Streetwise Professor

Vlad Socor at EDM has more details on the allegations about GRU involvement in the bombing of the US Embassy in Georgia (and in other bombings in that country):

On July 28, the US National Intelligence Council (analytical arm of the Office of the Director of National Intelligence) provided the Intelligence Committees of both chambers of Congress with a second analysis, following up to the December 2010 analysis of the September 2010 incident. Both analyses drew on a variety of inputs, including those from Georgian counterintelligence. The basic conclusion is that Russian GRU’s Major Yevgeny Borisov, stationed on a military base in Abkhazia, coordinated the planting of about a dozen low-yield bombs in Georgia during 2010, including that outside the US embassy (another bomb outside the embassy was detected and defused).

Borisov operated from Abkhazia through a few agents recruited inside Georgia, at least one of whom is in pre-trial detention since December in Tbilisi. Several of the bombs, including those at the US embassy, were made to look innocuous by using candy-box packaging.

A blunder helped to confirm Borisov’s already suspected role. On his behalf, his deputy telephoned the European Union’s Monitoring Mission (EUMM, in Georgia’s interior, with a hotline to the Russian military), offering to help with the casualties of a bomb explosion that had supposedly occurred on the railway bridge near Poti, Georgia’s Black Sea commercial port. However, the field agent had falsely reported to Borisov by mobile telephone minutes earlier that the bomb had exploded. In fact, Georgian counterintelligence was tracking that agent and defused the bomb.

The Georgians intercepted at least two telephone calls from field agents inside Georgia to Borisov’s office, immediately following explosions. Georgian authorities put six suspects on trial in December 2010. Borisov and his deputy, GRU officer Mukhran Tskhadaia, were sentenced in absentia to long prison terms. The investigation established that Borisov’s office supplied the explosive material (Hexogen, known as Cyclonit or RDX in the West) and paid those agents.

. . . .

Obama administration officials, speaking to the press without nominal attribution, downplay the incident in two ways. First, there is no full inter-agency consensus about a direct responsibility of the GRU at the high levels of that organization. Perhaps Borisov was operating as a rogue agent, these officials speculate aloud. Second, the incident at the US embassy in Tbilisi has more to do with Russia-Georgia than with Russia-US relations; and “it pokes the Georgians in the eye, not the US” (EurasiaNet, The Cable, The New York Times, Washington Times, July 27, 28, 29).

The first excuse is lame.  The second is simply mendacious.  Our embassy is our embassy, and bombing it is a poke in our eye, not Georgia’s.  It is also clearly aimed at us, and intended to get us to back off in support for Georgia.  Ah, for the days of “Perdicaris alive or Raisuli dead!”  Turning the other cheek on this only encourages further probing–or worse–and not just by Russia, but by the even more unscrupulous.

Note that for those who want to blow this off as a figment of Georgian imagination–or propaganda note that the administration investigated the issue, and agreed with the Georgians despite its clear desire to sweep the whole matter under the rug.  The administration is so invested in the precious reset that if it could have discredited the factual allegations, it would have done so.  This lends credence to the reliability of those allegations.  The only alternative available  was to minimize the importance of the bombing.  The justifications are palpably pathetic, but given Obama’s parlous domestic situation, plummeting poll numbers, and serial foreign policy follies (I can’t even bring myself to write anything about the Libyan fiasco which is playing out as badly as I forecast back in March), the administration is not about to admit failure on what it considers one of its signature accomplishments.

So expect more mischief in Georgia–and more silence and excuses in DC.

Today would have been Milton Friedman’s 99th birthday.  His son, David, said something today about the debt ceiling circus that I’m sure his father would agree with:

Reading Google News, I am struck by the degree to which dramatic stories crowd out arguably more important material. The top of the page is dominated by the current U.S. debt limit crisis. It is an entertaining example of the game of Chicken as played by politicians but of limited importance otherwise, since both sides are focused not on how to deal with the long term debt problem but on the terms on which they will agree to postpone dealing with it.

Exactly.  The “both sides” remark is perfectly justified, although there are exceptions on one side.  The problem is that too many of those who are serious about tackling the problem are tactically inept and hasty, and those who are tactically canny and patient are not all that serious about tackling the problem.

Beldar also is worth reading at his splenetic best:

I refuse to watch “Meet the Press” — I’d rather be waterboarded [amen!]— but if NRO’s Katrina Trinko accurately quotes former Obama campaign manager and current White House Senior Advisor David Plouffe’s statement on that program today, I’m appalled:

White House senior adviser David Plouffe emphasized that the White House is unwilling to accept any deal that does not provide a long-term debt ceiling hike.

“This debt ceiling cloud has harmed our economy. Why on earth would we want to go through this again in the next few months?” Plouffe said on Meet the Press.

Got that? It’s not the spending that’s the problem, it’s the limit on government borrowing to finance more government spending that’s hurting the economy, according to Plouffe. Having a statutory limit on the amount of money the government can borrow — even a limit that can be raised by another mere statute, at the behest of simple majorities of House and Senate plus presidential signature — is “harm[ful] to our economy,” according to the Obama Administration.

Obama and his party are obviously entirely content to go years without any budget, and now they’re bitching about having any debt ceiling, any maximum amount on the national credit card.

. . . .

The danger is not merely that they’re clueless. The danger is that they’re still actively and passionately devoted to exactly that which has gotten us into this mess. They are completely unrepentant; they will neither act responsibly nor accept responsibility. And they will keep making things worse until they’re out of office, be that in January 2013 or, heavens forbid, January 2017.

This is the strongest argument yet for a constitutional amendment requiring a balanced budget. [Emphasis in original.]

I’m not big on a Balanced Budget Amendment, but with all its flaws, it has much to recommend it as compared to the alternative–which we see acted out in living color every damn day.

Another amen! moment from Beldar:

I’m already at toxic levels in my exposure to Plouffe for one day. I need a shower.

The dose makes the poison, they say.  With Plouffe, a picosecond’s exposure will do.

Beldar notes that something I mentioned in last night’s post is today’s talking point: specifically, the attempt to construct a narrative in which the debt ceiling standoff is the cause of the bad economy–which has been sputtering for nigh-on to a year (remember that QE2 was mooted about a year ago due to miserable economic signs), well before the debt ceiling became a major bone of contention.

Obama’s National Economic Council Director Gene Sperling was equally mendacious on Fox News Sunday.

It is creepy to watch a propaganda machine cranking up.

Speaking of machines, while doing my daily mad-dog midday walk in the St. Louis sun, I was thinking today that considerable blame for what is going on now can be attributed to one mechanical invention: air conditioning.  There is no way such a tortuous process would have dragged on so long if the legislators and executive branch people had to broil in the midsummer heat of DC.  That would be far more a sobering a prospect to those types than a looming default.

So, to fix our politics, break the air conditioning.

The most recent GDP numbers were dismal.  The Q1 2011 growth rate was revised downwards from an anemic 1.9 percent to a virtually invisible .4 percent.  Q2 growth was a measly 1.3 percent.

This creeping growth coincided with the Fed’s most recent “quantitative easing” episode–QE2.  QE2 was predicated on a variant of Phillips Curve reasoning.  Bernanke and the Fed were concerned that the economy was lurching into a deflationary episode, and wanted to “re-anchor” inflationary expectations upwards in the belief that this would spur spending and growth.  Hence the operation to monetize huge amounts of debt.

Note that QE2 evidently had the desired effect on inflation.  The price indices for gross domestic purchases rose 4 percent in the first quarter, and 3.2 percent in the second.  Core inflation was 2.6 percent in the first quarter and 2.4 in the second–both well above the Fed’s 2 percent “tolerance” zone.

One very reasonable interpretation of all this is that the Phillips Curve is bunk: there is no tradeoff between inflation and growth.  Like we didn’t know that before.

But no tradeoff doesn’t explain the paltry growth, especially at this phase of the alleged recovery.  One highly plausible explanation is that the combination of regulatory onslaught and a burgeoning debt overhang is a drag on the economy.

If there is in fact a Phillips curve, that would mean that the drag resulting from the metastasizing Federal government is even bigger.

These figures are consistent with an incipient stagflation.  Great news.

The economic performance is definitely not great news for Obama’s re-election prospects.  Hence the palpable desperation in the attempts of the administration and its acolytes (including vast swathes of the media) to put the blame somewhere else, anywhere else.  Some of these efforts are same old-same old Blame Bush, or the Japanese earthquake, or the weather.  Seriously.  But some of the efforts are truly novel, and involve violations of the laws of nature.  Specifically, some have endeavored to pin the economy’s somnolent performance in January to June on Republican intransigence on the debt ceiling in July.

Quite a trick.  Note to class: cause must proceed effect.

But there is a link between the economy’s stall and the dynamics of the debt ceiling debate.  The stall is politically fraught for Obama and the Democrats in November, 2012.  There is likely nothing that they can do to rejuvenate the economy in the next 15 months.  Indeed, with this lot, anything they’re likely to try would make things worse.  So not being able to change the substance, the only alternative is to shift the blame.  And precipitating a crisis over the debt ceiling is one way of throwing a lot of dirt in the air, changing the subject, and creating an alternative narrative with a different villain.

It’s a high risk strategy, but desperate times call for desperate measures.  And based on objective measures–including plummeting popularity and foreign policy fiascoes as well as a sick economy–Obama’s situation is desperate.

Which all bodes ill for compromise, the New Civility–and the economy.

Poland has released a report that (a) acknowledges that Polish military pilots were primarily responsible for the crash of President Lech Kaczynski’s aircraft in April, 2010, but (b) lays some culpability at the feet of Russian air traffic controllers.  Here was one disturbing tidbit:

Polish Prime Minister Donald Tusk Friday insisted Polish investigators were given access to all documents in Russia and defended his choice to give the lead in the investigation to the Moscow-based committee. Yet the Polish committee said Friday Russia hadn’t disclosed video recordings of the control room at the airport in Smolensk as the recordings “hadn’t survived.”

Didn’t survive?  Seriously?  I mean, come on.  There’s an crash that kills the President of a neighboring country and 95 top officials and their spouses.  There are videos of the air traffic control room that was responsible for the flight.  And the videos don’t survive?

I know Hanlon’s Razor: “Never attribute to malice that which is reasonably explained by stupidity.”  (Believe me:  In this day and age, that razor gets used so much I have to run it over the strop daily.  NB: similar expressions are attributed to Napoleon, among others.)  But is something like this “reasonably” explained by stupidity or incompetence?  That is stretching the term “reasonably” to a breaking point.  Even marginally competent officials, not to say the barely sentient ones, would ensure the integrity of such potentially vital evidence.  The control room should have been locked down and all video and audio secured.  And shared with the Poles, BTW.

I doubt there was a nefarious plot to bring down the plane.  I’m pretty sure that the pilots screwed the pooch–possibly while being browbeaten by Kaczynski to land so he could get to the Katyn commemoration, weather be damned.  But I’m equally confident that the videos would have shown careless, grossly incompetent and quite possibly drunken performance by the air traffic controllers.

Remember that the ATC on duty “retired” immediately after the crash and took off to destinations unknown.  Allegedly.  How convenient.  And how convenient that the recordings didn’t survive.  Anything that could shed light on what Russian personnel did has vanished.  Wow.  What a bad break.  Could have happened anywhere.

But not anywhere, really.  In Russia–certainly.

This is a perfect illustration of how Russia is its own worst enemy.  Russian officialdom constantly whines about NATO being its most dangerous adversary.  NATO, hell.  Just look in a mirror, guys.

The Exchange Formerly Known as the Chicago Mercantile Exchange–now dubbed the CME Group–has announced that the tax situation in its current corporate home of Illinois is “untenable“:

“Our tax situation is untenable,” [CEO Craig] Donohue told Reuters, noting that CME is taxed more heavily than any of its global competitors. The company is talking with at least three states — Texas, Florida and Tennessee — about relocating some of its business to take advantage of lower tax rates there, Donohue said.

Did he say Texas?  Well, come on down!  Plenty of room!  Might I suggest Houston?

I am a native Chicagoan, and a latter-day Texan. As someone who still identifies with Chicago, and who is deeply proud of the city’s history, I am truly saddened by the circumstances that led to the CME thinking seriously about pulling up stakes.  It is the company that arguably has the deepest, longest, and most emotional tie with the city.  Their destinies and identities have been linked for almost 160 years, if you include the CBT, and nearly 100 just looking at CME alone.  The exchanges have long been iconic symbols of the city.  When derivatives exchanges began to spring up around the world beginning in the 1980s, they all looked to emulate Chicago.   The futures exchanges were the city’s unique and enduring contribution to the world of finance.

But, as they say in Texas, bidness is bidness.  Illinois has become an unbelievably hostile environment for business.  As Walter Russell Mead has blogged about regularly, the Blue State model is broken beyond repair.  And Illinois is about the bluest and brokenest state in the country–in many senses of the word “broke.”  “The City That Works”–Chicago’s old-time motto–is no longer operative.  The state is well into the fiscal death spiral: bloated spending leading to high taxes that drives out business and people.  The writing was on the wall before the last election, but the new governor and the legislature refused to make fundamental changes in the way the state spends and operates, deciding instead just to ratchet up taxes.  When businesses and people can move, that never works.  Never.

So the mystic chords of memory only go so far, and the CME owes it to its shareholders to make a rational decision.  And a rational decision means start humming “Southbound.”  The tax environment is better, and the regulatory environment is too.  In Texas specifically, tort reform has made a big difference in the business environment.

And unlike Boeing (also a Chicago company, as of recently), CME Group won’t have to worry about the NLRB if–or should I say when?–it decides to move.

Like the bumper stickers say, I wasn’t born in Texas, but I got there as soon as I could.  And damned glad I did, for a variety of reasons.  Paradoxically, it is in many ways more like the US of a long time ago, but its future is a lot brighter than that of virtually any other “progressive” place in the US–including progressive Illinois and Chicago.

Though actually that’s not really a paradox, IMO.

I’ve written before that Russia–and Putin specifically–has said that it will not change its protectionist rules for goods like autos even if it gets into the WTO.  Now Medvedev has chipped in with another sector that is off-limits:  agriculture.

Medvedev also said Russia retains the rights to increase import duties on some products to help farmers.

“We are not talking about any restrictions on state support of agricultural producers after (Russia’s) accession to WTO, ” Medvedev told a meeting on crops and grain markets.

Apparently Russia is taking the view that the WTO is an a la carte menu: you order what you like, and just ignore the stuff you don’t.  In this, alas, it is not alone, especially when it comes to agriculture.

There is reporting based on leaks describing the results of US intelligence investigations that the explosion at the US Embassy in Georgia was the work of the Russian GRU (military intelligence).  This allegation had been made originally by the Georgians, which touched off the usual torrent of accusations that the claims of Russian involvement were Georgian propaganda.  That’s a harder–though not impossible–case to make if US intelligence has independently arrived at the same conclusion.

The administration’s response: “It’s not necessarily pointing a finger, but part of a dialogue expressing our deep concerns.”  Wow.  That’ll put the fear of God into them.  Wouldn’t want to label, now would we?

IMO this is just one of the periodic surfacings of the ongoing covert and dirty conflict between Russia and Georgia.  Evidence of US involvement is absent, but as Rumsfeld noted, absence of evidence is not evidence of absence.  I would surmise that one explanation for the Russian action–if it indeed occurred–is that the US has been actively assisting the Georgians and in fact did something that struck very close to Russian operations and interests.   If that’s true, then it would mean that the vaunted reset is pretty much a fraud.  If it isn’t, and the Russian action was unprovoked, the vaunted reset is pretty much a farce.

I would imagine that the covert conflict will continue unabated.  And the prospects of it breaking out into something not so covert are always there, given the volatility of the personalities involved, and the political uses of conflict.  The political uses are particularly important given the impending Russian presidential election.  Depending on your theory of what the real dynamics of that election are, you could easily construct scenarios in which a renewal of conflict between Russia and Georgia would be beneficial for Putin or Medvedev (if you believe that they are truly rivals wrestling under the carpet), or both (if you really believe in the fundamental unity of the tandem).

I further imagine that given the near Pavlovian reactions to anything involving Russia and Georgia, the comments will soon revert to free-fire mode.  Counting down.  Ten, nine, . . .

The respite from TNK-BP-Rosneft-related news was broken the other day, with news that the AAR consortium is restarting legal action.  The Gang of Four is demanding $10 billion to compensate for business opportunities allegedly lost as a result of the abortive BP-Rosneft tie-up.  The theory as to how these opportunities are lost and gone forever now that the deal is, well, aborted, is rather difficult to discern from news accounts.

Moreover, minority shareholders of TNK-BP Holdings are suing TNK-BP Holdings, TNK-BP Management and BP Exploration Operations Company, and two BP employees who serve on the Holdings board for preventing TNK-BP from participating in the BP-Rosneft tie up.

AAR denies being a party to the suit, but acknowledges that it had been informed about it, and that the issues raised in the lawsuit are the same as those in the Gang of Four’s actions in the Stockholm Arbitration Tribunal.

Perhaps this is a coincidence, but the private lawsuit is being filed in the same court in Tyumen where a straw plaintiff (a shadowy off-shore investment fund called Fairmex) sued Telenor over Vimpelcom.  The beneficiary of this lawsuit was Alfa Group–the first A in AAR.  Ultimately Telenor capitulated and came to terms with Alfa.

So maybe it isn’t a coincidence: an ostensibly independent group of minority shareholders files a suit in the Tyumen court that benefits AAR.  Telenor’s torturous experience in Siberia shows that the court can exert substantial pressure, enough to compel a capitulation.

In other words, we are seeing a legal pincer movement.  Or perhaps more accurately, extortion by law.  It seems pretty clear that AAR is attempting to compel BP into buying their half of TNK-BP at a very high price.

As I’ve said before, there is a wicked irony here.  BP is being tormented legally for its strategy that relied upon its belief that Russian lawlessness would allow it to flout the TNK-BP shareholder agreement–as long as it had the protection of Igor Sechin.  I still do not understand exactly why BP’s bet failed: whether they got played, or murky backroom politics in the lead-up to the Russian presidential election undercut Sechin, or something else.  But it is crystal clear that its bet failed spectacularly, and now it will pay.  And pay dearly.

Yes, today marks the one year anniversary of the day when The Monster slouched off of Capitol Hill (aka Frank-n-Dodd Castle) to begin its rampage of error and terror in the countryside.

Believe it or not, I’m not grateful, despite the never-ending source of material that it has provided in the past 12 months.

It is hard to pick the Worst of Frank-n-Dodd.  There is much to choose from, and the competition is intense.  There is one element, though, that is particularly indefensible, and which happens to be in the news now, so it will get special billing in this Special Anniversary Post: The Swaps Execution Facility (SEF) mandate.

It is indefensible for a variety of reasons.  For one thing, the ostensible purpose of Frank-n-Dodd is to reduce systemic risk, and it is very difficult to make a case that requiring trading of swaps on exchange-like platforms has anything to do with systemic risk.  It is particularly interesting to note that the Europeans, who are on board with the Dodd-Frank stuff that at least is related to systemic risk (like clearing and margining of derivatives) are deeply skeptical, not to say contemptuous, of the SEF requirement.  They show no signs of adopting anything even like it.

Moreover, the SEF requirement seems to reflect some extremely childish understanding of markets.  Exchanges– transparent and good.  OTC markets–dark and scary.

This cartoonish view of markets completely fails to recognize the tremendous diversity of transactors and instruments in the market place.  It is sensible that this diversity has given rise to a diversity of trading mechanisms adapted to the traders and instruments.  Shoving everything into a one-size-fits-all framework with intense pre-trade and post-trade transparency–and transactor anonymity–presumes that all traders and all traded instruments are effectively alike.

Wrong.  Gary Gensler regales everyone with tales of how the improved transparency is going to reduce transactions costs for the buy side and end-users, and these benefits will more than offset the other, uhm, inconveniences arising from Frank-n-Dodd.  Which is kind of weird, because the buy side and end-users have been largely critical of the SEF mandate, and comfortable with the current way of doing business.  As I’ve said before, Gensler’s Fairy Tale presumes that the supposed beneficiaries of the SEF mandate are suffering from some sort of battered spouse syndrome, and love and protect their bankers despite the abuse that the latter allegedly dish out on a daily basis.

It’s also weird because the OTC markets grew absolutely and relative to exchanges–by a large margin–pre-crisis.  Given the choice, the buy side and end-users more often than not chose to trade OTC. Absent mass ignorance of self-interest, this very strongly suggests that it was cheaper for the buy side and end users to trade on these markets.

Has Gensler, or any of the other SEF evangelists, provided a convincing explanation of these facts?

No,they haven’t.  They haven’t even tried.

A non-cartoonish analysis of transactions and transactors makes it perfectly clear why the OTC markets have flourished.  A big part of that is the very basic fact that for many traders exchanges with pre- and post-trade transparency but trader anonymity are more costly places to trade.  Uninformed traders (e.g., big hedgers or pension funds) trading in size typically trade more cheaply in face-to-face markets with negotiated prices, rather than in anonymous auction markets where their orders get lumped with the trades of the informed, and hence get filled at worse prices.  This is why dark markets, block markets, etc., have always been with us, and why OTC markets are frequently the venue of choice for big buy side and commercial traders.

The SEF mandate is bad enough, but as hard as it is to believe, the CFTC proposals are even worse.  Gensler and Chilton in particular clearly want to make OTC markets as exchange-like as possible, and are pushing SEF rules that would sharply constrain the diversity of execution platforms.  The CFTC is taking an even more extreme approach to this than is the SEC.

Which is why it is encouraging to see that this is one part of Frank-n-Dodd that is the target of a legislative effort for overhaul.  Representative Scott Garrett (R-NJ) has sponsored a bill that would sharply limit the kinds of requirements the CFTC or the SEC could impose on SEFS:

H.R. 2586 prohibits the CFTC and the SEC from interpreting the SEF definition to: 1.) require a minimum number of participants to receive or respond to quote requests, 2.) require a SEF to display or delay quotes for any specific period of time, 3.) limit the means of interstate commerce that market participants can use to execute swap transactions, or 4.) require one trading system (i.e. RFQ) to interact with another trading system (i.e. Limit Order Book) on the same SEF.  These prohibitions are necessary to preserve investor choice of execution, promote transparent price discovery for market participants, and decrease the costs of hedging for American businesses, farmers, and retirement plans, all of which contribute to economic growth and job creation.

I’d prefer no SEF requirement at all, but at least this bill would give market participants a lot more lee-way to develop systems that accommodate the diversity of trades and traders.

As to its prospects–I have no idea.  But hopefully this is a harbinger of efforts to chain The Monster and bring some relief from its depredations.  That would be a good thing–despite anything Timmy! says.

Pavel Felgenhauer has a piece that ties together the threads of two recent SWP Russia posts, one on protectionism, and the other on the appalling risks of Russian transport:

The Russian transport infrastructure crisis took years to unfold and is indeed manmade. From 2000 to 2010 under Putin the number of civilian aircraft (planes and helicopters) declined from 6,500 to 6,000, while the number of relatively new ones (5 to 15 years old) declined from 57 percent to 7.2 percent. The number of aircraft 15 to 30 years old increased from 40 percent to 58 percent and aircraft over 30 years of age increased from 1.7 percent to 27.6 percent (Vedomosti, July 12). This collapse in quality was directly promoted by Putin’s policies of supporting Russia’s ailing aircraft industry by protective tariffs. Putin has been deliberately sabotaging Russia’s entry into the World Trade Organization (WTO) to keep high tariffs on aircraft, cars and other industrial produce. The result is disastrous: Russian air companies were anyway forced to import aircraft, because aviation industry could not build new planes of necessary quality or numbers to replace the decaying fleet. But imports tended to be also cheap and old – second hand assets.

Recently the government has began to lift some aircraft import tariffs, but it is too late – the time for an orderly and gradual modernization has been squandered – there is no spare production capacity in the world that could help Russia put its transport infrastructure in order. Putin has been boasting about the success of government support for the automobile industry by protective tariffs and subsidies. Russia’s roads are still being filled by millions of cheap, ugly and unsafe Lada cars that poison the environment and kill more Russians in crashes than planes or boats (Vedomosti July 12).

More good work there.  More wonderful unintended consequences–or should I say more indifference to the real consequences.

But hey!  Forget all that. Putin’s Army Wants You!:

“I’m crazy about the person who has changed our country. He is a prominent politician and an awesome man. His name is Vladimir Putin. Millions of people adore and trust him” says Diana, the narrator of the video.

Get that? He’s freakin’ awesome. Like totally. Never mind the corruption and the corpses.

What makes this video particularly funny is that it is taken on the banks of the Moskva River, and not too far by my recollection from where the tour boat I wrote about the other day docked–and in the background of one of the shots, there is a tour boat on the river that looks pretty much like the one I was on.