out before goes through. If you impose a stay, if market participants would prefer to terminate rather than live with the outcome of a resolution process, they have an incentive to run a failing bank, and find a way to get out of their derivatives positions and recover their collateral.
This can actually precipitate the failure of a weak bank.
I say again: constraining the actions of derivatives counterparties at the time of default can have perverse effects if their actions prior to default are not constrained.
This means that you need to fix bankruptcy rules regarding derivatives in a holistic way. And this is precisely the problem. Despairing at their ability to achieve a coherent, systematic fix of bankruptcy law in the present political environment, regulators are trying to implement piecemeal workarounds. But piecemeal workarounds create more problems than they correct.
But of course, the regulators pressing for this are pretty much the same people who rushed clearing mandates and other aspects of Frankendodd into effect without thinking through how things would work in practice.
Stephen Lubben has garnered a lot of attention with his recent paper “Nationalize the Clearinghouses.” Don’t get nervous, CME, ICE, LCH: he doesn’t mean now, but in the event of your failure.
A few brief comments.
First, I agree-obviously, since I’ve been saying this going back to the 90s-that the failure of a big CCP would be a catastrophic systemic event, and that a failure is a set of positive measure. Thus, planning for this contingency is essential. Second, I further agree that establishing a procedure that lays out in advance what will be done upon the failure of a CCP is vital, and that leaving things to be handled in an ad hoc way at the time of failure is a recipe for disaster (in large part because how market participants would respond to the uncertainty when a CCP teeters on the brink). Third, it is evident that CCPs do not fit into the recovery and resolution schemes established for banks under Frankendodd and EMIR. CCPs are very different from banks, and a recovery or resolution mechanism designed for banks would be a bad, bad fit for clearers.
Given all this, temporary nationalization, with a pre-established procedure for subsequent privatization, is reasonable. This would ensure continuity of operations of a CCP, which is essential.
It’s important not to exaggerate the benefits of this, however. Stephen states: nationalization “should provide stakeholders in the clearinghouses with strong incentives to oversee the clearinghouse’s management, and avoid such a fate.” I don’t think that the ex ante efficiency effects of nationalization will be that large. After all, nationalization would occur only after the equity of the CCP (which is pretty small to begin with) is wiped out, and the default fund plus additional assessments have been blown through. Shooting/nationalizing a corpse doesn’t have much of an incentive effect on the living ex ante.
Stephen recommends that upon nationalization that CCP memberships be canceled. This is superfluous, given the setup of CCPs. Many CCPs require members to meet an assessment call up to the amount of the original contribution to the default fund. Once they have met that call, they can resign from the CCP: that’s when the CCP gives up the ghost. Thus, a CCP fails when members exercise their option to check out. There are no memberships to cancel in a failed CCP.
Lubben recommends that there be an “expectation of member participation in the recapitalization of the clearinghouse, once that becomes systemically viable.” In effect, this involves the creation of a near unlimited liability regime for CCP members. The existing regime (which involves assessment rights, typically capped at the original default fund contribution amount) goes beyond traditional limited liability, but not all the way to a Lloyds of London-like unlimited liability regime. Telling members that they will be “expected” to recapitalize a CCP (which has very Don Corleone-esque overtones) essentially means that membership in a CCP requires a bank/FCM to undertake an unlimited exposure, and to provide capital at times they are likely to be very stressed.
This is problematic in the event, and ex ante.
Stephen qualifies the recapitalization obligation (excuse me, “expectation”) with “once that becomes systemically viable.” Well, that could be a helluva long time, given that the failure of a CCP will be triggered by the failure of 2 or more systemically important financial institutions. (And let’s not forget that given the fact that FCMs are members of multiple clearinghouses, multiple simultaneous failures of CCPs is a very real possibility: indeed, there is a huge correlation risk here, meaning that surviving members are likely to be expected to re-capitalize multiple CCPs.) Thus, even if the government keeps a CCP from failing via nationalization, the entities that it expects to recapitalize the seized clearinghouse will will almost certainly be in dire straits themselves at this juncture. A realistic nationalization plan must therefore recognize that the government will be bearing counterparty risk for the CCP’s derivatives trades for some considerable period of time. Nationalization is not free.
Ex ante, two problems arise. First, the prospect of unlimited liability will make banks very reluctant to become members of CCPs. Nationalization plus a recapitalization obligation is the wrong-way risk from hell: banks will be expected to pony up capital precisely when they are in desperate straits. My friend Blivy jokingly asked whether there will soon be more CCPs than clearing firms. An “expectation” of recapitalizing a nationalized CCP is likely to make that a reality, rather than a joke.
Second, the nationalization scheme creates a moral hazard. Users of CCPs (i.e., those trading cleared derivatives) will figure that they will be made whole in the event of a failure: the government and eventually the (coerced) banks will make the creditors of the CCP whole. They thus have less incentive to monitor a CCP or the clearing members.
Thus, other issues have to be grappled with. Specifically, should there be “bail-ins” of the creditors of a failed CCP, most notably through variation margin haircutting? Or should there be initial margin haircutting, which would intensify the incentives to monitor (as well as spread the default risk more broadly, and not force it disproportionately on those receiving VM payments, who are likely to be hedgers) ? Hard questions, but ones that need to be addressed.
It is good to see that serious people like Stephen are now giving serious consideration to this issue. It is unfortunate that the people responsible for mandating clearing didn’t give these issues serious consideration when rushing to pass Frankendodd and EMIR.