Coverage of MFer John Corzine’s House testimony yesterday has focused on his repeated denial of any intent to dip into customer seg funds. That’s walking a thin legal line, and it’s unclear that lack of intent would be sufficient to evade time in the pokey. That part of his testimony seemed weasely, at best.
But this piece suggests idiocy:
Why did you bet the survival of the firm on European sovereign debt?
“We looked at the ratings, but they were not the only consideration. We looked at what counterparties would charge for initial margin. We would look at how individual securities were looked at by regulatory authorities around the globe – what they were able to use as collateral. We look at prices in markets to determine whether people thought the default or restructuring risk was being priced into it.
“There were many considerations along with the ongoing dialog that, which after the fact clearly can be second guessed, that the European community was going to take a much more forceful steps to avoid bankruptcy or insolvency.”
Looked at initial margins? What about the risk of variation margin or the equivalent? What about the risk of ratings trigger-induced increases in haircuts?
Initial margin isn’t what killed the trade. It was increases in margin–additional collateral calls based on adverse movements in the price of the European debt, and perhaps collateral calls based on the downgrade–that sunk the company.
In other words, what killed the firm was its inability to fund the trade over its life in the face of adverse price moves. Note that nowhere in Corzine’s answer does he mention mark-to-market risk, funding risk, haircut risk, variation margin risk, or anything related. Given the firm’s leverage and the leverage in the trade, that oversight is beyond idiotic. The main risk of a trade like that to a firm like MF was that prices would move against it and it wouldn’t have the resources to fund the additional collateral calls.
That’s exactly what happened–and per Corzine’s answer, that risk played no role in his decision to make the trade. None. That is just beyond belief.
Could he really have overlooked that risk? Or was he just weaseling again, leaving out the crucial risk of the trade from his account, in the hope nobody would notice?
Speaking to party functionaries, Putin described United Russia’s increasingly popular moniker — “the party of crooks and thieves” — as “a way of referring to government in general,” according to Ria Novosti. People “say the party in power is the party associated with thieving and corruption. But if we recall the Soviet years, who was in power then? Everyone called [people in government] thieving and corrupt. In the 1990s [under President Boris Yeltsin] they did the same thing.”
So, according to Putin in this translation, (a) “government in general” is the target of the crooks and thieves epithet, and (b) Russians have believed without interruption since Soviet times that the government was “thieving and corrupt.”
That makes it so much better. The “government in general”–which Putin heads–is corrupt, and Russian governments as a rule are corrupt.
China will become a major gas importer in the near future but is unlikely to sign a deal with Russia’s Gazprom and is instead looking to Turkmenistan and perhaps even the United States to cover its needs, a report said on Thursday.
China plans to increase gas in its energy mix from 3 percent to 10 percent by 2020 and has secured its gas import needs until around 2018, but after that needs to strike new supply deals to feed a rising appetite for natural gas.
“Judging by the apparent lack of any progress on the gas pricing issue, it seems Beijing is in no particular hurry to sign any gas contracts with Gazprom,” French bank Societe Generale said in a research note on Thursday.
An agreement on Russia’s gas deliveries to China, the world’s largest energy consumer according to the International Energy Agency, would boost Moscow’s efforts to reduce its export dependency on the European market, which currently provides around 80 percent of Russia’s gas export revenues.
But Moscow and Beijing have haggled for five years over the commercial terms for any deal.
“The various measures China has taken to secure its imports reinforce our view that China would first look into any potential U.S. LNG (liquefied natural gas) deal before reverting to Gazprom,” SocGen said.
In November, China signed a deal with Turkmenistan to increase its planned supply of gas to China by 25 billion cubic metres (bcm) of natural gas, to a total of 65 bcm.
SocGen said China’s apparent policy meant that Gazprom’s exports were likely to remain focused on Europe, and that this “leaves Europe well supplied until 2016 at least.”
But I’m sure that contract with China will be signed any day now! Lucy Sechin said so!
There is more irony here given how Gazprom has done everything to keep Turkmen gas from going to Europe. Where “everything” includes blowing up piplelines and threatening war over the Trans-Caspian pipeline. (Nice little country you have here. Pity if it ended up like Georgia. A threat, by the way, that gives the lie to the Russian justification for the 2008 war. Just one of many recent revelations and statements that belie the official narrative.)
PetroChina has discovered shale gas in China’s Sichuan province, confirming that the energy-hungry country is sitting on vast reserves of this unconventional fuel source.
PetroChina, the listed subsidiary of Chinese oil and gas producer CNPC, told the Financial Times it had drilled about 20 wells in its shale gas acreage in southern Sichuan province and that initial results had been positive. “The wells are producing more than 10,000 cu m of gas per well per day,” said Mao Zefeng, PetroChina senior assistant secretary to the board. “We are still assessing the exact size of the potential reserves.”
China does not yet have any shale gas wells producing commercially, but several companies have exploratory projects underway, including Sinopec, PetroChina, Royal Dutch Shell, BP and Chevron. China has more shale gas reserves than any other country in the world, with 1,275tr cu ft of recoverable shale gas reserves, according to estimates from the US Energy Information Administration. That is enough to supply China for more than 300 years, based on current consumption levels.
The dam is cracking. The water is rising. On all sides.
Whenever I need a good laugh I look around to see what Gazprom says about the perils of spot pricing mechanisms for gas. (OK. I confess. My sense of humor is, uhm, idiosyncratic.) And they seldom disappoint!
Spot prices, which European customers have asked the Russian gas export monopoly to factor into long-term contract prices, should play a “subordinate, balancing role,” said Sergei Komlev, head of pricing and contract formation at Gazprom’s export division.
Gazprom supports “the existing dual hybrid pricing model,” Komlev said today at a conference in Moscow. Switching to 100 percent spot indexation or de-linking oil and gas prices “is unacceptable to gas producers because it will create opportunities for predatory pricing.”
Uhm, just how would that “predatory pricing” work, exactly? Predatory pricing involves the sale of a product at below marginal cost with the intent to drive competitors out of the market. Once exit occurs, the predator then raises price to supercompetitive (and perhaps monopoly) levels.
The problem with this strategy, as appealing as it is to the economically illiterate (well, I am talking about Gazprom management, so . . . ), is that (a) it can only work under very special conditions, (b) these conditions unlikely to hold in practice, and (c) the documented examples of successful–or even attempted–predation are virtually non-existent. And I would say that the use of the modifier “virtually” is unduly cautious.
Predation is unlikely to work in an industry as unconcentrated as gas–and if anyone is in a position to be a predator, it is Gazprom, as the world’s largest producer with the world’s largest reserves.
But the more basic problem is that predation can’t destroy the competitor’s productive assets. For instance, if a big gas producer tried to charge a below-cost price in an attempt to drive Gazprom out of business, Gazprom’s wells and pipelines would still exist, and could come back on line as soon as the predator attempted to raise price. Meaning that the predator would lose money driving down prices, but would never be able to profit by raising them to supercompetitive levels.
In other words, predation is usually a great way for the predator to lose money. Which is why it is more a figment of heated imaginations than an economic reality.
As for empirical examples, Rockefeller’s Standard Oil was the poster child. Ida Tarbell–the daughter of a refiner that lost out in competition to Rockefeller–alleged in various muckraking articles and books that predation is how Standard Oil was built. But the painstaking, non-muckraking, historical research of John McGee (then at Chicago, and published in the JLE) showed that Tarbell’s characterization was all wrong. Standard Oil did not engage in predatory pricing.
So, predatory pricing is just another Gazprom bogeyman. A risible scare tactic employed to defend an increasingly indefensible position.
Gazprom reminds me of the little Dutch boy, holding back the waters by putting his finger in the hole in the dike. But Gazprom’s problem is that there are more holes than it has fingers. Just follow the news and you’ll see story after story about gas exploration and development and export just about everywhere in the world.
One interesting development occurred the other day in Qatar. Russia has downgraded its diplomatic relationship with the Gulf country because of an incident in which a Russian diplomat was roughed up, allegedly when Qatari officials tried to seize the diplomatic pouch he was carrying.
Recently, Qatar and Russia had been singing of the same hymnal with respect to gas contracting practices. Moreover, Qatar has been Russia’s main interlocutor in discussions to create a gas cartel analogous to OPEC. Given the proliferation of supply sources, actual and potential, the prospects for such a cartel are dim on economic grounds. But political friction between Qatar and Russia makes the prospects even more remote.
Given the gravity of the accusation, one wonders what would have been so serious as to lead Qatar to take such an action. Most likely guess: something related to Iran. There are many indications that there is a covert war going on against Iran. The Gulf states are in a cold war with Iran–and maybe it is a little warmer than that. Russia’s role with Iran has been equivocal, at best. Under these circumstances, one can readily imagine why Qatar would go after a Russian diplomat.
Regardless of the actual story, political tension between Qatar and Russia is just another hole for Gazprom to plug.
“They say it’s a party linked with theft and corruption,” Mr. Putin said. “That’s a cliché not about a specific political force but about the authorities.”
Really. He said that.
Let’s break it down, shall we?
First, United Russia is a “political force” that is first and foremost the party of the authorities–the bureaucracy. It is the party of the apparat. Any distinction between United Russia and the “authorities” is utterly farcical.
Second, putting that aside, Putin is at the pinnacle of the “power vertical,” and he constantly extols the virtues of his hierarchical system. All lines on the organizational chart in Russia terminate with him: just ask him. The practice of the “vertical chop” (in Navy vernacular) is an inherent part of the Russian system of governance. Which means that (a) “the authorities” derive their power–including the power that they utilize to enrich themselves–from Putin, (b) these authorities are accountable to Putin, and (c) Putin claims responsibility for them. So, if you believe the Putinist model works as claimed, the “cliché” (and remember clichés get that way by being true) about the “authorities” directly implicates Putin as a crook and thief, or at least an accessory before and after the fact because he lets the thievery persist.
The only way to absolve Putin of this charge would be to claim that he cannot really control the apparatchiks. That the “power vertical” is a sham. That bureaucrats can run amok unchecked. That Putin is, in fact, just a Man Behind the Curtain who pulls levers and spins dials–which do nothing.
Under any of these interpretations, though, Putin’s statement is a damning assessment of Russian government. A confession that the authorities are indeed crooks and thieves.
In my post on the purported voyage of the Russian “aircraft carrier” to Syria, based on past experience, I recommended that the flotilla include a salvage tug. And so it shall! Wise move.
And speaking of that visit to Syria. First, it was on. Then it was denied. Now it’s apparently on again. So which is it? Do you need any further examples of why any “information” coming out of the Russian Ministry of Defense should be almost completely discounted?
My colleague, economist and historian of Russia Paul Gregory, delivers a beatdown on former NYT editor Bill Keller for Keller’s attempt to define who is a real economist and who is a crank. And I mean beatdown: make sure no children are present when you read it.
Keller’s views on economics are a pitch-perfect display of the insular Pauline-Kael-I-don’t-know-anybody-who-voted-for-Nixon worldview so characteristic of the Upper West Side. Sadly, although Keller is not an economist and wouldn’t know good economics if it bit him where he sits (his head, apparently), he is joined in his narrowmindedness by Krugman and David Warsh, who have taken it upon themselves to read Hayek out of the respectable economics canon. I can guarantee you, by the way, that Krugman has no prayer of being remembered and cited 40-75 years after the publication of his most important scholarly works, as Hayek is. Eat your heart out, Paul–teh Krugman, not Gregory.
The Keller-Krugman-Warsh effort to define respectable economics as “people who agree with Keller-Krugman-Warsh” is actually kind of pathetic and defensive. It also brings to mind the frantic efforts of the climate clerisy to discredit and stifle contrary voices. These efforts actually betray a rather acute insecurity. An insecurity that is quite warranted, by the way, as Paul Gregory brutally points out.
Filed under: Uncategorized — The Professor @ 9:26 pm
The Hall of Fame Golden Era Committee voted Ron Santo to the Hall of Fame, 360 days after the former Cubs third basemen passed away after a long battle with diabetes–a disease he was fighting even while playing.
As I wrote last year after Santo’s death that he was a deserving of the honor, and that it was an injustice that he had not been voted in before. It’s not like his statistics improved or anything in the last year. Yes, the rap against him was that he didn’t play long, but his diabetes clearly played a role in that.
Ron deserved better. It’s nice that he has finally received recognition. It would have been nicer had a man who gave his life to the game received that recognition when he was alive to enjoy it.
The failure of United Russia to break the 50 percent level in Sunday’s Duma election is a major shock, given its huge structural advantages and the relentless efforts of the Russian government to undermine, marginalize, discredit, starve, and crush any potential opposition.
Putin spit out a statement that this result was “optimal.” Tell me another one! Some of his pilot fish have elaborated on his statement, claiming that (a) a win is a win, and (b) the narrow margin gives the lie to allegations about vote fraud, intimidation, etc. That’s even more hilarious, (b) especially. The supposed Putin juggernaut can’t even muster 50 percent despite the structural advantages AND its shameless vote rigging, especially in all the usual places (e.g., Chechnya).
So what does this bode for the future? Many are asking what Putin does now. Several measures are likely:
Even more populism, with lavish promises regarding pensions, state investments, limitations on increases in utility tariffs.
Nationalist appeals, complete with dark tales about foreign conspiracies to destroy Russia.
Relatedly, even more truculence in foreign policy, e.g., Syria, BMD, the Near Abroad.
A pretty brutal purge of cadres in United Russia. I think Medvedev might carry the can on this one.
And one can imagine even more sinister developments. Ed from Pickerhead (who kindly links to SWP with some frequency) emailed to ask: Who will be Putin’s Kirov? Don’t rule it out.
But the important thing about this election is that the question is no longer merely what will Putin do?, but what will Putin be forced to react to?
Authoritarian systems like Russia’s under Putin depend very, very heavily on the Wizard of Oz effect. The perception that the leader is a great and powerful wizard, unchallenged and unchallengeable. Putin has quite clearly cultivated such an image.
But a Russian electorate, mulish and apathetic as it is, has pulled back the curtain. It has shown that the giant projected image of a strong, popular leader is just a product of political technology.
This completely changes the dynamics going forward. Any challenge to an authoritarian leader is daunted by coordination problems. In the political science literature, there is the concept of “falsification of preferences”, whereby people in authoritarian regimes disguise their true feelings about it, and feign support out of fear of retribution. Given this aura of popularity, any individual is reluctant to step out, in the belief that others will support the regime. Thus, given this belief, it is difficult to coordinate opposition to an authoritarian leader, permitting him to thrive despite the fact that he is actually unpopular.
Once this belief is punctured, however, the equilibrium can shift rapidly from broad (though feigned) support, to widespread opposition.
The election results create this very real risk for Putin at the popular level. He must also face challenges within the elite, and within the siloviki in particular. As I have noted many times, he plays the role as balancer among competing factions within the elite. His ability to do so depends crucially on the perception that he is in fact powerful and indispensable. That perception has been dented by the election, making him far more vulnerable to challenge from within the elite. Individual bureaucrats will have to figure out how the political winds will blow, and will trim accordingly. Deals made in exchange to support challengers that would have been unimaginable Friday are now conceivable. Potential challengers will be emboldened. The factions will attempt to exploit the weakening of the balancer by attempting to achieve dominance over their rivals in the belief that Putin’s power to intervene is limited. (Think of a mafia war when the capo di tutti capi is weakened.)
Which all means that Putin will be on the defensive. Given this, he is likely to try to preempt the opposition, popular and inter-elite, by cracking down. The crackdown on any opponents within the elite, real or imagined, is likely to be swift and unrelenting. (This is why the Kirov scenario is not outside the realm of possibility.)
The crackdown on dissent expressed by ordinary Russians will be more challenging. Going all Muscovite on the opposition poses considerable risk of galvanizing and unifying the opposition, and destroying any pretense that Putin is a popular embodiment of Russia and Russians. But being soft will make it easier for the palpable discontent to coalesce into a real political force. Given that the result was likely unexpected, any response is likely to be ad hoc and extemporized, increasing the potential for mistakes.
During the financial crisis, I noted that regimes like Putin’s are extremely brittle. Due to the coordination game aspect of authoritarian rule, when authoritarian regimes fall, they collapse quickly. The crucial element opponents face is overcoming the problems of coordinating their opposition. Both within the elite, and the populace more broadly, the Duma elections have undermined the belief that the wizard is all powerful. Maintenance of this belief is key to preventing coordinated opposition.
This election results challenge this belief. This has the potential to change dramatically the dynamics of the Russian political system in the next 3 months leading up to the presidential vote. Putin will do everything possible to try to restore the belief. But it is easier to maintain it when it is unquestioned, that to reestablish it when it is in doubt.
