Streetwise Professor

April 14, 2012

I Liked Him Better When He Was Just A Buffoon. Not Much, But Better.

Filed under: Commodities,Derivatives,Economics,Energy,Politics,Regulation — The Professor @ 8:50 pm

University of Maryland law professor Michael Greenberger is quoted often in the financial press on derivatives related matters. I have no idea why. He is a complete buffoon on these issues.

Perhaps it is his stint at the CFTC makes reporters think he’s credible. All the worse for the CFTC.

Personal anecdote. He and I were on the same panel when I testified on oil speculation before the House Ag Committee in July, 2008. He said something typically inane; I think it was about increases in Saudi oil output not driving prices down. I jumped on him, saying that he had overlooked the fact that Saudi crude was heavy and sour, and the market was short light, sweet crude. He was flustered, and responded by stammering “I’m not an economist” to which I responded: “That’s the first thing you’ve ever said that I agree with.”

And the last.

But Greenberger has crossed the line from buffoonery to mendacity with this interview:

Greenberger makes very serious allegations: criminal conspiracy to manipulate the prices of multiple commodities.

He says speculators are “working together.” “There is doubtless criminal conduct here.” He compares speculators to bank robbers and burglars. He asserts that the (alleged) huge profits of commodity speculators are due to their criminal conduct, and would not exist if prosecutors did their jobs; instead, they have “blindfolded themselves, stuffed their ears, held their noses” and let criminal conduct proceed uninvestigated, and of course unpunished.

He even gives this a political spin, saying that since higher gas prices are the only thing that can result in Obama’s defeat, the conspiracy could lead to the Republicans taking the White House, and racking up big gains in the House and the Senate.

Which obviously begs the question: then why wouldn’t an Obama DOJ be falling all over itself to investigate? An Obama CFTC? An Obama SEC? I mean, this part of the interview alone marks Greenberger as completely unhinged, as it makes no sense that a hyper-politicized administration would refuse to investigate rampant criminality that threatens its re-election.

Greenberger’s evidence for his lurid claims about a criminal conspiracy to manipulate prices?-zip. Really. Zip. His claim that speculators are driving up prices by trading futures is without solid empirical foundation, but is common enough. But to allege criminal conduct, and a vast conspiracy among major financial institutions, goes far beyond the pale. He says he won’t name names. Why not? If he has the evidence, why shouldn’t he? Truth is an absolute defense in libel and slander.

And recall what Judge Easterbrook wrote over 25 years ago: an undetected manipulation is an unsuccessful manipulation. If there is such a vast and successful effort to manipulate prices, the evidence would be there for all to see.

If Greenberger can back up what he says about criminal conduct, and a criminal conspiracy, he should do so. Now. Stat. If he can’t, he shouldn’t be making such lurid claims. It is beyond irresponsible. It is mendacious.

April 12, 2012

How Do You Like Them Apples?

Filed under: Economics,Regulation — The Professor @ 3:39 pm

The US DOJ has filed suit against Apple and some book publishers over their agreement to replace the existing wholesale model for ebooks with an “agency model.”  Under the old model, publishers would charge a wholesale price to a retailer, and the retailer would choose its own price.  Under the agency model, the publishers would set the retail price, and the agent/retailer (e.g., Apple) would receive a fixed margin (30 percent).

I am inherently more skeptical about antitrust actions involving vertical restrictions, although there is an element of horizontal coordination here.  Normally, you would expect that wholesalers/manufacturers would love retailers who sell for very low margins, and would resist guaranteeing a pretty fat margin, as lower margins downstream increase the derived demand at the wholesale level.  So why would publishers want higher margins downstream?  That suggests that there was some sort of inefficiency associated with the wholesale model that the agency model was intended to correct.

The agency model is, in essence, a resale price maintenance strategy.  Once upon a time these were per se illegal, but scholarship pioneered by my thesis advisor Lester Telser revolutionized understanding of this practice, and led to RPM being evaluated on a rule of reason basis.

Telser argued that free rider problems could undermine the incentives of retailers to provide information and special services that increased the demand for a wholesaler’s product: a consumer could go to a retailer that provided the information/service, then go to a cut price retailer that didn’t when actually purchasing.   Due to the discount retailer’s cut rate price, the information/service providing retailer wouldn’t get any return from supplying these (costly) services, so few or no services would be offered.  This would reduce the demand for the wholesaler’s product.  Wholesalers/manufacturers would have an incentive to guarantee a retail margin to prevent undercutting by free riders.

I don’t know enough about book publishing to opine whether resellers provide services or information that is subject to free riding.

In any event, publishers didn’t seem to be focusing on that issue.  It was Amazon’s dominant position as a retailer that seemed to be the reason for changing the model.

Time permitting, I give this some more thought.  Several questions suggest to me that this will be a challenge for the DOJ.  In particular, what were the publishers getting from Apple (and potentially other resellers adopting the model) that would make it worthwhile to guarantee the resellers a fat margin? Why didn’t the publishers love the fact that Amazon was willing to sell at very low margin?  These two questions suggest this is not a garden variety horizontal price fixing case, and that the conduct (and contracts) at issue were designed to address a free rider problem or other source of distortion.  How does Amazon’s potential monopsony power affect the analysis?  What are the implications of the high fixed cost-zero marginal cost nature of epublishing? Specifically, when combined with the potential for monopsony power downstream, could finding the agency model illegal have adverse dynamic implications (fewer books published, for instance)?

A lot of complicated issues here, and lurid tales of secretive dinners in London tell me zip about the economics.  My (rebuttable) presumption is that vertical restrictions usually have efficiency purposes.  The nature of the agreement with Apple shares similarities with other efficiency enhancing vertical restrictions, and doesn’t make a lot of sense as a means of facilitating collusion among publishers.  To persuade me (not that that matters in the scheme of things) the government would have to explain why colluding publishers would use this form of agreement, and why they would want to guarantee retailers a big margin.

I am sure the defendants’ lawyers will make every effort to make this into a vertical restrictions case instead of a price fixing case.   They seem to have considerable material to work with.

April 11, 2012

Fail Columbia

Filed under: Economics,History,Politics — The Professor @ 10:57 am

Yesterday’s New York Times carried an essay by a Columbia University philosophy professor, Philip Kitcher, that waved the pom-poms for Obama’s claim that Republicans are Social Darwinists (h/t R).  And what a low, dishonest essay it is.

Kitcher’s identification of Social Darwinism with Republicans is the epitome of weaseling insinuation:

It is not entirely implausible to think that doctrines like these stand behind a vast swath of Republican proposals, including the recent budget, with its emphasis on providing greater economic benefits to the rich, transferring the burden to the middle-classes and poor, and especially in its proposals for reducing public services.

“It is not entirely implausible.”  Is that the standard of evidence for Columbia full professors and the New York Times? “Not entirely implausible”?  Really?  Is Philip Kitcher, PhD, incapable of finding a single direct quotation from a major Republican figure (e.g., Paul Ryan, the primary author of the budget that Kitcher savages) that demonstrates belief in Social Darwinism?  Or is it that he just cannot be bothered? Or maybe he just Knows It, like some sort of Revealed Truth.  Or believes that it is self-evident.

Presumably he has research assistants.  Maybe they can help him out.  If Republicans and those in favor of smaller government (which are definitely not the same groups, but which Kitcher lumps together in typical leftist fashion) are so wedded to the idea of Social Darwinism, the evidence should be quite easy to collect. Even for a philosopher.  Hell, there should be entire books in which evil non-lefties expound on the subject.

From this dishonest beginning, Kitcher commences bashing around straw men.  In his telling, those who disagree with an expansive role for government like that advocated by Obama believe that individuals should be social atoms, without any social support or public goods:

If the vast majority of citizens (or, globally, of people) are to enjoy any opportunities to develop the talents they have, they need the social structures social Darwinism perceives as pampering and counter-productive. Human well-being is profoundly affected by public goods, a concept that is entirely antithetical to social Darwinism or to contemporary Republican ideology, with their mythical citizens who can fulfill their potential without rich systems of social support. It is a callous fiction to suppose that what is needed is less investment in education, health care, public transportation and affordable public housing.

Again.  Not one piece of evidence to support this sweeping assertion about “Republican ideology.”  One effing piece.

Does Philip Kitcher, PhD, stir himself to examine the writings of any scholar of note who is widely recognized as an advocate of smaller government, and who provides the intellectual foundations for such a position? Adam Smith? Friedman? Hayek? Or, to throw in a more recent name, Deirdre McCloskey?

Of course not.  He just knows. Or doesn’t care, because the “not entirely implausible” standard is good enough for Columbia professors of philosophy (and the New York Times).  Kitcher’s description fits anarchists, perhaps-and anarchists actually despise Friedman and Hayek, it should be noted.  And I don’t think the Anarchist Caucus is all that influential in the Republican Party.

If he did so bestir himself to read anything by any of those authors, he would realize his claim is complete bunk.  Complete and utter bunk.  Each supports the provision of public goods.  Each supports public funding of education.  Each supports some form of welfare for the indigent and disabled.  The questions they wrestle with are how much of each should be provided, and what are the best mechanisms for making those choices. That’s what Kitcher should really be debating, but he evades engaging in any such honest exchange by caricaturing his political and intellectual opponents.

And none of the authors I cited could remotely be considered a Social Darwinist.  Not even close.  That Philip Kitcher, PhD, thinks so only reveals his stunning ignorance and smug sense of superiority.  Smith, Friedman, Hayek, McCloskey and myriad others who favor a greater reliance on individual liberty and a reduced reliance on the state do not believe that this will result in ruthless, cutthroat competition.  They view it as the most efficacious way of creating “rich systems of social support.”  They view it as a way of facilitating cooperation among disparate individuals, through the mechanism of voluntary trade.  Any market system is a mix of cooperation and competition: individuals engage in various cooperative activities (e.g., the formation of firms) that compete to provide greater value to potential trading partners.

The basic belief underlying this vision is that voluntary mechanisms are far more efficacious in building “social support networks” than government-based mechanisms that operate on the principle of coercion.  This greater efficacy derives from a variety of sources, most notably the superior ability of decentralized and voluntary systems to create and utilize information, and meet the diverse needs of diverse individuals in a flexible and adaptive way.

But it also derives from the fact that competition to provide value to willing trading partners channels self-interest into beneficial activities that help others,  whereas statist mechanisms reliant on coercion channel self-interest into wasteful, destructive, and often violent actions that benefit some but make others worse off.  Government provision does not eliminate competitive drives: it usually results in these drives finding their outlet in rent seeking, corruption, expropriation, and worse.

That is the essence of the small government, small-l libertarian, classical liberal critique of statism and progressivism of the sort that Obama (and Philip Kitcher, PhD) advocate. It is virtually antithetical to Kitcher’s grotesque caricature.  Presumably Kitcher objects to the Smithian view, on either philosophical or empirical grounds.  Fine.  Let’s have that debate.  But to have it, it is necessary to characterize the views of the opposing party in a fair and honest way.  And that Kitcher does not do. In fact, he does the exact opposite.  Meaning he is either completely clueless or mendacious. Or both. (That’s where I’m putting my money.)

I wish I could say that it is truly remarkable that a professor at a highly reputable university stoops to such low and dishonest rhetoric to advance his political positions.  And it is low and dishonest.   And arrogant in its smug refusal to provide actual evidence to support his slanderous claims about his political foes.

But it is all too common in academia, alas, especially in the humanities and some social sciences-like philosophy.

Finally, note that Professor Kitcher’s Columbia University is the academic milieu which Obama inhabited for several years.  The oft-remarked upon absence of any Obama paper trail at Columbia (or anywhere, for that matter) is really irrelevant. Kitcher’s piece, and Obama’s dishonest rhetoric and statist policies make it clear that he learned his lessons well. Quite well, in fact.

April 9, 2012

Georgia On His Mind. Always.

Filed under: Military,Politics,Russia — The Professor @ 6:59 pm

Putin’s truculence is on display daily in the aftermath of his election.  One example is the deployment of S-400 AA missiles to the Kaliningrad enclave, in a demonstration of pique at American refusal to acquiesce to Russian demands regarding ballistic missile defenses.  But the most ominous sign is the clear escalation of hostility towards one of Putin’s blackest bêtes noir: Georgia.

Georgia, along with Estonia, Lithuania, and Poland, inhabits a special place in sovok hell for its refusal to truck to Russian dominance, and for its taking a leading role in the dissolution of the USSR. Its attempts to cement ties with the west generally, and the US in particular, further enrage the sovok mind. Add to these visceral hates the fact that Georgia is an important link in an energy transportation chain that circumvents Russia, and you have more than enough reasons for Putin to attempt to do anything possible to bring the small country to heel.  Moreover, it is more vulnerable than the Baltic countries or Poland, which are in NATO; Georgia is still outside the western security perimeter, and its sometimes erratic behavior, combined with a reluctance to get involved in a conflict with Russia in a region where all of the military and strategic advantages lie with the Kremlin, make it far more vulnerable.

The escalation of hostility is displayed in ways large and small. The shrillness of Russian rhetoric about Georgia has ramped up.  Another example: Russia accuses Georgia of deliberately introducing swine flu into southern Russian regions.  Get a load of this:

“ASF came to us from Georgia. First, of course, to Ossetia, and then to the Krasnodar and Stavropol regions. There are signs that this situation is artificially injected,” Rospotrebnadzor head Gennady Onishchenko was quoted as saying by the news agency Interfax.

“It is economic sabotage,” he added.

Onishchenko, by the way, was the official who banned Georgian wine and mineral water in 2006. That was a measure that presaged an escalation in actions against Georgia, including crackdowns on Georgian immigrants in Russia.

Then there is this from Eurasia Daily Monitor:

Russian Defense Ministry sources told the semiofficial news agency Interfax that action plans are being finalized to react to an armed conflict involving Iran and its nuclear program. The General Staff of the Russian Armed Forces “calculates” that military action against Iran will commence “in the summer” of 2012. Since Israel does not have sufficient assets to defeat Iranian defenses, the Russian military considers US military involvement inevitable (Interfax, March 30).

Bits of information have been appearing, indicating the essence of Russian military action. Last December it was disclosed that families of servicemen from the Russian base in Armenia have been evacuated to Russia, while the troops have been moved from the capital, Yerevan, north to Gumri – closer to the borders of Georgia and Turkey. The preparation of Russian forces in Armenia for action in the event of military conflict with Iran began “two years ago” (Nezavisimaya Gazeta, December 15).

After the short Russo-Georgian war in August 2008, break-away provinces Abkhazia and South Ossetia were occupied by Russian troops. Tbilisi in turn stopped military transit to the Russian troops in landlocked Armenia. There is only an air link to Russia, while fuel and other essentials reportedly come over the Iran-Armenia border. Moscow believes this border may be closed in the event of war. According to Lt. General (retired) Yury Netkachev – former deputy commander of Russian forces in Transcaucasia – “Possibly, it will be necessary to use military means to breach the Georgian transport blockade and establish transport corridors, leading into Armenia (Nezavisimaya Gazeta, December 15). The geography of the region implies that any such “corridor” may go through the Georgian capital of Tbilisi.

The article goes on to detail how the 58th Army-which spearheaded the attack on Georgia in 2008-has received far more modernized equipment than the Russian army as a whole.

The leaks of this information are probably a twofer.  First, they are intended as a warning to the US against taking any military action against Iran. That is, Russia/Putin running interference for Iran. Second, they are part of a pressure campaign against Georgia in the run-up to its October elections, analogous to the pressure campaign that culminated with the 2008 war.

Hopefully Saakashvili will have wised up, and won’t rise to the bait this time, as he did to his cost in August of 2008.

Putting this in a broader perspective: note that this is all occurring after Obama’s plea to Medvedev for “space” in the lead-up to the November election, in return for a promise to be more flexible afterwards. A plea that Medvedev, good little errand boy that he is, promised to convey to Putin.

I wonder if Barry notices how Putin is responding to his plea for understanding. I don’t know whether it would be more disturbing that he does, or he doesn’t.

More News From Absurdistan

Filed under: Politics,Russia — The Professor @ 4:26 pm

Russia has dropped charges against the doctor accused of negligence in her failure to treat Sergei Magnitsky in prison shortly before his death.

But the prosecution of the late Mr. Magnitsky continues apace. To restore his reputation, natch.

Who You Gonna Believe? The Russian Economy Ministry or the Lying Data?

Filed under: Economics,Politics,Russia — The Professor @ 4:21 pm

Russia’s economy ministry estimates that capital outflow in 2012 will total $20 billion.  That’s actually pretty pathetic, for a country that should be benefitting from high energy prices, and which portrays itself as a great investment opportunity.

But the $20 billion outflow seems delusionally optimistic compared to the reality:

Capital flight from Russia accelerated in March, despite Vladimir Putin’s re-election to the presidency, which officials had hoped would allay concerns about political risk and slow the torrent of money leaving the country.

“This is coming from domestic businesspeople sending their money out of the country, either to avoid corruption or because they have no place to invest it here,” said Alexander Morozov, chief economist at HSBC in Moscow, warning that they aren’t likely to reverse this year. The outflows could be a problem for Mr. Putin as he returns to the presidency and seeks to boost economic growth and investment.

The Central Bank reported Wednesday that capital outflows reached $35.1 billion in the first quarter, nearly double the $19.8 billion seen a year earlier. The latest result was little changed from the fourth quarter of last year, when many economists blamed the outflow on concerns about political instability around Mr. Putin’s return to the presidency and the huge anti-Kremlin demonstrations in Moscow in December.

The central bank didn’t give a monthly breakdown in Wednesday’s figures, but using figures for January and February reported earlier, analysts estimated capital outflow for March at around $12.5 billion—up from $9 billion in the previous month.

So the capital outflow is accelerating despite the resolution of the political risk that had supposedly was the impetus for the outflows.

Since capital outflows are already $35 billion, to reach $20 billion it would be necessary for capital inflows to average more than $1 billion for the rest of the year.

Just what would be the basis for such a forecast? Look at the chart in the WSJ link. There have been 3-yes, 3-months of inflows since 2009.  Note further that the recent outflows have occurred when oil prices have been high-which should encourage inflows. Therefore, why should anyone expect flows to reverse from about -$10 billion/month to +$1 billion/month?

No. The Russia Economy Ministry is quite clearly MSU.

And what, pray tell, could possibly explain why capital is fleeing Russia despite the supposed stability that will accompany a Putin return? Well, maybe “despite” is the wrong word: I would suggest that the capital is fleeing because of Putin’s return, and the dreary implications thereof for the rule of law, the security of property, and the physical safety and freedom of anyone who dares to engage in the crime of entrepreneurship:

Russia’s business climate remains high-risk even for entrepreneurs with modest ambition and restrained appetites. There is a 50-percent chance that any entrepreneur doing business in Russia will sooner or later end up behind bars, a panel of experts concluded at an April 5 conference examining the country’s socio-economic development over the past ten years. Up to 16 percent of the country’s entrepreneurs have been prosecuted in the past decade and no less than two-thirds of companies that ran afoul of the law have been closed, the experts concluded.

At the very core of all business issues in Russia is a lack of trust, said the experts, who were speaking at the International Academic Conference on Economic and Social Development organized by Moscow’s respected Higher School of Economics. “There is a perception in government that business people are dishonest,” said Yevgeny Yasin, former Russian Minister for the Economy and Higher School of Economics professor. “Sadly, this appears to be the prevailing mindset.”

That mindset also appears to have been enshrined in the country’s legal code. Since 1996, the laws governing economic and financial crimes in Russia have been toughened with the addition of 12 new provisions, Vedomosti reported, each of which carry punishments of 5-10 years in prison.  By contrast, in recent years the government has adopted only two laws to ease Russia’s business climate: one that banned the pre-trial detention of people suspected of economic crimes and another requiring that a tax audit be conducted before tax evasion charges can be filed, said Viktor Burobin, head of Justina law firm.

Russia’s culture of the presumption of guilt is also reflected in the outcome of court cases involving businesses. The acquittal rate for economic crimes in Russia is just 0.3 percent, compared to up to four percent in former Soviet economies like Georgia, Poland and Ukraine, said Vadim Volkov, the scientific director of the Institute of Law Enforcement. The results are an illustration of Russia’s high incarceration rate of 600 prisoners to 100,000 inhabitants, as opposed to 300 in Ukraine and 200 in Bulgaria, said Volkov.

As they say, RTWT.

This reinforces a point made in the WSJ article: it is Russian businessmen who are sending their capital abroad.  It is not exclusively driven by foreign investors (although they are apparently sufficiently wary of the risks of sinking capital in Russia that they are not investing enough to overcome the desire of Russians to get their money the hell out of Dodgeski).  Those who know the local conditions best-Russians-are trying to get out while the getting is good.

That is Putinism.  It is also why the return of Putinism for the foreseeable future is hardly conducive to economic dynamism-the exact opposite is the case, in fact. And that is why Russia continues to hemorrhage capital, and why the Economics Ministry’s forecasts can hardly be called delusional: they are far worse than that.

April 8, 2012

The Tarantula Makes a Funny

Filed under: Military,Politics,Russia — The Professor @ 3:30 pm

Sergei Lavrov says many risible things, even for a diplomat, but he has topped himself in the Bout matter:

Foreign Minister Sergei Lavrov will bring up the Viktor Bout case with counterpart Hillary Clinton during his visit to Washington, which starts Wednesday.

“For sure, Bout is a topic that is regularly addressed in our contacts with the Americans,” Lavrov said Friday while answering reporters’ questions.

“Bout was presented to the judge and jury like a person who was already a criminal,” Lavrov said. “It was described in a way that made it seem like a done deal, and that, of course, influenced the trial.”

Uhm, that’s kinda the way it works, Sergei.  The prosecution makes an allegation that the accused is a criminal.  They make that presentation to the judge and jury.  They typically do so in forceful, often lurid, terms. They would like to make it seem like a done deal, but here in the US, the burden is on the prosecutor to make that allegation stick.  The defense has every opportunity to show that the prosecution has not met its burden.

I wonder what the alternative is in Sergei’s alternative universe? Is it something like: the “prosecutor” says: “We’re really sorry to have to do this to such a nice guy, but . . . ”

I am not a big Hillary fan, but she is the one half-way sensible person in this administration.  I sincerely hope she doesn’t let diplomatic niceties stand in the way of responding to Lavrov’s raising the issue with a good horse laugh, followed by a belittling lecture (from a Yale Law School grad) on the way that criminal justice works.

But Lavrov was not alone in his inanities:

The case of Bout creates a negative background for the Russian-American relationship, said Alexei Pushkov, head of the State Duma’s International Affairs Committee.

“The relationship-improvement ball is in the United States’ court,” Pushkov said, RIA-Novosti reported.

Unfortunately, many in the administration probably take that view, and are looking to salvage something from the reset.  But Bout is a bridge too far, and certainly the Russians know this.

Which raises the question (which has come up in the comments): why are the Russians so bent on moving heaven and earth to get Bout out of American clutches?

The Occam’s Razor answer is clear: Bout is a Russian intelligence operative, or was, and knows a great deal that Putin and the FSB and the siloviki generally would prefer to remain secret.

A word to the wise.  Anyone involved in a business even remotely associated with the US military or intelligence should be quite careful when traveling to Russia, and might want to reconsider his or her trip.  It is pretty clear that Russia will be willing to do some extraordinary things to secure Bout’s release. Lavrov’s appeal will go nowhere, and plan B a la Russe is a trade: being a bargaining chip is a bitch, so beware.

April 6, 2012

By typical Russian, whatabout, chutzpah double standards, yes the treatment of Bout is inhumane

Filed under: Politics,Russia — The Professor @ 12:28 pm

Just when I thought that Russian chutzpah could never surprise me, something like this comes along:

A federal court handed Bout 25 years in prison on Thursday for conspiring to sell weapons to Columbian guerrillas who were actually US federal agents in disguise.

. . . .

The ministry claimed the US had used “unbearable conditions” in detention as a means of physically and psychologically pressuring Bout during his trial. “Long before the verdict, the authorities declared V.A. Bout a ‘merchant of death’ and little short of an international terrorist, while the prosecution was built entirely on his imputed ‘criminal intent’,” it said, adding: “The Russian foreign ministry will take all necessary efforts to return V.A. Bout to the Motherland.”

This from the country that uses psychological pressure and physical torture and literally-literally-unbearable conditions to coerce those they want to break.

Three prominent examples: I could spend days assembling many more.

Example 1.  Today is the 6th anniversary of the arrest of Vasily Aleksanyan.  Aleksanyan worked for Khodorkovsky and Yukos.  The Russians wanted to compel him to testify against Khodorkovsky.  How?  Here’s how:

During Aleksanyan’s imprisonment, his health rapidly deteriorated due to HIV-related illnesses. He became almost blind and developed cancer of the liver with metastasis into the lymph nodes. He also became ill with tuberculosis.

Despite the grave medical situation demanding urgent antiretroviral treatment and chemotherapy in a hospital, he was denied both. The prosecutors also ignored three injunctions by the European Court of Human Rights on 27 November 2007, on 6 December 2007 and on 20 December 2007.According to Aleksanyan, the prosecutors are demanding false evidence against other Yukos executives from him before starting his medical treatment. On 26 December Aleksanyan made public a statement asking for help from human rights advocates.

Example 2. Sergei Magnitsky:

Magnitsky was arrested and imprisoned at the Butyrka prison in Moscow in November 2008 after being accused of colluding with Hermitage. Held for 11 months without trial, he was, as reported by The Telegraph, “denied visits from his family” and “forced into increasingly squalid cells.” He developed gall stones, pancreatitis and calculous cholecystitis, for which he was given inadequate medical treatment during his incarceration. Surgery was ordered in June, but never performed; detention center chief Ivan P. Prokopenko later indicated that he “…did not consider Magnitsky sick…Prisoners often try to pass themselves off as sick, in order to get better conditions.”

On November 16, eight days before he would have had to have been released if he were not brought to trial, Magnitsky died for reasons attributed first by prison officials as a “rupture to the abdominal membrane” and later to heart attack. It later emerged that Magnitsky had complained of worsening stomach pain for five days prior to his death and that by the 15th was vomiting every three hours, with a visibly swollen stomach. On the day of his death, the prison physician, believing he had a chronic disease, sent him by ambulance to a medical unit equipped to help him, but the surgeon there — who described Magnitsky as “agitated, trying to hide behind a bag and saying people were trying to kill him” — prescribed only a painkiller, leaving him for psychiatric evaluation. He was found dead in his cell a little over two hours later.

Journalist Owen Matthews described his suffering in Moscow’s notorious prison, Butyrka.

According to [Magnitsky’s] heartbreaking prison diary, investigators repeatedly tried to persuade him to give testimony against Hermitage and drop the accusations against the police and tax authorities. When Magnitsky refused, he was moved to more and more horrible sections of the prison, and ultimately denied the medical treatment which could have saved his life.

And of course, Russia continues to torture Magnitsky-or his mother, to be more accurate-by insisting that he be tried-yes, tried-posthumously.

Example 3. Svetlana Bakhmina:

The drama surrounding Svetlana Bakhmina, a former Yukos lawyer who gave birth to her third child while still in prison, has come to a head after a Moscow court granted her parole.

Her release on Tuesday has raised hopes of the change in the judicial climate that President Dmitry Medvedev has been advocating. It could also affect the second trial against her former boss, ex-Yukos chief Mikhail Khodorkovsky.

While the court’s decision to free Bakhmina may indicate a softer line in the Khodorkovsky trial, it could indicate that she could be called to give testimony against him.

Lawyers have suggested Bakhmina was somehow a hostage in the Yukos affair, while the drawn-out hearings into her parole last year illustrated indecisiveness on the part of the authorities. Regional courts in Mordovia, where Bakhmina was serving her 6 1/2-year term for embezzlement, twice refused to parole her.

In late October, just a month before giving birth to a daughter, Bakhmina requested a pardon from the Kremlin, a move that sparked widely-publicised campaigns involving public figures petitioning Medvedev to release her. But it was later reported that Bakhmina had withdrawn her request just five days after filing it.

Bakhmina’s lawyer Roman Golovkin said that he did not know Bakhmina’s motives for withdrawing the petition because her defence was barred from seeing her at that time. But others believe the hasty withdrawal was evidence that Bakhmina had come under pressure from investigators.

“The fact that, under these conditions, she was forced to withdraw her request for a pardon – this is a significant moment in this whole story,” said Lev Ponomaryov, a human rights activist who has been watching the highly-politicised Yukos affair. “She was pressured.

So yes, by these standards the treatment of Bout is cruel, unusual, and inhumane.

And by these standards I mean the typical Russian, whatabout, chutzpah double  standard.

Note too that the alleged pressure placed on Bout was absolutely immaterial to his trial.  He was not broken and compelled to testify against himself: indeed, any attempt to do so would have been pointless, facially illegal, and a perfect way to get Bout on a plane back to Russia a free man.  Which is exactly why the DOJ would never do it.  All of the statements made about Bout in court were SOP in this kind of trial.  And he had attorneys that were capable of rebutting these points, and cross-examining any witnesses that made them.  (Although apparently Bout erred terribly in his choice of counsel.  But that’s his mistake.) Any inflammatory statements made by witnesses (rather than attorneys in opening and closing arguments) were subject to being struck from the record, and jeopardizing the prosecution-another reason for the DOJ to avoid this.

So the appropriate response to this Russian tantrum, and any efforts to return Bout to Russia should be: (a) “F*** you.”  (b) Passing the Magnitsky act.   And then watch them really go non-linear.

April 5, 2012

A Track From the SWP Greatest Hits Compilation

Posner & Weyl are continuing to flog their idea of an FDA for financial products.

I wrote about this really, really bad idea in February.  Given the swooning over the Posner-Weyl proposal, that post needs to be re-released.  So here it is.

I don’t need to change a word.  The FDA idea is a very bad one and the metaphor is completely inapposite.  Posner and Weyl are repeating their argument, and so my rebuttal needs no change.

It is good to see that not everyone is swooning.  This blog at The Economist rips into the proposal.  Great!

But gee, the points in the Economist post seem familiar.  Very familiar.  Every damn one.  To the points I made two months ago.

Purely coincidental, I’m sure.

When the Levee Breaks, Redux

Recognition is dawning that clearing mandates-the supposed silver bullet for making the derivatives market safe-are not the panacea that their advocates claimed.  Recently, major regulators in the US and the UK have warned about the dangers of concentrating so much risk in CCPs.  The recognition is spreading to the press too, as illustrated by this article in The Economist:

The source of all this angst is the clearing-house, a mundane bit of financial-market plumbing that sits between buyers and sellers in transactions. And the reason why people are fretting is that G20 policymakers have seized upon clearing as the solution to some big problems in the over-the-counter derivatives market.

. . . .

That feeds worries about the other effect of lots more clearing: a new concentration of risk. Moving derivatives trades to clearing-houses mitigates the effect of a default of a clearing member (Lehman Brothers’ cleared trades were handled smoothly in 2008, for example). But it makes the impact of a clearing-house itself going down much worse. They may lack the heft of big banks, but few financial institutions are more interconnected. Failures are rare but they do happen: Hong Kong’s futures clearing-house ran out of resources in 1987, for example, and it took a government bail-out and the closure of the main stockmarket for things to get back to normal.

This should not be a surprise-after all, it’s not like what happened in Hong Kong-or in Chicago-in 1987 was a big secret.  And it’s not as if nobody, ahem, has been raising this point for going on four years now.

And that italicized part is just too rich.  Didn’t Timmy! and GiGi constantly-and I mean constantly-tell us that clearing eliminated interconnections in the financial system? Yes they did! I guess that explanation is now seen to be the BS it always was.  I’ve been calling BS on that for about three years.  I’m waiting for the dynamic duo to admit they were either ignorant, or liars.  There is no third alternative.

The aforementioned regulators are demanding that CCPs be made immune from failure.  The Economist agrees:

The more systemic they become, the more tightly clearing-houses should be regulated. That means more clarity over their collateral and margining policies. It means agreeing on plans for recapitalising a failing entity without tapping the taxpayer. And it means getting clearing-houses to hold more equity: LCH.Clearnet had just €333m ($463m) of capital in 2011, compared with collateral and cash under management that averaged €73 billion. Clearing can achieve many things. Solving the too-big-to-fail problem is not one of them.

Sigh. On the one hand, it is good to see growing awareness of the systemic vulnerabilities that CCPs create.  On the other, it is distressing that regulators and commentators seem to have target fixation and can focus on only one thing at a time.  Put differently, they fail to consider how the financial system will adjust to attempts to make one part of the system safer.

I’ve also written about this ad nauseum.  The point is that raising margins, or increasing the size of default funds, or changing margin calculations, or tightening up restrictions on eligible collateral, or other measures to improve the safety of CCPs will induce reactions and adjustments elsewhere in the financial system, and these adjustments have systemic implications.

For instance, requiring more collateral is likely to lead to the growth of systemically-fragile collateral transformation services and other shadow banking mechanisms to secure collateral to post for CCP margins.  Expanding CCP member commitments to default funds increases their exposure to wrong way risks, and is an important source of interconnection in the financial markets.

I return to the 1987 Chicago experience.  Yes, the big exchange CCPs were under stress, but a major source of stress in the financial system as a whole was due to the extraordinary need for liquidity to meet margin calls-the very mechanism that is put in place to protect CCPs against default.  Sometimes “safety” equipment can be downright dangerous.

I return to a metaphor I’ve used before: that of flood controls.  Building up levees to protect one location can increase the risk of a catastrophic flood elsewhere in a river system.  It is good that more regulators and market observers recognize that CCPs are a source of systemic risk, but the levee-building reflex is worrisome in the extreme.  It suggests an inability to think about the financial system as a whole, a system that reacts to changes imposed on one part of it.  These responses are not necessarily salutary, and can be downright frightening.

The responses need to be anticipated, to the extent possible.  But it is often difficult to do that with accuracy.  Which means that it is necessary to proceed cautiously when making the levee around CCPs higher and higher.  There will be responses to this process, and it is likely best to proceed cautiously and incrementally, seeing what the responses are to the gradual changes, and then adjusting accordingly.  Wholesale changes made in a hurry focused monomaniacally on one part of the system are a recipe for an major disaster elsewhere in the system.

I say again: to understand how policy changes affect systemic risk you need to think of the financial system as an organic whole, a system that responds often unpredictably to changes imposed on one part of it.  Although it is encouraging to see that the magical thinking about clearinghouses is being replaced by sober concern, it is far less encouraging that the concern is leading to policies focused on individual institutions that do not pay adequate attention to how the system will respond.

In other words: Don’t build financial levees without giving very deep study how other financial currents will react to the levees during flood times.

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