Streetwise Professor

Prior to the health care wars, I only knew of Bart Stupak for his sponsorship of the “Prevent Unfair Manipulation of Prices Act,” related to energy speculation, which led me to ask: What is fair manipulation?  Indeed, when I testified about energy speculation before the House Ag Committee in July, 2008, the first question I received was about Stupak’s testimony on the previous day, in which he had compared speculation in energy futures markets in the 2000s to the Hunt Brothers in 1979-1980.  That one was teed up for me: I replied that Rep. Stupak had it exactly backwards.  A comparison of the Hunts to what had transpired in the oil markets in ’07-’08 in fact demonstrated how speculation almost certainly was not causing artificially high energy prices.

Stupak’s statements on speculation just marked him as an idiot.  His star turn in the health care drama marks him as a hypocritical, unprincipled, posing, publicity slut.

After seizing center stage, gaining all sorts of press attention for being the leader of a group of representatives whose no votes threatened to derail passage of the health care bill,  and making it seem like his opposition was a matter of deep principles about life and abortion; at the moment when the publicity potential was greatest; Stupak agreed to vote for the health care bill in exchange for a promise that Obama would sign an executive order preventing the expenditure of any federal money for abortion. He gets the spotlight.  He gets to speak on the floor.  And his so-called principles get heaved overboard.

In a post earlier today (which has already gotten 28 comments over at SeekingAlpha), I quoted Mark Twain: “I never can think of Judas Iscariot without losing my temper. To my mind Judas Iscariot was nothing but a low, mean, premature, Congressman.”  Seldom were truer words ever spoken.  For at least Iscariot got 30 pieces of silver:  Stupak got a fig leaf.  And a phony one at that.  It is phony because an executive order cannot override a statute.  This is just something that Stupak can wave in front of the gullible; a way to have his cake and eat it too.  To pretend that he won a victory on abortion AND saved the health care bill.

In fact, he saved the health care bill, but at the cost of his purported principles, for as soon as night follows day, government funds will be spent on abortion under the bill that is about to pass.  But, no doubt, he will gull enough people in his district that the executive order is actually more than a worthless piece of paper, and bask in the limelight that he evidently craves so desperately.

It should also be noted that if it were genuine, Stupak’s “compromise” would in fact compromise a jealously guarded right of the branch of government he serves: it is the Congress that has the right to appropriate money, not the executive, and Congress would never willingly surrender that right to the president.  But since this is all theater, political cover, Stupak isn’t compromising that right at all.

Damn how I wish Mark Twain were alive today, for I think only his pen could do justice to the presumptuous, unprincipled, hollow men and women that go by the epithet “Member of Congress.”

Hillary Clinton just visited Moscow.  While there, she was sandbagged by Vladimir Putin.  Putin scammed his way onto her schedule for what was supposed to be a grasp-and-greet photo op, then launched into a six minute diatribe against the United States, in front of the assembled press corps

Instead, with cameras rolling, they watched Putin spend six minutes rattling off a number of complaints he has with the United States.

Trade with the US has slowed during the financial crisis, he complained, Russian companies have been slapped with US sanctions and Russia is having trouble joining the World Trade Organization.

He also singled out the 1974 Jackson-Vanik amendment, as he has in the past, as evidence that the US is not fully encouraging business with Russia. (The amendment restricts trade with countries that limit emigration, as the USSR did with Jews.)

. . . .

Reporters were surprised at the length of Putin’s list of issues and the fact that he did it in front of the Russian and American press corps, a pool reporter noted.

But wait!  There’s more!  Putin/Russia added injury to insult.

The other most contentious moment of Clinton’s trip was also thanks to Putin after he announced yesterday that a nuclear power plant Russia is building in Iran will be completed in the next few months.

(Interesting that this announcement came from Putin, not the sockpuppet “President.”)

And how did Hillary! respond?  By mounting a spirited defense of her country?  With a corresponding inventory of Russian actions (which could have taken far longer than six minutes, BTW)?  Sadly, no: she merely assumed the position:

“If we continue to work together, we can move beyond the problems to greater opportunities,” Clinton replied, according to the Washington Post, after emphasizing some of the accomplishments the two countries had recently achieved.  The report added that Clinton was “unfazed by the blunt lecture.”

Continue working together?  Did I miss something?

The contrast here between Clinton’s reaction to the deliberate insult from an ex-KGB thug (ex?) who happens to be the head of Russia’s government, and the administration’s hyperbolic response to the decision of an Israeli functionary regarding building in a Jewish area of Jerusalem is stunning.  From Obama to Biden to yes, Hillary, the administration reacted to the Israeli decision like a Southern planter: “My honor has been insulted, suh!”  All that was missing was a challenge to a duel.  But a real, in person, in-her-face insult from a real leader of a major government leads to a passive, flaccid, non-response.

This failure to respond robustly to insults verbal and practical (e.g., Russia’s continued support for Iran’s nuclear program) will only encourage continued provocations.  In an inversion of Hillary!’s formulation, this will cause us to move beyond opportunities to greater problems.  Much greater.

Whatever happens this afternoon (or this evening) in the healthcare vote, the entire spectacle brings to mind what Mark Twain once wrote: “It could probably be shown by facts and figures that there is no distinctly native American criminal class except Congress.”  Or perhaps this one: “I never can think of Judas Iscariot without losing my temper. To my mind Judas Iscariot was nothing but a low, mean, premature, Congressman.”  (There are more: all, sadly, fit.)

And this, uttered by lawyer Gideon Tucker: “No man’s life, liberty, or property are safe while the legislature is in session.”

As dysfunctional as the American healthcare system is, we will pine for the merely dysfunctional if Obamacare passes.  The procedural chicanery and will to override the clear sense of the American people will make things worse, not better.  If only Congress were subject to the Hippocratic Oath: First, do no harm.  (But then what would they do with their time?)

There are ways of amending the system that would largely rectify the sources of dysfunction in the current system.  The first would be to eliminate the immense tax advantage to employer provided insurance, which subsidizes the consumption of health care (driving up costs), contributes to job-lock, and increases the risk of becoming uninsurable due to pre-existing conditions.  The second would be to eliminate mandated coverages, which inflates the cost of care, and makes it rational for some to decide not to purchase insurance–because they would have to pay for things they don’t want or need.  These measures would also encourage people to purchase high deductible, high maximum limit catastrophic coverage policies, and to self-insure (i.e., pay for themselves) against routine expenses. This would also help control costs.  Other knotty problems, notably the pre-existing condition issue (to the extent not resolved by the above two measures) would probably require some form of subsidy, along with measures to prevent opportunistic gaming of the system; but addressing that issue does not require all of the other elements of the pending legislation, and should be focused on when the system equilibrates to the elimination of employer provided coverage and coverage mandates.

Besides damaging the health care system, the legislation that hangs in the balance will wreak tremendous economic damage.

Pay no attention to the blarney about the CBO budget scoring.  (Did it come out on St. Patrick’s Day?)  First, for the effin’ billionth time, it’s the total amount of spending that is important, not the budgetary impact.  The budget impact is a government-centric measure; we should focus on a citizen-centric measure.  The important question is: Is what we as citizens are getting worth a trillion dollars over the next ten years?  (And it will almost certainly cost more than a trillion, if historical experience in these estimates is any guide, and if one considers the political economy forces that will impel future Congresses to expand entitlements.)

Second, the CBO ignores the inevitable effects of the legislation on economic growth. CBO ignores the pernicious effects of the myriad taxes included in the legislation–and the myriad taxes not specifically included in the legislation that will be necessary to pay for it in the future.  Most damaging are the capital taxes, which as I’ve written, are inimical to growth.  There are also elements in the legislation that are not taxes per se, but will effectively increase marginal tax rates, thereby discouraging work and effort.  In particular, the subsidy phase-outs (the subsidy declines as income increases) dramatically increase effective marginal tax rates.

Worse care.  Less growth.  What’s not to like?

The ugly process is a mirror to the repulsive substance.  To watch the tawdry dealing is to understand that Twain’s Judas Iscariot comparison is spot on.  Why would Senators and Representatives need to get their metaphorical 30 pieces of political silver (if only it were 30 pieces, worth about $500!) if the legislation were so beneficial?

And it will not be over after the vote.  This will not be the end.  It will not even be the beginning of the end.  It will merely be the end of the beginning of interminable political knife-fighting.  We are well into the Era of Bad Feelings, which will only get worse as the practical implications of this legislation become manifest, and the land mines hidden in the bill begin to explode.

What Tucker said is literally true today, 21 March, 2010.  Our lives, liberty, and property are all in grave jeopardy as Congress is in session today.

This could become a regular SWP feature: Gary Gensler continues to grind out the metaphors in his verbal attack on OTC markets.  The most recent: “[the dealer banks] is also the group that nearly drove us off the cliff.”

Wait a minute.  Just days ago he said: “The dealers collectively nearly burned down the financial system.”  So what is it, are dealers bad drivers?  Or arsonists?  Or, is it that they drove a car off a cliff, and the explosion of the gas tank on impact ignited a conflagration?

I’m so confused.  But I’m also a little disappointed.  Haven’t heard about apples in a while.

I’m also still waiting for an explanation of how dealers qua dealers sped over a cliff, or lit a huge fire, or sped a flaming car over a cliff, and how the regulations Gensler is advocating would address any of those problems.  And no, saying the AIG incantation for the zillionth time doesn’t count.

The Futures Industry Association, a trade group for futures commission merchants and exchanges, has come out strongly in opposition to the CFTC’s proposed energy position limits.  The most interesting thing to me about the FIA letter is the fact that one of the central pillars of its argument is similar to an objection I’ve been raising for some months: specifically, that the CFTC doesn’t have a legal leg to stand on because (a) Congress has authorized the CFTC to impose limits when “it is necessary to diminish, eliminate, or prevent” the “undue and unnecessary burden” of “excessive speculation” that causes “sudden or unreasonable fluctuations or unwarranted changes in the price” of any traded commodity, but (b) CFTC has made no finding that excessive speculation that causes unreasonable price fluctuations exists, or has existed, in energy products.  Indeed, it’s worse than that.  CFTC’s attitude has been “we don’t got to show you no steenking evidence.”  CFTC, and notably Chairman Gensler, have also invoked repeatedly the idea that concentration is a danger that should be controlled through position limits.  But the Commodity Exchange Act is silent on concentration in this context.

The FIA letter is quite blunt: “Substantively in the absence of the ‘necessary’ finding, the CFTC lacks the statutory authority to adopt position limits.”  FIA also states that “[t]he ‘excessive concentration’ and ‘uncontrolled speculation’ themes the CFTC cites are both factually unproven and legally irrelevant.”  The letter states further that the “‘excessive concentration’ focus is misguided.”  I agree with all this, and have said and written as much over the past year (or more).  I further agree with the FIA’s statement that “FIA is not aware of any convincing or even credible evidence that large traders with speculative positions in energy futures markets have trumped fundamentals as the determining factor in energy futures prices.”  (Emphasis in original.)  Again, agreed.

To summarize, like the FIA, I believe that the CFTC position limit proposal is unjustified and legally dubious.  It is unjustified because there is no credible evidence, or logical argument even, that speculation has distorted prices.  It would be nice to make policy on the basis of, you know, evidence, wouldn’t it?  (Isn’t this the administration that said it was going to base policy on science, not politics?)  It is legally dubious because the CFTC’s authority to impose limits is not absolute.  The CFTC can impose limits pursuant to a particular purpose laid out in statute, but the CFTC’s justification for its proposal (a) does not show that its limits are in fact necessary to achieve that purpose, and (b) includes considerations that are altogether absent from the statute.

This is regulatory overreach based on no evidence.  Other than that, it’s great!  Kudos to the FIA for joining me in pointing that out.

A prosecutor in Milan, Italy has filed charges against four banks, alleging fraud in dealing swaps in the Italian city.  There are numerous other allegations of fraudulent marketing of swaps to municipalities, in Italy primarily, but also in the United States (e.g., Jefferson County, AL).

So far, the reporting is a bit sketchy, and in the Milan episode specifically, is driven by the prosecutor’s charges, and the flat (but uninformative) denials of the accused.  This article from FT goes into more detail about the issue generally.

Here’s my initial take.

According to the FT article, many of the municipalities borrowed at a fixed rate with the banks, and then swapped into a floating rate (by entering a receive fixed, pay floating swap).  This was all great and stuff when interest rates were low.  When interest rates rose, not so good.

But that’s a risk you take when you effectively borrow at a floating rate.  To the extent that losses resulting from rising interest rates are the basis for grievances–or legal action–against the banks that offered the swaps, I say tough luck.  You take a risk, and you shouldn’t be able to walk when that risk doesn’t pay off.   You can walk away from an option–but you have to pay money for that privilege.  (Once upon a time, in fact, options were called “privileges.”)  You entered into a swap, which costs nothing up front, and have to take the downside with the upside.

Other aspects of the deals are somewhat cloudier.  Because of options, in fact.  Some of the deals included collar structures (caps and floors).  These are embedded options.  A zero cost collar should have cap and floor strikes such that the values of the cap and the floor offset.  The banks are likely to be better informed about option values, especially given the very long terms on some of these transactions.  Thus, it is plausible, though not proven, that the options were mispriced in favor of the banks.

I am more sympathetic to such a claim, but not oodles more.  It would have been straightforward for a big entity like Milan, and many of the other affected governments, to hire a qualified, independent academic to vet the valuations.  Off the top of my head, I can think of a half-dozen very capable Italian finance academics that would have been overqualified to perform this rather routine exercise.  By spending a couple of thousand Euro in consulting fees, those now complaining could have saved themselves the millions of Euros they’re claiming they lost.  (A hundred million Euros, in the case of Milan.)  You’d think Italians would be able to understand the concept of caveat emptor.  (I don’t know how to say “due diligence” in either Latin or Italian, but the concept is the same in any language.)

There’s also an element of greed involved–and not just by the banks.  (Politicians and bureaucrats can be greedy?  Who knew?)  Many entities apparently renegotiated the deals frequently, and the new deals were priced off-market, but resulted in a cash payment to the municipalities at the front end.  This allowed the politicians to defer uncomfortable spending and tax choices.

But there’s no such thing as free money.  You get more money now, you have to pay more later.  Funny the way that works.  Again, the effective interest rate in the off-market swap vs. up-front cash payment might have been too high.  But again–that’s a fairly straightforward calculation to make, so hire somebody competent to do it.

The most likely explanation here is that nobody covered themselves in glory.  No doubt the banks saw suckers coming.  No doubt the municipalities were short sighted, greedy, and careless.  Funny how those two types seem to find one another, isn’t it?

The situation in Jefferson County, Alabama is somewhat different.  The county borrowed at floating rates through auction rate securities, then swapped that into a fixed rate.  That worked fine until the ARS market blew up, and the yields (and hence the county’s borrowing costs) spiked, and importantly, spiked relative to the floating rate in the swap.  This is a painful lesson in the risks of hedging.  You exchange flat price risk for basis risk.  In this instance, the basis blew out, and the hedger took a beating.

I haven’t followed the ARS debacle that closely (only so many hours in the day), but it seems that the implosion was an unexpected consequence of the unanticipated financial crisis.  It’s quite possible that both the banks and the county didn’t fully appreciate this basis risk.

To sum up, I’d say be very suspicious about sob stories and morality tales from municipalities that have lost money in derivatives deals.  In some cases, they took a risk, and they lost.  In other cases, it is possible that they were in fact overpaying to the banks on the other sides of the deals.  In still other cases, it’s likely that both things were true.  But from what I’ve read these deals weren’t so devilishly complicated that a qualified academic or independent consultant couldn’t have provided an analysis that would have prevented a municipality from entering into bad deals.  The municipalities should have some obligation to undertake due diligence, and letting them off the hook for failing to do so will only raise the costs of legitimate uses of such transactions.

In an uncharacteristically dyspeptic opinion piece on his newsletter, John Lothian concludes that CFTC Chairman Gary Gensler has his eye on something more than Chairmanship of what has long been an also ran among Federal agencies:

There has been talk in Washington, Chicago and in the media that Gary Gensler has ambitions to become the next Treasury Secretary should Tim Geithner’s reputation continue to take a beating and be force out.  It has been written, said and whispered that he is positioning himself for this promotion.  After seeing him in action at Boca, I tend to agree with this assessment.  We have had short-timer CFTC Chairmen before, with ambitions for greater jobs.  One only has to think of Reuben Jeffrey, who was mailing it in as CFTC Chair shortly after being named to the position, or so it seemed at the time.

To which I say: well, yeah.  When asked by a reporter for my appraisal of the CFTC commissioners last August, I wrote that it was pretty clear that Gensler had his eye on Treasury.  It’s only become clearer since then.

And in his campaign, Gensler is willing to say anything–anything–even if it is misleading, or untrue.  Consider what he said in an interview with Jeremy Grant at the FT (available here, for now, anyways): “The dealers collectively nearly burned down the financial system . . . . We know that.”

It is no doubt true that firms that are dealers, namely Lehman and Bear, failed, thereby shaking the financial system to its foundations.  We know that other firms that serve as dealers dealt with AIG (which was not, as commonly understood, a dealer), and that these dealings played some role in AIG’s bailout (exactly what role none of the principals involved will state forthrightly or consistently).  We know that other firms that serve as dealers, such as Citi and BofA and Merrill, were in desperate financial trouble.

But it is misleading, and a non sequitur, to assert that these events justify the kinds of regulation that Gensler is flogging endlessly in purple prose.  For once, I would like Gensler to state specifically what these various dealers did, qua dealers, that put the financial system at risk, and how the proposed regulations would address this behavior.

Again: read the Valukas report on Lehman.  The catastrophic investments that Lehman made involved pretty much everything but its OTC derivatives business (which was in the black to the tune of $21 billion).  Residential real estate, commercial estate, CDOs, private equity, leveraged loans, you name it.  Merrill and Citi and BofA were also torpedoed not by their activities as OTC dealers, but as underwriters of and investors in CDOs and other real estate related investments.

It is a bait-and-switch to say that “dealers” cratered the financial system to justify regulation of dealer activities.  Doing so suggests that it was the OTC dealing activities that were the root of the problem, when they clearly were not.

But, you might argue: OTC derivatives dealing creates interconnections between firms that can communicate financial contagion.  It is definitely true that the events make plain something I’ve flogged myself for well over a year: namely, that balance sheet risk arising from other investments and activities is an important determinant of the default risks posed by any dealer firm.  But it is just this kind of risk that clearinghouses do not and cannot price, nor effectively control.  And it is just this kind of risk that can be spread to big financial firms via their interconnection through a clearinghouse.  Clearing does not make interconnection go away: it reconfigures the interconnections, and does so in ways that can be riskier, not safer.

So, balance sheet risk is arguably a problem, but clearing is quite definitely not the solution; exchange trading and post-trade price transparency are even less relevant to this problem.  Indeed, it can make the balance sheet risk problem worse, and will do so IMHO.

It is, in short, perfectly consistent to excoriate the banks for what they did (and sadly, for what some continue to do) while opposing the proposed regulations of OTC derivatives.  These banks are big, complex, and engage in a wide variety of activities.  Some of the risks that banks ran proved ruinous, or nearly so.  But the OTC  dealing activities are not high on the list of those risks, if they are there at all.  But that doesn’t stop Jeremiah (or is it Ahab?) Gensler.

And a shout out to Stacy-Marie Ishmael at FTAlphaville who joins me in mocking (though she is more gentle in her mocking than me) Gensler’s fondness for metaphors over-the-top, mixed, and just plain wrong*.  But literary merit–not to mention fairness or accuracy–is of little moment when there is a political battle to be fought–or a cabinet post to be won.

* I am still chuckling over the Mrs. O’Leary’s cow Genslerism.  It is the perfect metaphor for him to use.  Like much of what Gensler peddles, the story of Mrs. O’Leary’s cow was a complete myth.

The clearing debate is getting more complicated, with major brokerages/FCMs clamoring to be admitted to OTC derivatives clearinghouses:

MF Global Holdings Ltd., Hexagon Securities LLC and at least 19 other financial firms are pressing regulators to force swaps clearinghouses to lower entry barriers in order to improve competition in a $605 trillion derivatives market dominated by the world’s biggest banks.

Brokers formed an association last month that hired a Washington-based law firm to pursue the issue with lawmakers and regulators, said Mike Hisler, a partner at New York-based Hexagon. They also seek tougher conflict-of-interest laws to ensure that a bank’s derivatives desk doesn’t influence clearinghouse decisions that could shut out new competitors.

There are numerous issues here that cut in different ways, and make policymaking treacherous.  Indeed, these are issues that I have raised in some of my academic work.

One issue is market power.  I’ve shown that in the presence of substantial scale and scope economies (which definitely exist in clearing), a coalition of intermediaries can form a cooperative firm to provide these services that is (a) smaller than optimal, and (b) immune to competitive entry.  The basic idea is that by adding just enough members to ensure that any other competing effort does not have the scale or scope to compete, this decisive coalition (which consists of the most efficient suppliers, e.g., the big dealers) can reap market power rents even if the cooperative itself charges marginal cost prices.  So, it is potentially problematic to permit a clearing cooperative firm to limit membership.

But there is another issue.  The whole idea behind a clearinghouse is to mutualize risk and, hopefully, to reduce systemic risk.  Admitting anybody willy-nilly is contrary to these goals.  Permitting less financially solid, not to say dodgy, entities imposes costs on the more solid ones, unless those risks can be priced effectively.  But, as I’ve argued extensively, clearinghouses typically do not have the information or the incentive to price the balance sheet risks of members properly.  Moreover, since the price setting process will inevitably be political in such an organization, it is likely (for reasons similar to what Peltzman described in his famous JLE ’75 article on regulation) that the prices will transfer wealth from the efficient to the inefficient (i.e., from the low risk to the high risk).  (A median voter-style analysis leads to a similar result.) Thus, open entry is a recipe for moral hazard–and systemic risk.  And hence, more financially solid firms have an incentive to bridle at the prospect of being required to share risk with other entities.

Allowing anybody in also increases the heterogeneity of the membership, which makes governance more costly and cumbersome.

This is just another example of the dilemmas posed by the network-nature of financial markets generally, and clearing in particular.  Scale and scope economies make competition difficult, if not impossible; efficiently scaled-entities are very large relative to the total market, and arguably natural monopolies.  These scale and scope economies can be exploited to exercise market power by limiting entry.  But permitting open entry creates its own difficulties, especially in clearing, because member heterogeneity that is inevitable with open entry, and member heterogeneity can be expected to lead to cross subsidies.  In this context, that means that some risks are underpriced, and riskier firms can expand and the expense of less risky ones.  That hardly comports with the putative objective of forcing more things onto clearinghouses.

In their rush to find a “solution” and the resulting embrace of clearing, regulators and legislators have largely ignored these very real challenges.  Mandating an expansion of clearing, and micromanaging the organization and governance of clearinghouses (as Gensler has advocated, and as the Lynch Amendment does), will involve unintended consequences.  These consequences will almost certainly undermine the ostensible objectives of these initiatives.

Again: Fools rush in.

Adam Smith said so, meaning that specialization (the division of labor) will be more extensive in big, thick markets than small, thin ones.  And driving through rural Alabama provides a couple of examples:

• JB’s Hardware and Grocery.
• Mike’s Saw and Cycle.

Saw and cycle?

Why was I in rural Alabama, you might ask?  I’m on my (pretty much) annual Civil War trip with my dad.  (We’ve been doing this since 1992.)  We’ve been to all the major battlefields (several more than once), and so are hitting some of the more obscure ones.

We started in New Orleans, with a visit to the WWII Museum, which is OK.  Also went to the New Orleans Confederate Museum, which has an amazing collection of uniforms and personal items.   The museum itself, in the Confederate Memorial Hall, is also quite striking, with a Gothic design and beautiful cypress paneling and beams throughout.

We then drove through Mobile, and on to the Gulf Coast beyond.  We went to Fort Morgan, built in 1819-1833, and the anchor of the Confederate defenses of Mobile Bay and a focus of US Navy gunfire in the Battle of Mobile Bay (5 August, 1864).  Then a first for me: a visit to a nautical battlefield, by taking a ferry from Fort Morgan to Fort Gaines on Dauphin Island across the entrance of the Bay from Ft. Morgan.  The ferry crossed the area in the Bay where Admiral Farragut said “Damn the torpedoes, full speed ahead!” (or he didn’t).  This was also where the CSS Tennessee battled Farragut’s entire fleet before succumbing to the hammering delivered by several US Navy ironclads (monitors).

Fort Gaines was quite well-preserved and quite interesting.  It is privately operated, and in much better shape than the state-operated Fort Morgan.

We then traveled up Mobile Bay, and visited the USS Alabama, a South Dakota class battleship from WWII.  I’ve been to several such memorials, and this was probably the best.  The interior spaces were in remarkable condition, with shiny stainless steel surfaces that look like they must have in 1945; for instance, the ship’s geedunk (soda fountain) looked brand new.

Today we visited the Fort Blakeley, site of a sad battle that took place on the very day that Lee surrendered at Appomattox Court House, on April 9, 1865.  The vastly outnumbered Confederates were defending Mobile, and the forlorn nature of their task is evident in the results of the battle, in which more than half the Rebel force surrendered, a sure indicator of collapsing morale.  And given the circumstances, who in their right mind wouldn’t have decided that resistance was futile?  Indeed, the Blakeley Battlefield Park centers on the redoubt held by the Missouri Brigade, arguably the best combat brigade in the Confederate Army during the war (which is saying something)–and even those redoubtable fighters surrendered in large numbers.

The battlefield includes some of the best preserved earthworks I’ve seen on any battlefield.   Most interesting are the picket/skirmisher pits in front of the main lines–larger, 5 man Confederate pits, smaller, foxhole-like 2 man Federal pits.  Also of interest was the zig-zag approach trenches leading from the Union’s third line (“parallel”).

Although small, and covering a battle that took place during the denouement of the war, Blakeley is worth a visit.  It is largely intact, and permits the visitor to visualize and understand the battle better than is possible at most fields.

Back to Houston tomorrow, and then back to work–and blogging.

Anti-corruption drive?  What anti-corruption drive? you might say, after reading this Reuters article:

Alexandra Wrage, whose non-profit organization TRACE International advises firms on how to avoid bribery, told Reuters the “rampant endemic” corruption in Russia was much worse than in other big emerging economies.

“My recommendation is: ‘Maybe you should reconsider doing business in Russia,'” she said. “I am considerably more optimistic about Nigeria than I am about Russia on this issue.”

So, then it’s not accurate to say that Russia is Nigeria with missiles?  Because it’s unfair to Nigeria?

Russia trawls the depths of the corruption rankings:

Berlin-based NGO Transparency International rates Russia joint 146th out of 180 nations in its Corruption Perception Index, saying bribe-taking is worth about $300 billion a year.

Apparently, the risks of not paying to play are much greater in Russia than elsewhere:

Wrage recalled a question at her first workshop in Moscow in 2002 which underlined the unique dangers of Russian corruption:

“Somebody came up to me in the break and said: ‘If I don’t pay the bribes here, I am really worried that my office will be burned to the ground.'”

Her reply? “Well, I have nothing to give you. I don’t have any best practice tips to help with that scenario.”

. . . .

Questions included how to avoid getting your company shut down on a trumped-up charge if you did not pay off an official, through to corporate raiding by Russian competitors with official connivance which could mean losing the whole company.Businesses were asking: “How do we survive here without paying bribes, because we’re not sure it’s possible,” she added.

Wrage serves on a U.S.-Russia government commission created to strengthen ties by sharing expertise. She was skeptical about Russian President Dmitry Medvedev’s repeated pledges to fight corruption, though she acknowledged they had contributed to a bigger public debate on the issue.

Frau Wrage calls bullsh*t on the metronomic Russian government pronouncements of anti-corruption campaigns:

“There is a new and exciting anti-corruption initiative here with startling regularity,” she said. “We don’t need any more initiatives, we need results.”

I like this woman.  She is wonderfully sarcastic.  And brutally honest in her appraisals:

TRACE has studied other leading emerging economies. In China, it describes corruption as an “inverted pyramid,” with most bribery at the top while India is the opposite, with corruption rampant at lower levels but tapering off higher up.

“Russia is a solid block. There is bribery at all levels,” Wrage said. “There appears to be sense of near-complete impunity, a sense of entitlement … there is no sympathetic low level management, no sympathetic mid-level management, or sympathy at the top (for anti-bribery efforts).”

In other words, solidly corrupt from top to bottom .

To sum up:  Russia is incredibly corrupt.  Its form of corruption is unique.  It is not getting any better, despite repeated criticism from the President and continued claims that something will be done.

Recall that foreign direct investment plunged during the crisis, and has not rebounded.  It is unlikely to do so as it becomes evident that corruption will sap returns, and puts entire investments at risk.