Streetwise Professor

Russia is outraged-outraged!-that a US Senate committee had the temerity to pass the Magnitsky Act:

Moscow expressed outrage on Wednesday over a U.S. Senate panel’s approval of a bill that would penalize Russian officials for human rights abuses, and warned Washington that adoption of the sanctions would force Russia to respond in kind.

The Senate Foreign Relations Committee passed the “Sergei Magnitsky Rule of Law Accountability Act,” named after a Russian anti-corruption lawyer whose death in 2009 while in pre-trial detention drew widespread condemnation.

Despite broad support in Congress, the bill’s future remains uncertain, partly because the Obama administration is unenthusiastic about a measure that Russia says would be an unwarranted intrusion into its internal affairs.

“The effect on our relations will be extremely negative,” Deputy Foreign Minister Sergei Ryabkov was quoted by state news agency Itar-Tass as saying.

“We are not only deeply sorry but outraged that – despite common sense and all signals Moscow has sent and keeps sending about the counterproductive nature of such steps – work on the ‘Magnitsky law’ continues.”

This issue was supposedly at the top of Putin’s agenda for his meeting with Obama in Cabos, and in his pre-election foreign policy manifesto he listed it as one of his major priorities.  This is obviously a very, very big deal with Russia generally, and Putin in particular.

Which speaks volumes.  The real outrage here is Magnitsky’s death, and the official response thereto.  Said response runs the gamut from neglect to indifference to cover-up, despite burgeoning evidence that high level FSB officials were directly involved in a massive tax fraud that Magnitsky uncovered, and that he was killed because of his insistence on pursuing those who committed this crime.  For all of Putin’s strutting about the need to serve the state, the state above all, here is a flagrant example of the alleged “servants” of the state using their power to defraud it, and to kill anyone with the audacity to attempt to stop them.

But rather than come down on the perpetrators, the Russian state is doing nothing.  Indeed, its inaction is best explained as a way of protecting those perpetrators.  Draw your own conclusions from that.

Focusing on those who are enabling this gross miscarriage of justice, as the Magnitsky Act does, is the right way to go about bringing attention to the most-what is the word?-yes, outrageous example of the official criminality that is embedded deep in the tissues of Russia and the Russian government.

If Putin were truly serious about dramatically improving Russia’s reputation as a place to do business, there would be no better way than to make an example of those officials who used their power to defraud a foreign investor and the Russian government, killed the  man who attempt to fight this crime, and also to punish those in power who are to this day protecting the perpetrators-and continuing to torture Magnitsky’s family with Kafkaesque legal proceedings.

But Putin does exactly the opposite.  He rages at a US initiative that does what Putin should be doing if he were actually serious about fighting corruption and official crime in Russia.  That reaction says very clearly that the Magnitsky Act is exactly the right thing to do.

Putin’s hatred of the Magnitsky Act says all you really need to know about the credibility of his fine words about improving the business and legal environment in Russia.  Meaning they are not credible in the least.

The progress of the Magnitsky Act is not the only thing that is stoking Russian paranoia and rage.  Yesterday the US successfully destroyed a separating, medium range ballistic missile with a Standard 3 Block 1B missile.  This was the second consecutive successful test of the Raytheon system against a realistic target.

Not that this system poses a real threat to Russia’s strategic forces, even from bases in Romania.  But regardless, the Russians react with unreasoning hostility to America missile defenses, and every step towards their successful introduction induces paranoid fury in Russia.  This test is just such a step.

So how’s the reset going, Bam?

Just asking.

Barclays’ has copped to an attempted manipulation of LIBOR.  It has agreed to pay about $450 million to the UK’s FSA, the CFTC, and the USDOJ.  The CFTC filing states that Barclays had two motives for its actions.  First, when Barclays’ reports to LIBOR were high relative to other banks’ (which Barclays people referred to as having their head above the parapet) and thereby raising questions about the bank’s financial condition, it allegedly reduced reported rates in order to allay such fears.  Second, the bank’s traders allegedly influenced rate submissions, and conspired with traders at other banks to change their submissions, in order to advantage derivatives positions.

As I noted in 2008, when the story first broke, the second possibility created substantial legal liability for banks like Barclays that submitted the false reports.  Under the anti-manipulation law in effect in the US at the time, it was necessary to have specific intent to create an artificial price of something like the LIBOR-based Eurodollar futures contract.  The emails divulged today suggest such a specific intent.

Perhaps crucially, the Order only finds that Barclay’s attempted to manipulate, not that it had in fact succeeded.  This will be an important issue going forward.  To prove manipulation, and crucially, to collect damages, it will be necessary to show that Barclay and other submitters of LIBOR quotes indeed distorted the index, that is, they caused an artificial price in a futures contract based on LIBOR or some other interest rate like Euribor.

Proving this will be a very data intensive exercise.  Moreover, there are two distinct issues-the impact of manipulation on the final settlement price of the futures contract (which is based on LIBOR), and the impact of manipulation on futures prices prior to expiration.  The second issue will prove more challenging than the first because the connection is more direct in the final settlement price.  Even that will pose some issues, however, because of the necessity of identifying the “but for”, i.e., what interest rate should banks like Barclays have reported.   This will necessarily require looking at actual interbank transactions, raising the question of how many such transactions there will be during periods of time of money market stress starting in 2007.

These issues are not impossible.  Similar, and arguably even more challenging issues, were confronted in a class action lawsuit against those who misreported  natural gas prices to publishers like Platts.  (Full disclosure: I consulted with plaintiffs in that matter, and wrote a declaration in support of certain aspects of the plan of allocation of settlement monies.)

The whole fiasco does point out, yet again, the overriding importance of basing cash-settled indices on actual transactions, wherever possible.

This is becoming an important issue in oil markets as well, as “Price Reporting Agencies” like Platts and Argus are under great scrutiny.  But oftentimes the problem is not amenable to easy solution.  You can’t have a reliable transaction-based index that is not susceptible to manipulation if (a) there are few transactions, and/or (b) market participants have the option to report transactions.  Pharonic pronouncements from regulators that PRAs make bricks without straw are futile.

None of these issues are new.  I (and my colleagues at UH) dealt with them in 2003 in our efforts to create an “energy data hub” in the aftermath of the price reporting scandal post-Enron.  Voluntary reporting is extremely problematic.  Compulsory reporting (along the lines of one of the few salutary features of Frankendodd) is necessary (but not sufficient for some markets) to produce reliable price indices.  Arranging this on an international market like oil seems virtually impossible to implement, let alone enforce.

This is the longer explanation behind my rather cryptic quote from this WSJ article from last week.

Going back to LIEBOR, the Barclays $450mm coughed up is the first fine, but it won’t be the last one.   In the energy markets, the CFTC collected about $250 million: fines will be many multiples of that in LIBOR and Euribor and TIBOR and whatever.  And believe it or not, the really big money will likely be in civil litigation, and the battles will be much more intense there as well, IMO.

Notorious Russophobe Alexei Kudrin is sounding the alarm on Russia’s economy.  (No doubt “a” is fulminating about him now.)

Mr. Kudrin, who was ousted from the government last year after protesting rising military spending, said he listened to presentations and speeches at the forum, where Russian officials typically woo foreign investors, and heard expressions of “worry” and discussions of “worst-case scenarios.”

Still, he said, “the situation is a lot worse than it was presented.” With Europe apparently slithering into recession this summer, Russia is now more likely than not to suffer a crisis of its own this year, he said. While he acknowledged that other economists were less worried about Russia than he is, he said, “I saw even less worry in the Russian government.”

Banks and investors are already pulling money out of Russia, he said in a question-and-answer session with journalists at the close of the three-day St. Petersburg International Economic Forum, while indications from Europe worsen by the day.

Mr. Putin, in contrast, spoke of Europe’s turmoil largely to highlight that Russia is better off.

The best part is at the end:

Mr. Kudrin did allow that his former boss’s speech struck a positive note in highlighting new business-friendly laws and promising a new round of privatization of state enterprises to shore up the budget. In his address, Mr. Putin said these privatizations would be conducted more fairly than those in the 1990s.

Mr. Kudrin said the actions would matter more than talk. “Putin’s speech was good, if it is realized,” he said.

Absolutely.  Putin talks a good game, especially when it comes to reducing Russia’s high beta economy’s dependence on energy, privatization, fighting corruption, and creating a rule of law.  Follow through, not so much.

Very interesting to see Kudrin call Putin out so clearly.  For most people, not a very healthy habit.

Luigi Zingales is a brilliant guy.  I find his advocacy in the FT of a return to Glass-Steagall less than brilliant.

Zingales identifies four reasons for supporting G-S.  Three are wildly implausible, the fourth hardly persuasive enough to justify a return to 30s-era regulatory structures.

The first reason is that it makes sense to restrict commercial banks’ participation in “very risky activities.”  There are at least two problems with this, when evaluated in the context of the financial crisis.

First, the investments and activities that put commercial banks at risk during each of the last two crises-mortgages and MBS in Financial Crisis I and sovereign debt in Financial Crisis II (the one currently ongoing, particularly in Europe)-were blessed by regulators as low risk activities.  They almost surely would have passed muster under Glass-Steagall.  There were other major banking crises under Glass-Steagall.  It is painfully clear that G-S is not sufficient to prevent banks from taking on risk in sufficient amounts to put individual banks and the banking system at risk.

Second, and I realize I am an apostate on this, although moral hazard is a concern associated with deposit insurance, funding and liquidity risk is as dangerous and arguably more dangerous.  Runs are more likely, the less sticky the funding.  Concentrating riskier activities in institutions like stand-alone investment banks that rely on wholesale markets rather than stickier insured deposits for funding increases the risk of destabilizing runs and makes the system more fragile.   It therefore seems extremely dangerous to allow the institutions with the riskiest funding hold the riskiest assets, and preclude the institutions with the safest funding not hold such risky assets.  Look for other means-such as risk-based deposit insurance premiums or capital requirements-to control the moral hazard problem.

Zingales’s second reason is that Glass-Steagall was simple.  Well, yes, the original bill was (as compared to Frank-n-Dodd or the Volcker Rule portion thereof) but there did grow up a thicket of regulations and interpretations and decisions around it.  This is inherent in any law that attempts to draw lines between activities: such laws generate efforts to engineer products that cross the lines in substance but seem to comply to the letter.  This generates a process of litigation, interpretation, regulatory challenge, etc.

And does anybody believe that if Glass-Steagall were to be brought back, it would be the same today as in the 1930s?  Glass-Steagall was simple in part because it was the product of simpler times  Financial markets are much more complicated today, and splitting the baby would be far harder.  Any attempt to do so would almost certainly result in a Son of Glass-Steagall that is far more complex, and far longer, than the nearly 80 year old original.

I have to say that Zingales’s third reason is cracked:

The third reason why I came to support Glass-Steagall was because I realised it was not simply a coincidence that we witnessed a prospering of securities markets and the blossoming of new ones (options and futures markets) while Glass-Steagall was in place, but since its repeal have seen a demise of public equity markets and an explosion of opaque over-the-counter ones.

I realize this is a newspaper oped, with tight space limits, but Luigi provides no serious evidence to support his realization that coincidence equals causation.  With respect to the demise of public equity markets, trading volumes have skyrocketed, and although there has been an increase in “dark markets”, such things existed in the glory days of G-S, just under a different name (“third markets”, for instance), and there are good economic reasons why this is so.  Moreover, some problems associated with equity markets are attributable to other regulations, notably Sarbanes-Oxley.

With respect to OTC instruments, Zingales’s characterization of cause and effect is muddled and ahistorical.  OTC derivatives began to grow rapidly in the 1980s, while G-S was still in force, but their growth was constrained by regulation.  However, it was legal uncertainty under the CEA that was the main problem, not Glass-Steagall.  This was addressed by the CFMA of 2000, rather than the Gramm-Leach-Bliley  (GLB-wouldn’t it have been funny if there had been a fourth co-sponsor with a name starting with “T”?) of 1999, which repealed G-S.  Commercial banks and investment banks both did OTC derivatives before GLB, and would likely continue to do them under Son of Glass-Steagall.  What’s more, they are constrained-over-constrained, IMO-by Frank-n-Dodd.

Zingales continues in a rather bizarre vein:

To function properly markets need a large number of independent traders. The separation between commercial and investment banking deprived investment banks of access to cheap funds (in the form of deposits), forcing them to limit their size and the size of their bets. These limitations increased the number of market participants, making markets more liquid. With the repeal of Glass-Steagall, investment banks exploded in size and so did their market power. As a result, the new financial instruments (such as credit default swaps) developed in an opaque over-the-counter market populated by a few powerful dealers, rather than in a well regulated and transparent public market.

But the IBs that got into trouble (Bear, Lehman, Merrill, Morgan Stanley) never had access to deposits post-GLB.  Not before, not after.  So the cause-effect link between the repeal of G-S and the explosion in size of IBs that Zingales posits (resulting from the the access to deposit funding for IBs inside CBs) never happened.

No one knows the exact cause (global imbalances, Fed looseness), but the financial system was flooded with funding liquidity in the 2000s.  That is what permitted the IBs to lever up and risk up, not a sudden access to insured deposits.

And by objective measures, markets were more liquid-substantially so-post-G-S.  Spreads were smaller.  Volumes were bigger.  The number of participants was larger: hedge funds proliferated, for instance.  Really, I don’t think anybody noticed the markets getting less liquid post-G-S.  If anything, the concern was that there was too much liquidity, too much trading.

And insofar as CDS are concerned, it is hard to believe that G-S would have (a) prevented the creation of these instruments, or (b) resulted in them being traded by something other than big dealer institutions.  Again, note that stand-alone IBs were major dealers in these instruments, and that they were first developed by a commercial bank (JP Morgan) prior to 1999.  In many respects, the disintermediation of banks by capital markets, a process that started and became quite pronounced under the G-S separation led banks into other, non-lending forms of intermediation.

I would also emphasize that there are intense economies of scale in responding to expansive regulation like Dodd-Frank, meaning that regulation can contribute strongly to consolidation in finance, with its consequent effects on competition, the number of market participants, and systemic risks.

Zingales’s history, in other words, isn’t history at all.

There’s another point here.  If G-S was that important, why didn’t its repeal lead to dramatic changes in market structure, with the demise of stand-alone IBs and the dominance of integrated, full-service universal banks with access to insured deposit funding?  Zingales’s narrative is inherently contradictory: he focuses on the metastasization of IBs post-GLB, but if you believe his story, the repeal should have caused IBs to shrink or die or get absorbed by commercial banks or turn themselves into universal banks funded substantially by deposits.  None of that happened.   Indeed, there were numerous studies in the mid-2000s, notably by the Fed, the Senate Banking Committee, and the St. Louis Fed that all concluded that GLB’s G-S repeal had very limited effects on the structure of US financial markets: most of the major changes in market structure had occurred in the 1975-1998 period.

It is also worth mentioning that the universal bank model that Glass-Steagall eliminated developed in a world without deposit insurance.  Indeed, Glass-Steagall created deposit insurance, which means that at least then implicit subsidies in deposit insurance couldn’t have caused the combination of investment and commercial banking.  Why should we believe that deposit insurance would cause such an integration today?  Especially in light of the fact that the elimination of G-S boundaries did not result in the absorption of investment banking into commercial banks.  Given the role that deposit insurance plays in Zingales’s narrative, this is a major problem for it.

Zingales also claims that the financial system was more resilient under G-S, and points to the contrast between the ’87 Crash (which was not followed by a financial crisis) and the ’08 debacle (which was) as an illustration.   I really don’t see any connection between G-S and how the broader financial markets fared post-Black Monday.  Zingales notes that commercial banks didn’t have problems post-Crash.  Well, investment banks didn’t either, for the most part.  The main difference is that in ’87, most equities were held by real money investors, not financial institutions: ditto the Dot Com crash.

In contrast, in ’07-08, the mortgages that cratered were held primarily by highly leveraged financial institutions-commercial and investment banks; many of these were destined to go to real money investors, but banks and investment banks were caught with them before they could securitize them and market them to real money.  Today, in Europe, sovereign debt is held mainly by leveraged financial institutions.  Banks today don’t hold huge amounts of equities, and an ’87-type event, where the crash originated in the equity market would probably have a similar result today.  The equity crash in ’08 was a response to the crash that was occurring in mortgages.  The events are very different.

And it is quite plausible that these two events were the direct result of regulations, notably the very favorable capital treatment of mortgages and MBS (especially those transformed into AAA securities despite the quality of the underlying collateral) and sovereign debt.

Luigi’s last point is that a divided financial industry is less effective in exerting political influence because commercial banks, investment banks, and insurers have divergent interests.  But again, commercial banks, investment banks, and insurers existed post-GLB.  There was not a wholesale shift to universal banking in the US.  Certainly this could have happened, post-GLB, but it didn’t.  The greatest impetus to consolidation was the crisis itself, when IBs either blew up or were absorbed into commecial banks.  Thus, again, the structural change that could have happened under G-S didn’t happen to that great an extent, meaning that the political economy didn’t change that much either.

Moreover, to the extent that the activities of financial institutions are siloed, as under G-S, they are not competing with one another in the marketplace.  This also limits their need to compete with one another in obtaining favorable legislation or regulation.  Each can focus its efforts on obtaining favorable laws and regulations pertaining to its silo.  Commercial banks focus on favorable rules for commercial banking activities; insurers focus on favorable rules for insurance; investment banks on favorable rules for broker-dealer and securities underwriting.  There is no Galbraithian “countervailing power” mechanism operating that pits investment banks against commercial banks when they are functionally separated a la G-S, because the very separation of these activities means that the firms in one segment are not competing for rents against firms in the other segment.

In brief, it appears that Luigi is aiming his argument at a world that could have arisen after the repeal of Glass-Steagall.  A world in which there was a decisive move to universal banking in the US, resulting in the disappearance of stand-alone investment banks.  Some certainly predicted that outcome in 1999, but it didn’t occur.  There were some changes in market structure, but only modest ones.  It is passing strange that Zingales attributes the growth in investment banks to a law that, under the most straightforward interpretation of his argument, should have led to their demise.  Most importantly, the mechanism that Zingales posits-the availability of cheap insured deposits to fund risk taking by investment banks-didn’t work that way in practice.  Risk taking was funded through the wholesale markets which were awash in money.  That was the vulnerability of the system.

Zingales’s history about the evolution of equity markets, OTC derivatives markets generally, and CDS markets in particular, is also suspect.

So when reading this article, a Mark Twain quote came to mind: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

The Bulava-esque trajectory of the “bailout” of the Spanish banks would be hilarious if it weren’t so tragic.  But it was predictably tragic.

The Euros pulled one of their characteristic delay and pray moves.  (Though, being thoroughly pomo, I doubt praying had much to do with it.)  In essence, they funded-maybe, because the details of the funding and the identify of the funder(s) are Players to Be Named Later-the movement of Spanish bank liabilities onto the balance sheet of the Spanish government.  This boosted the debt-to-GDP ratio of Spain to the severe pain range: uhm, bringing the SPVs on balance sheet doesn’t make the entity stronger; quite the contrary.  A level that is likely unsustainable given the dire economic straits the country finds itself in, with GDP contracting and unemployment at Great Depression heights.  Moreover, the move has affected the game between the EU and the other debtor nations, who see that Spain extracted a deal that compares favorably, in terms of “conditions” to theirs.  Thus, Ireland may want a renegotiation of its deal, and the Greeks may conclude that telling the Troika to eff off might be the best course.  Moreover, it gave those holding bonds not just in Spain but in other precarious countries-notably Italy-serious concerns that they might be subordinated.

Furthermore, by absorbing a big chunk of EFSF/ESM resources, the Spanish bailout raised serious questions about their ability to assist other countries, with Italy again at the top of the list.  This further increases the angst of bondholders. (A warning to CCPs that have resources to absorb the default of N members, but no means to recapitalize.  When the N-2d or N-1st default occurs, there is likely to be a run on the CCP, making its ultimate demise almost inevitable.)

Hence, after an initial burst of foolish EUphoria, Spanish bond yields spiked, as did those on Italian debt.

Well played!  Well played! Bravo!

No, Europe’s real choices, as opposed to its finger-in-the-dike stopgaps, are exactly the same as they were last year, and the year before that.  Amputation or gangrene.  Socialization of debt or dissolution of the Eurozone as it currently exists.

But Europe refuses to grasp those nettles.  Truth be told, moreover, it seems impossible that they can negotiate the arrangement necessary to make socialization palatable to those who are likely to be net contributors-notably, the Germans. Germany obviously does not want to be Europe’s ATM, and reasonably demands mechanisms that limit its exposure.  Furthermore, it is highly unlikely that the electorates of other nations are willing to surrender sovereignty, or undertake the structural reforms* necessary to make them competitive and put them on a reasonable growth trajectory.

Indeed, look at the delusional policies that France is pursuing.  Lowering the retirement age.  Looking to make it virtually impossible to layoff or fire anybody-which will mean that it it will be financially insane to hire anybody in the first place.  In the name of growth!  These policies are popular-not only did Hollande win, but the Socialists won an outright majority in the just-finished parliamentary elections.

Good luck with that!  Be careful what you ask for!

Everyone is importuning Merkel and Germany to save them.  Particularly annoying are the gratuitous proddings of Timmy! and Obama.  Timmy!’s post-bailout-that-wasn’t-a-bailout remarks were particularly grating.  Sayeth Timmy!: the bailout represents”concrete steps on the path to financial union, which is vital to the resilience of the euro area.”

Read that again.  Geithner, whom the (relatively) solvent Euros loath, is telling Europe that financial union is the way to go.  What chutzpah.

Germany realizes that such a financial marriage in haste will permit it plenty of time to repent its error at its leisure.  But there isn’t time to negotiate a solid pre-nup before the whole thing goes up the spout.  And I doubt there is a pre-nup that all parties are willing to sign, or would adhere to if they did.

The core of this game is empty, it seems to me. Which means that it is a matter of time before the whole thing collapses.  And that time is drawing nigh.

* Structural reform-supply-side measures, if you will-are essential to supporting long run growth.  But commentators insist on either misunderstanding this, or grossly mischaracterizing it.

For instance, consider the recent Roubini-Ferguson oped on Europe:

Structural reforms that boost productivity growth should be accelerated. And economic growth needs to be jump-started. The policies to achieve this include further monetary easing by the ECB, a weaker euro, some fiscal stimulus in the core, more bottleneck-reducing and supply-stimulating infrastructure spending in the periphery (preferably with some kind of “golden rule” for public investment), and wage increases above productivity in the core to boost income and consumption.

Uhm, none of those are structural measures.  They are all variants on Keynesian nostrums.

But that is nothing compared to the truly aggravating Martin Wolf:

Moreover, “structural reform” is a woolly term. If by this Mr Schuknecht means that falling prices, induced by ultra-high unemployment, debt deflation and sovereign and banking insolvencies, will ultimately restore competitiveness, he is correct, provided the country is able to stick with such policies, for a very long period indeed (probably a decade, or even far longer). This is what is required if a country with a large private sector debt overhang and a sizable structural current account deficit is to eliminate its fiscal deficit, regain competitiveness and restore growth, particularly in a currency union whose core country has a structural current account surplus and low inflation. The question is whether democratic politics (or the eurozone) will survive the experience. I doubt it.

Way to bash a straw man there, Marty! You know that’s not what German FinMin official Ludger Schuknecht meant by the term, and for you to insinuate otherwise is truly low.  Schuknecht is referring to the kinds of labor market and other reforms that transformed Germany from the sick man of Europe to the prosperous nation whose pocket everyone wants to tap.  If you want to discuss structural measures, at least do it fairly.  John Stuart Mill you ain’t. (Mill was/is legendary for his even-handed characterizations of his opponents’ views.)

With these clueless or deeply misleading analyses from esteemed purveyors of opinion, structural reforms don’t stand a chance.  Especially in delusional countries like France, which are hell-bent on implementing structural deforms.

After all that, isn’t a little musical entertainment in order? I think it is!

Sorry about the prolonged interruption.  Work demands-notably testimony in a couple of cases-intervened.  One of the cases, believe it or not, stems from the California electricity crisis of the summer of 2000.  The wheels of justice do grind slowly.  We’ll see how fine.  On Tuesday, I testified at a FERC hearing/trial relating to refunds demanded by electricity buyers in California.

The interruptions may recur going forward.  I appreciate your patience, and the inquiries of those who wondered about my absence.

A few quick comments on things that caught my eye in the past couple of weeks.

• My last post was on the administration’s sole commitment to transparency, i.e., it’s chattiness on sensitive intelligence matters, in an information operation designed to make Obama look like a synthesis of Rambo and Thomas Aquinas.  In the weeks following, this issue has caught fire to some degree, at least in DC (though popular opinion has been somewhat muted).  There have been numerous calls for official investigations. These are not purely partisan. Diane Feinstein and Carl Levin have also expressed dismay at the leaks.  And in the latest episode of the inversion of transparency, Obama has asserted executive privilege in the Fast & Furious matter.  His assertion is either facially baseless and contrary to established precedent-or implicates him in a coverup.
• Hillary botched the Russian helo to Syria story. By suggesting that Russia was sending new equipment to Syria, Hillary gave the Russians the opportunity to make outraged denials. On the subject generally, here’s a question that I think is important, but which hasn’t been asked.  Where is Syria getting the spare parts and support services for its Russian/Soviet weapons?  Especially at the increased operational tempo, Syria would need a steady supply of spares to keep its forces in the field.  And likely also some repair and support services.  Arab armies are notoriously-notoriously-bad at this.  (It’s something that has driven American trainers assigned to Arab armies, such as Egypt’s, absolutely crazy over the years.)  I wish someone would ask, investigate, etc.
• Obama met with Putin in Cabo.  Obama came out of the meeting looking like he would have preferred 32 root canals sans anesthesia.  He got nothing from Putin.  Well nothing substantive, that is.  But I am sure that Putin gave him plenty of disdain.  Obama later said that China and Russia were not on board regarding Syria.  No sh*t.  What was his first clue?
• Putin looks bad in the photos from Cabo BTW.  His face looks puffy and waxy.  I’m guessing steroids.
• It has been reported that Putin will attend the Olympics in London after all.  Not the opening ceremonies, as is traditional, but the judo competition.  You know, to see the next generation of Russian billionaires.
• Putin jetted from Cabo to St. Petersburg, for the Annual Economic Forum.  He was in fine form, and in some ways, a flashback to 2008.  That is not a compliment.  In 2008, Putin famously asserted that Russia was an island of stability in the world economic storm.  That was right before the country suffered the biggest decline of any major economy.  Putin also lashed out at the west generally and the US in particular for causing the world crisis.  He repeated both themes yesterday, in a somewhat schizophrenic performance.  First, he stated that Russia is a strong country capable of withstanding another global economic crisis. This despite the fact that Russia is even more dependent on energy/oil now than in 2008, and that the link between economic crisis and oil prices is as strong today as it was four years ago. In other words, Russia is more dependent on oil than ever but Putin believes it is perfectly positioned to withstand another crisis.  Or something.  And speaking of oil, Brent is trading with an $89 handle, down 4 percent on the day and over 20 percent over the last several weeks, and Urals with an $88 handle (a $1.60 discount to Brent). Recall that Russia’s budget balances at Urals=$117.  This may explain the vituperativeness of Putin’s attack on the US and the west.  The more nervous he gets about economic conditions, the more he directs his salvos westward.  This reflects, IMO, his rage at the fact that Russia is hostage to the west, via the commodities price channel.  It is an inevitable consequence of the marriage of comparative advantage and the natural statism of Putinism.  And it drives him nuts.
• Putin also channeled his inner Barney Frank and said that the west needed more effective regulation of derivatives markets. (Bad mental image, I know.)  The man is an expert on everything.

That’s all for now, folks.  Will post as circumstances permit.

Administrations are always schizo about leaks, fulminating against those that make officials look bad, but strategically leaking information that officials believe casts them in a good light.  Then there is the Obama administration, which takes this to a politicized extreme.

Consider stories from just the last month:

1. The administration gives the makers of a film about the mission that killed Osama bin Laden unprecedented access to intelligence and Special Operations Command personnel.
2. Details about the mission that uncovered a new “underwear bomber” plot are released.  It was revealed that a UK passport holding Saudi-born Yemeni had infiltrated Al Qaeda in the Arab Peninsula, and had been accepted as a suicide bomber.  This revelation has British and Saudi intelligence hopping mad.
3. Most recently, on Friday, the NYT ran an excerpt from an upcoming David Sanger book revealing that (a) the US was behind the Stuxnet worm that disabled Iranian centrifuges, and (b) the Obama administration had increased the intensity of the program.  The administration made no effort to prevent publication of this material, and indeed, it is plainly obvious that it eagerly cooperated with it.

Note that all of these leaks are intended to make the administration look stalwart on national security.  Note further that they all are extraordinarily damaging to national security, especially the last two.  These leaks are incredibly short-sighted: they  compromise the United States’ ability to undertake similar operations in the future and make foreign intelligence services less likely to cooperate in highly sensitive and dangerous operations.  The provide details that will make future human- and cyber-intelligence operations far harder to conduct.

And for what?  Need you ask why an administration would take such a short sighted view? Right now Obama’s time horizon is five months and counting.  Economic news is a litany of dreary stories. Obamacare will likely be struck down by the Supreme Court.  Romney is proving to be a more formidable opponent than expected.  National security has always been an Achilles Heel for Democratic candidates.  Need a map?

And if you are still skeptical that leaking of the most sensitive defense and intelligence operations is political, consider that David Axelrod, the Creature From the Black Lagoon (i.e., Chicago politics) and Red Diaper Baby, regularly attended “kill list” meetings at which Obama decided at whom he would hurl his thunderbolts.

I know that defense, security, and intelligence have always been politicized, and that leaks have been used as a political weapon. But it should be no surprise that this hyper-partisan, hyper-politicized administration has taken damaging leaking to such an egregious extreme.

The latest official line on Syria is incredibly mendacious, even by Russian standards.  First, Putin claims that Russia is not taking sides:

“We have a good, long-standing relationship with Syria, but we do not support any side from which the threat of a civil war may emerge,” Putin told a joint news conference with Merkel.

Second, and worse, Putin made this remarkable statement:

“As for supplying weapons, Russia does not provide weapons that could be used in a civil conflict,” he added.

Just what kind of weapons cannot be used in a civil conflict?

Syria is using armor and artillery in its current onslaught, so those quite evidently can be used in a civil war.  Moreover, reports about the most recent shipment indicate that a Russian ship supplied small arms and ammunition to Syria:

The ship, the Professor Katsman, apparently turned off its transponder on May 26 in the vicinity of Tartus, Sadia Hameed of Human Rights First told AFP. The vessel had been tracked from Piraeus in Greece.

Hameed said she could not be sure of the cargo because there was no official manifest. “The sense we get is that (the ship’s contents) are small arms and ammunition.”

Nice touches.  No official manifest.  Turning off the transponder. Yup, VVP-obviously nothing to hide.

Previous shipments also apparently included small arms and ammunition:

The biggest importer of arms to Syria, Russia sold Damascus nearly $1 billion worth of arms including missile systems last year, while shipments of hard-to-track Russian small weapons have risen since the uprising against Assad started, government defectors say.

In January, the Russian ship Chariot, loaded with arms and ammunition, turned off its radar and sailed quietly to Syria to avoid attracting the attention of world powers increasingly frustrated by Russia and China’s refusal to back U.N. Security Council resolutions aimed at ending 11 months of violence.

. . . .

ThomsonReuters shipping data shows at least four cargo ships since December that left the Black Sea port of Oktyabrsk – used by Russian arms exporter Rosoboronexport for arms shipments – have headed for or reached the Syrian port of Tartous.

Separately was the Chariot, a Russian ship which docked at the Cypriot port of Limassol during stormy weather in mid-January. It promised to change its destination in accordance with a European Union ban on weapons to Syria but, hours after leaving Limassol, reset its course for Syria.

A Cypriot source said it was carrying a load of ammunition and a European security source said the ship was hauling ammunition and sniper rifles of the kind used increasingly by Syrian government forces against protesters.

Among the weapons provided earlier in the year were sniper rifles, obviously of no use at all in a civil conflict.

But don’t worry! If there are any weapons being shipped, it is because Russia has a contract with Syria to supply them, and we all know that the Russians are nothing if not honor bound to adhere punctiliously to contracts!:

Russia’s UN ambassador Vitaly Churkin has rejected criticism of the arms sales insisting they are legal and have no influence on the Syria conflict.

“The weapons we may have provided to Syria under various contracts, which were concluded a long time ago, are fully in line with international law and do not contribute to the current armed violence in Syria,” Churkin told reporters on Wednesday.

Yes.  I’m sure that the Syrians just put those weapons aside, just to make sure they do not contribute to the current armed violence.

I note that it is quite easy to find numerous articles detailing contracts for small arms and ammunition entered into between Russia and Syria in the 2005-2006  time period: would that count as “a long time ago.”

Of course not all the weapons Russia has supplied to Syria-notably anti-aircraft missile systems and anti-tank weapons systems-have been used by the Assad regime in its attempt to crush the uprising.  But it is abundantly clear that since virtually every weapon in the Syrian arsenal is of Russian origin, and that Russia continues to supply weapons, Putin’s claim is a particularly bald-faced lie.

Given Putin’s clear willingness to stand right next to Angela Merkel, and mouth such outrageous untruths-in full knowledge that anyone who has been paying attention knows that they are untruths-should be more than sufficient to convince even the most naive and deluded that Russia will not back away from protecting Assad (and arming his regime) regardless of how many more Houlas there are.

In a show of his unbounded generosity, Timmy! (AKA Rodney Dangerfield) has agreed with Spain that Germany should lend directly to Spanish banks, thereby avoiding the untidy strings that come with a bailout of the Spanish government, a la Greece.  (Yes, the loans would come from the ESM, but we all know who is on the hook.)

The US and Spain agreed that European banks should be able to “go directly to obtain funds without any state intervention, without any conditionality”, Ms Santamaria said.

Go ahead!, sayeth Timmy! Give them the money.  No conditions!

The Schäuble smack down coming in five, four, three . . .

PS. Timmy had been on one of his extended disappearances of late.  He is the Major Major Major of the Obama administration.