Streetwise Professor

November 19, 2012

Capital Strike Redux?

Filed under: Economics,Financial Crisis II,Politics — The Professor @ 10:01 pm

After the US economy began to recover rather robustly in the mid-1930s, a series of ill-considered government policies, notably a tax on undistributed profits, a big increase in marginal rates on high incomes, the Wagner Act, and a Fed contraction of the money supply led to a substantial contraction in 1937.  The depression within the Depression.

One notable feature of the 1937 episode was the so-called “Capital Strike”, a sharp decline in corporate investment.

The imminency of Obamacare and Frankendodd, and the continued failure to address seriously the country’s fiscal situation, with the associated uncertainty about taxes and spending, may be creating a modern-day version of the capital strike.  The WSJ reports that growth in investment expenditure has slowed to a standstill, and that many large companies are slashing investment plans.  The article places the blame on the “Fiscal Cliff”, but in reality, this is overdetermined, as they say.  There are multiple factors at work, and all in the same bearish direction: the regulatory friction (epitomized by Obamacare, Frankendodd and the EPA) is a major drag on growth, and a major source of investment-killing uncertainty.  Indeed, I would put the least weight on the Fiscal Cliff as it is conventionally portrayed: that conventional portrayal is almost purely comic book Keynesian in nature, focusing on “aggregate demand”.  IMO, the handling of the expiration of various tax reductions and the potential for sequestration is relevant not because of AD-a slippery and largely chimerical concept-but because of what it portends about the future course of government spending, and in particular the appetite to deal with entitlements and transfer payments.

If what the WSJ reports is indeed a harbinger of a modern day capital strike, that would be consistent with my broad forecast in my post-election post.  A protracted period of stagnation/slow growth.  Which will only exacerbate the fiscal situation and increase the risk of a rollover/funding crisis.

As if we really should need another Ghost of Christmas Future to warn us, take a look at Japan right now.  Just saying.

Murder on the Orient Express, Benghazi Talking Points Edition

Filed under: Politics — The Professor @ 7:29 pm

There is intense debate over the Benghazi Talking Points Not Made by Human Hands.  Somewhere between the CIA and Susan Rice’s yap, all references to terrorism, Al Qaeda, etc. were murdered.  By whom? everyone wants to know.

There are numerous suspects.  The White House.  The State Department.  The intelligence community.  All had motive and opportunity.

My hypothesis: just like in Agatha Christie’s Murder on the Orient Express, they all did it.  Everyone involved had a motive to obscure what happened, in order to conceal their culpability for the shocking events in Benghazi.  The bureaucratic powers that be in DC colluded to eliminate references to terrorism and Al Qaeda.

Unfortunately, apparently is no Poirot to unravel this “mystery”.

November 17, 2012

Is Russia the Future? Sadly, the Answer May Be Yes.

Filed under: Politics,Regulation,Russia — The Professor @ 7:07 pm

Russia is relentlessly pushing a plan to revolutionize the governance of the internet.  Working behind the scenes, Russia is scheming to place control of crucial aspects of the internet under the auspices of the UN’s International Telecommunications Union.

The Russian Federation is calling on the United Nations to take over key aspects of Internet governance, including addressing and naming, according to documents leaked on Friday from an upcoming treaty conference.

The Russians made their proposal on November 13 in the lead-up to December’s World Conference on International Communications in Dubai. The conference will consider revisions to the International Telecommunications Regulations (ITRs), a treaty overseen by the UN’s International Telecommunications Union (ITU). The treaty has not been revised since 1988, before the emergence of the commercial Internet.

Russia’s proposals would, if adopted, dramatically affect Internet governance, transferring power from engineering-based organizations such as the Internet Society and ICANN to national governments, all under the authority of the UN.

There are 193 Member States participating in the WCIT. Each gets a single vote on proposed changes to the treaty. The treaty negotiations and its documents are secret, though many have been exposed through the Web site WCITLeaks, run by two researchers at George Mason University.

“The [proposed] additions to the ITRs…are aimed at formulating an approach that views the Internet as a global physical telecommunications infrastructure, and also as a part of the national telecommunications infrastructure of each Member State,” the Russian proposal says.

Russians propose bringing “IP-Based Networks” under UN control

Currently, the ITRs cover only international telecommunications services (PDF). But the Russians propose adding a new section to the treaty to deal explicitly with “IP-based networks.” Bringing the Internet into the treaty in any capacity would represent a major expansion of the scope of the ITU’s authority.

A congerie of the world’s civil liberties lovelies, including Iran and China as well as Russia, is pushing this initiative.  If that doesn’t engender warm and fuzzy feelings, what will?  What could possibly go wrong?

A word to the wise: putting anything under the auspices of the UN is to surrender it to the control of autocrats and kleptocrats, and autocratic kleptocrats.  Where the UN treads, freedom dies.

There is no surprise that Russia, China, Iran and the other assorted modern day fascists want to control the internet.  Where information is free, autocrats are vulnerable.  Control of information is necessary to maintain control of power-and the spoils that go along with it.

Russia recently implemented an internet control regime that gives you a flavor of exactly of the kind of thing Putin et al have in mind:

On the surface, it’s all about protecting Russian kids from internet pedophiles. In reality, the Kremlin’s new “Single Register” of banned websites, which goes into effect today, will wind up blocking all kinds of online political speech. And, thanks to the spread of new internet-monitoring technologies, the Register could well become a tool for spying on millions of Russians.

Signed into law by Vladimir Putin on July 28, the internet-filtering measure contains a single, innocuous-sounding paragraph that allows those compiling the Register to draw on court decisions relating to the banning of websites. The problem is, the courts have ruled to block more than child pornographers’ sites. The judges have also agreed to online bans on political extremists and opponents of the Putin regime.

. . . .

Most importantly, however, the new Roskomnadzor system introduces DPI (deep packet inspection) on a nationwide scale. Although DPI is not mentioned in the law, the Ministry of Communications — along with the biggest internet corporations active in Russia — concluded in August that the only way to implement the law was through deep packet inspection.

In other words: all your packets belong to us.

The invocation of child pornography to justify these efforts is typically cynical.  Russia has long been the largest producer and exporter of child pornography (not to mention virtually every other species of internet crime), and hasn’t done a damn thing about it.  Presumably because those who produce it and export it have paid well for the requisite krysha.  The interests of the state and the criminals are aligned.

Presumably-hopefully-the US will fight these efforts to extend the UN’s malign influence to the internet.  But if the Russian initiative succeeds-or even portions of it are implemented-do not believe for a moment that the USG will not take advantage of the powers it would confer.  Have any doubts about that?  Just look at the Petraeus-Broadwell episode, in which a ditzy socialite can call a self-righteous FBI agent friend who unleashes a efishing expedition and leaks the results to a Congressman when the investigation doesn’t proceed as he thinks it should, thereby unleashing a personal and national security nightmare.

I began to write about Russia precisely because it is a real life libertarian dystopia, and as such should serve as a warning to those who have been heretofore able to maintain some semblance of civil liberties and property rights (a redundancy, actually, because property rights are the foundation to civil rights).  But we in the West, and in the US are specifically, are converging to Russia from above.   There are aspects of the Benghazi debacle that provide further evidence of that convergence.   More on that soon.

November 14, 2012

For This We Need a Congressional Committee?

Filed under: Clearing,Economics,Exchanges,Politics,Regulation — The Professor @ 8:09 pm

Jon Corzine caused the demise of MF Global.

Poor management decisions by MF Global former CEO Jon Corzine triggered the brokerage firm’s collapse, while lax protections for customer funds contributed to the loss of an estimated $1.6 billion of customer money, congressional investigators have determined.

Evidence unearthed by the House Financial Services Subcommittee on Oversight puts the blame squarely on Corzine, the panel’s chairman, Rep. Randy Neugebauer, said in a preview of the report that will be released on Thursday.

“The responsibility for failing to maintain the systems and controls necessary to protect customer funds rests with Corzine,” the report says. “This failure represents a dereliction of his duty as MF Global’s chairman and CEO.”

Who knew?

Except anyone paying the slightest attention, I mean.  It has been beyond blindingly obvious since even before the implosion of the brokerage that Corzine was gambling for resurrection, and made the decisions that destroyed MF Global.  It was also clear that the firm was a managerial mess, a disaster waiting to happen.

But his “spokesman” says the failure was a collective one for which Corzine is not personally culpable:

A spokesman for Mr. Corzine said that “all of the firm’s significant business decisions…were subject to review, debate and approval” by MF Global’s board. “At all times, Mr. Corzine acted in good faith and did what he believed was necessary to turn around MF Global.”

Because boards are never, ever, ever the creatures of domineering, out of control CEOs.

The spokesman, Steven Goldberg, said that the panel didn’t find any evidence of “intentional wrongdoing” and that Mr. Corzine was working to turn around an already-failing business.

I see.  Taking huge risks-and running roughshod over risk controls to do so-is a turn-around strategy that only unintentionally results in mayhem.  His intentions were good, so everything’s just fine.  Big harm, no foul-because he didn’t mean it.

The fact that MF Global was “already failing” is precisely the motive for Corzine’s rashness.

The Neugebauer panel punts on the most important open question: who was directly responsible for the loss of customer money?  We all know that Corzine was the first mover who set of the chain of events that ultimately led to the looting of MFG’s not-so-segregated customer funds.  We knew that on Halloween, 2011.  But why, pray tell, we don’t know exactly who authorized this looting more than a year and two weeks after the firm’s collapse?

As I’ve written before, Edith O’Brien is essential to answering that question, but Edith O’Brien is silent because prosecutors refuse to grant immunity.

In the scheme of things, she doesn’t matter.  It is highly unlikely that she would have taken it upon herself to throw good customer money after bad Corzine bets.  And even if she did, letting her escape legal punishment would have no effect on the odds of a future recurrence of such a debacle.  It is more likely that someone else higher up in the firm made the call.  Given Corzine’s dominance, he is the most likely candidate for making that call.  Letting him skate would set a bad precedent that would encourage other CEOs to engage in such misconduct.  The balance of costs and benefits is clearly on the side of getting Ms. O’Brien’s testimony.

And indeed, this is Federal Financial Crime Prosecution 101: go for the big fish by catching and releasing the little ones.  The failure to follow this tried-and-true strategy is quite revealing, given the identity of the biggest fish: a made man in the Democratic Party, a former Senator and governor, and fund raiser for Obama.

Because of this pointed refusal to do something that would put Corzine at risk, the MF Global collapse remains the Immaculate Destruction, and the firm remains the Financial House Not Destroyed by Human Hands.  And the House Financial Services Subcommittee on Oversight does nothing to resolve that mystery.

November 13, 2012

Just When You Thought The World Couldn’t Get Any Weirder

Filed under: Military,Politics — The Professor @ 6:57 pm

When the Petreaus resignation originally broke my take was that the administration had tried to blackmail him into backing up its official line on Benghazi, but he had refused and resigned instead.  That seemed courageous.

I am now of a different opinion.  Given the lack of concrete information, this is speculative, but my current speculations run as follows.

First, the Benghazi and Petreaus-Broadwell strands of the story were and are for the most part completely independent, and that the administration didn’t use the latter to try to dragoon Petreaus to stay on the reservation regarding the former.

My take is that AG Holder and FBI Director Mueller would have just sat on the investigation of Broadwell and Petraues hadn’t the wacked out FBI agent gone telling tales to Congressmen.  They didn’t really care about Petraeus’s personal life, and judged that it was not a security threat.  Once the story had escaped into the wild, however, all bets were off.  They definitely managed it so that it would not go viral until after the election, but I now doubt that Petreaus’s resignation and the revelations had anything to do with his impending Benghazi testimony.  They just didn’t want his resignation to create turmoil immediately before the election.

(And by the way.  Why in hell did the FBI even care about some nasty emails sent to some diva?  If you or I received some “back off, varmit” emails, and went to the FBI, would they really launch a full-scale federal investigation?)

Second, insofar as Benghazi is concerned, it is evident that the annex in that city was engaged in a variety of highly sensitive covert activities.  For one, attempting to scoop up weapons that could flow to Islamists/terrorists, in Syria and elsewhere.  (Note: those who believe that the CIA was smuggling guns to the Syrian opposition are logically challenged.  They “reason” as follows: 1. The CIA was collecting weapons in Benghazi.  2. Weapons were shipped from Libya to Islamic extremists in Syria.  Ergo, 3. The CIA was shipping weapons from Libya to Islamic extremists in Syria.  Er, no.  It’s far more plausible that concerns about weapons going to Islamists in Syria and elsewhere caused the CIA to try to stem the flow, and that’s what they were doing in Benghazi.)  For another, there are reports from Jennifer Griffin claiming that “multiple sources” confirm that the CIA was holding prisoners at the Benghazi annex.  Indeed, Broadwell made the same claim in a speech at the University of Denver on the same day Griffin first made a rather ambiguous reference to prisoners at the site: interestingly, this was after Broadwell had been questioned by the FBI. (Warning shot across the bows of the administration? Dunno, but this can’t be coincidental.)

Evidently, the CIA was trying desperately to get the people it held there out of the facility.  Given the events that transpired, this is totally understandable.  The facility was obviously terribly vulnerable.

There is considerable outrage over Petraeus’s testimony before the Joint Intelligence Committee, during which he allegedly endorsed the MoVid story.  Take note: the source of this information is a statement by a member of the committee, not a video or transcript of Petreaus’s testimony.  Thus, people are jumping to conclusions regarding the entirety of Petreaus’s testimony.

Take this with considerable skepticism.  Here’s what makes most sense to me.  Revelations about the activities at the annex would have been explosive, especially given that they would have been in violation of an Obama executive order.  A secret CIA facility would also have been an obvious target for attack, especially if it was interfering with the operations of local jihadis, and was indeed holding some prisoner. Meaning that a failure to anticipate an attack, or to be prepared for it, would have been extremely embarrassing.

So my conjecture is that Petraeus gave a frank appraisal of what happened, and what the CIA was doing in Benghazi.  He and the Committee agreed that this could not be disclosed, so they went with the story du jour-the MoVid-to obscure the inconvenient truth.  Given that this is a joint committee, such an understanding could explain the bipartisan efforts to paint Broadwell as a crazed seducer/stalker, rather than a smart and distinguished USMA grad, triathlete, and Harvard PhD.  (I won’t hold the WooPoo and Harvard connections against her.)

As an aside, Krauthammer’s claim that Petraeus gave misleading testimony (a) in order to support the administration line, because (b) the administration had him in a compromised position, doesn’t make sense, precisely because of the evidence Krauthammer cites to support it.  Krauthammer cites in support of this view the fact that Patreaus’s alleged testimony (which again, we have only been told about by an Intel Committee member) diverged from that of Panetta.  But this story would require that Panetta was going rogue, because that is the only reason he would have diverged from the administration line.

So where does this leave us?  Well, we should leave the Petreaus-Broadwell story behind.  This should be about Benghazi first, last, and foremost.   In particular, if the CIA was running some highly sensitive operations out of the annex there, the lack of preparations for an attack become even more outrageously negligent.   The place was in Indian country, and if the reports are correct, it was doing things that were highly inconvenient to the jihadi Indians in the neighborhood.  Meaning that an attack was likely, not merely possible.  Further meaning that the facility should have had better defenses, and more importantly, robust backup at the ready.  But none was at hand, with fatal results.

This situation demands thorough Congressional audit-which in turn demands Petreaus’s testimony.  The outcome could be explosive, because it potentially implicates Obama’s actions in Libya going back into 2011, and because it could reveal that the Candidate Who Ran on Closing Gitmo (and who issued an EO banning detentions) is the President Who Perpetuates the Policies of the Evil Bush.

Prior to the election, I feared that the worst outcome would be that Benghazi would not be resolved before 11/6; that Obama would win; and that his second term would be consumed by a bruising battle over the  festering issues of the before, during, and after of 9/11/12.  Immediately after the election, I believed that would not in fact happen, because it appeared that the Republicans were content to bury the matter in the aftermath of their bruising defeat.  Now I think it is a very real possibility, though it will unfold in a way that I-nobody, actually, could have anticipated before Petreaus’s resignation.

Another long, national nightmare?  It could be.

November 11, 2012

GiGi Wants to Rule the World. World Says Eff Off.

Go to a conference where derivatives or Frankendodd are discussed, and you can’t escape without hearing somebody’s tongue trip over the word “extraterritoriality” (say it 5 times fast!) -the imposition of Frankendodd rules (such as swap dealer registration) on foreign firms.  Gensler has been quite aggressive in his interpretation of where the CFTC’s writ extends: in his mind, it basically extends everywhere that directly or indirectly could have an impact on US markets.  In an interconnected financial world, that doesn’t limit things much.

Foreign financial institutions (and other firms, such as pension funds and money managers) are less than thrilled.  To say the least.  Some smaller institutions have announced their intention to have no dealings with US firms that could put them in the monster’s grip.

Foreign regulators have also criticized US assertions of authority, both in writing and now in GiGi’s face:

Financial regulators from around the world have rounded on the main US swaps regulator over its attempts to extend new rules on derivatives overseas, warning of destabilising effects on the global financial system.

Supervisors from Japan, Europe and Hong Kong have previously criticised the Commodity Futures Trading Commission in written correspondence. On Wednesday, the regulators set out their concerns during a public meeting at the CFTC in Washington.

GiGi nodded, and then defended the CFTC’s actions.

Regulatory arbitrage is a concern, but unilateral assertions of US authority, and foreign pushback on those assertions, raise various concerns of their own.  In particular, they threaten to balkanize derivatives markets (and financial markets generally) as non-US firms limit their dealings with US entities.  This will reduce liquidity; tend to lead to concentrations of risk; and will impede the efficient allocation of risk.

Per usual, Gensler is appealing to a simplistic version of the financial crisis to justify his position, and not acknowledging the adverse consequences-most notably due to fragmentation-that will result from over-aggressive American initiatives.  Regulatory consistency across jurisdictions (which would mitigate regulatory arbitrage) ironically is undermined by the unilateral efforts of the US regulator to impose its will around the world.

This is particularly amazing given the CFTC’s less than glorious record at regulating a subset of US derivatives markets.  Hubris, anyone?  And unfounded hubris at that?

Speaking of regulatory hubris, David at Deus ex Macchiato is justifiably outraged at the assertion by an Irish regulator that global regulations of OTC markets had “the explicit policy objective” of reducing the size of these markets.  Because of course regulators know exactly how big OTC derivative markets should be and know with metaphysical certainty that the markets will reconfigure themselves to the regulatory fiat in ways that enhance stability.  Yes, these are the most complicated, interconnected markets in the world, so of course guys in Dublin and DC should know exactly how big they should be and exactly how they should be configured.  Because that always turns out just swell.

This is exactly what Hayek meant by “the fatal conceit.”  And I fearlessly predict that this very conceit will be the source of the next crisis.

November 10, 2012

No Joy in Mudville, Second Term Edition

Filed under: Economics,Financial crisis,Financial Crisis II,Politics,Regulation — The Professor @ 10:43 am

Soon after the 2oo8 election, I wrote a post titled “No Joy in Mudville” in which I prophesied numerous malign effects of the Obama election: the post got some notoriety, including a pickup by the WSJ Political Diary.  Although I was off on some of the specifics, I think I was right on the essentials.  Four years of cascading progressive statism, with a heavy measure of foreign policy incompetence as an added bonus.  And four years of moribund economic performance.

My pre-election appraisal was that defeating Obama was a necessary but not sufficient condition to stave off serious decline, and perhaps crisis.  I had little hope that Romney or the Republicans would have been able to address the deep structural problems the nation faces, especially if they had prevailed in a close election.  But I am nearly metaphysically certain that Obama and the Democrats won’t, in large part because they don’t perceive that we face serious structural problems arising from unsustainable entitlements, a fiscally incontinent government, and crushing regulatory burdens.  Indeed, they see these as features, not bugs. These were the main planks in Obama’s real platform: no substantive change in entitlements, more government spending-excuse me, “investment”-and more regulation.

Consequently, I predict continued sluggish economic growth-if we’re lucky-with a heightened risk of fiscal (and consequently financial) crisis, timing TBD.  The regulatory burden-most notably the Four Horsemen of Frankendodd, Obamacare, the EPA, and Other Assorted Insanity From Agencies You’ve Never Heard of-will make us pine for the growth rates of the 1970s.  Redistributionist-driven changes to the tax code which will raise marginal rates and particularly increase taxes on capital will create further drag, all the while doing nothing to improve the country’s fiscal situation (and in fact worsening it with non-trivial probability)

Slow growth, combined with continued high levels of government spending, a failure to address entitlement spending, and increased expenditures arising from Obamacare, will accelerate the deterioration of the nation’s fiscal condition.  Given the multiple equilibrium nature of government finances (where small changes in circumstances can lead to a jump from an equilibrium in which lenders are willing to rollover debt to one in which they aren’t), this deterioration increases the risk of a funding crisis that would make what is going on in Europe now look like a pleasure cruise.  (For those of you who take solace in the fact that other people might have it even worse, there’s always Japan, which would love to have our trivial problems.)  Any such crisis would inevitably be accompanied by a huge inflationary spurt, as inflation is de facto default: If it occurs before the Fed has trimmed its bloated balance sheet-and there is no sign that Ben will slim it down anytime soon-the spurt will be that much worse, as all those reserves (the Fed’s liabilities) that have been moving with virtually no velocity will start to turn over at an accelerating rate.

In other words, après nous le déluge doesn’t quite capture it.  Le déluge est maintenant. Well, perhaps not now now, but uncomfortably soon, and certainly en avant notre disparition, actuarially speaking.

There is widespread disquiet about the country’s fiscal and economic circumstances.  Indeed, if only economic and budgetary issues were in play in the election, it is my sense that the outcome would have been different.  But cultural, social, and religious issues prevented Romney from assembling a winning coalition.  The single issue cultural and religious right that blessed us with monstrosities like Mourdock and Akin-who became the poster boys of the Republican Party as a whole, due to the combined efforts of the Obama campaign and a supportive media-drove away many people with libertarian sympathies on both economic and social issues who would have been willing to vote for Romney if only economics and public finances were at issue.

Righteousness has a way of interfering with good judgment, and the ability to make rational calculation.  Cultural and religious conservatives have no way of prevailing on their agenda.  If anything should seem obvious in the aftermath of this election, that should be it.  Obama should have been extraordinarily vulnerable on the economic and budget issues that are conventionally believed to be decisive in national elections, but he prevailed nonetheless.  Why?  Social and cultural issues are the most likely explanation.

The result: a president and a Congress (especially the Senate) that is actively hostile to the agenda of the cultural and religious right instead of one that is at least not an enemy (even though it would be unable and unwilling-unless suicidal-to push that agenda), and inexorable movement towards fiscal catastrophe.

Well played.

If it were only about economics I would have some optimism-not much, but some-that we could address the growth, regulation, spending and entitlement issues.  But it’s not only about economics.  Social and cultural divides make it nigh on to impossible to assemble a coalition (under the aegis of the Republican Party) that can win a national election, and win it decisively enough to permit serious action on these budgetary and economic issues.

No Joy in Mudville, indeed.

November 8, 2012

Amazing Coincidences

Filed under: Military,Politics — The Professor @ 9:19 pm

An Iranian SU-25 tried-unsuccessfully-to down a US MQ-1 Predator in international airspace in the Persian Gulf. This information was not released at the time, November 1, because the Predator was on a highly classified mission.  But the news comes out today, 2 days after the election.  What, did the mission suddenly become less sensitive in the last 8 days?  Was there some discontinuity that occurred on, say, late-Tuesday night?  Wonder what that could be.

In another strange coincidence, on Wednesday morning Boeing announced large layoffs as part of a massive restructuring of its defense division.  Recall that Lockheed had faded its plans to layoff 123,000 workers until after the election under pressure from the administration.

November 5, 2012

The Invisible Man

Filed under: Military,Politics — The Professor @ 10:17 pm

OK.  Back to Benghazi.  Two major stories.

The first is the mystery of Obama’s actions-hell, his location-on the afternoon and evening of 9/11.  The Pentagon has told its story.  The CIA has given us its explanation.  The White has given us . . . the execrable flack David Axelrod (whom I’ve been onto since living in Hyde Park in the ’80s).  Axelrod assures us that Obama did everything that could be done:

David Axelrod was asked this morning on Fox News Sunday about the decision not to deploy military forces to Benghazi the evening of September 11. His response: “The president convened the top military officials that evening and told them to do whatever was necessary and they took the steps that they thought, they took every step they could take.”

But as the Weekly Standard notes, Obama’s involvement in all this was quite peripheral: certainly the White House has provide no evidence whatsoever of Obama’s continued involvement with the decision making (in the way that it has tried to tout his involvement in the OBL raid):

What did or didn’t the president do on the evening of September 11?

The White House has chosen not to answer questions. One has to presume we’d have answers by now if those answers showed a president engaged in managing the crisis. If President Obama had convened meetings, if he had called senior State Department or Defense Department or CIA officials to the White House, if he had held a teleconference from the situation room, one has to assume we would know about it. One therefore has to assume he did none of these things.

Here’s what we know the president did on the evening of September 11. After returning to the White House, he seems to have presided over a previously scheduled 5:00 p.m. meeting with Defense Secretary Leon Panetta and Joint Chiefs of Staff chairman Martin Dempsey. Apparently the ongoing situation in Benghazi was one topic discussed. It was at this meeting, one assumes—”the minute I found out what was happening,” as Obama has said—that the president gave his “directive” to “make sure that we are securing our personnel and doing whatever we need to.” There seems to be no actual written record of this directive, so it was presumably a spoken directive to Secretary Panetta and national security adviser Tom Donilon (who, one assumes, was at that meeting as well).

That meeting went until about 6:00 p.m. About an hour later, President Obama placed a call to Prime Minister Netanyahu designed to dampen down the political flap over his refusal to meet with the prime minister at the upcoming U.N. General Assembly meeting. That call went from about 7:00 to 8:00 p.m., and was followed by a press release giving a read-out of the call. So the president was presumably doing nothing about Benghazi during that stretch.

After that … nothing. There’s no evidence the president did anything more than get occasional updates from Tom Donilon or other White House staff. On Fox News Sunday, David Axelrod said of the president, “Every conversation that needed to be had was being had between him and his top security officials” and “he was talking to them well into the night.” The formulation suggests the president was talking on the phone with White House staffers rather than meeting with them in person, and it suggest a president who was being updated rather than a president in charge.

The reticence of the Most Transparent Administration of Leakers in History is pretty telling.

The second revelation is the release of perviously unseen video of a Sixty Minutes interview with Obama on 9/12-hours after the attack and mere minutes after his appearance in the Rose Garden discussing the assault.  In the interview, Obama pointedly refused to characterize the attack as terrorism.

This raises serious questions about CBS.  Why was this tape released only now, at the last minute before the election, and then just by posting it unobtrusively on the CBS website?

This portion of the video would have been particularly newsworthy, and relevant to the public’s deliberations about the election, in the immediate aftermath of the second debate when Obama (with sick-making cheerleading from Candy Crowley) claimed he had called the attack terrorism in his Rose Garden remarks.

Did CBS give the White House control over what portions of the interview would be released?  If not, why did CBS sit on this crucial information until it was too late to matter?

That last question is rhetorical.  I know the answer.

Wrong Way Risk on ICE

In more non-Benghazi news, some clearing stories.  (Contain your excitement, people.)

First, Gretchen Morgenson is still wretched. (So I said this was a post about news.  Sue me.)  She kills CO2 absorbing trees to criticize the very thought of providing CCPs access to central bank liquidity:

But placing them at the bailout trough is wrong, according to Sheila Bair, the former head of the Federal Deposit Insurance Corporation. In a recently published book, Ms. Bair wrote that top officials at the Treasury and the Fed, over the objections of the F.D.I.C., pushed to gain access for the clearinghouses to Fed lending.

The clearinghouses “were drooling at the prospect of having access to loans from the Fed,” she wrote. “I thought it was a terrible precedent and still do. It was the first time in the history of the Fed that any entity besides an insured bank could borrow from the discount window.” .

“The Treasury’s and the Fed’s reasoning was that since another part of Dodd-Frank was trying to encourage more activity to move to clearinghouses, we should provide some liquidity support to them,” she said in an interview last week. “Our argument back was, if you have an event beyond their control with systemwide consequences, then you have the ability to lend on a generally available basis. What they wanted was the ability to lend to individual clearinghouses.”

Look, one of the reasons I think Frankendodd is monstrous is precisely because clearing and collateral mandates impose tremendous contingent liquidity demands.  Last week I spoke at in Osaka at the annual meeting CCP12, an organization of 30+ CCPs (which apparently uses the Big Ten as a naming role model).  An exec at an Aussie CCP asked me what the most worrisome unintended consequence of derivatives “reform” would be.  I answered before the words were out of his mouth: the potential for a liquidity crisis in times of market stress.

That’s what happened 25 years ago, on Black Monday and the following Tuesday morning.  The Fed prevented an apocalypse by leaning on banks to lend to FCMs to meet margin calls.

Clearing mandates without some mechanism to provide additional liquidity, either directly to CCPs or indirectly via clearing members, are a recipe for disaster.  Like Gary Gorton, I am increasingly skeptical of moral hazard being the major concern: the major concern is the inevitability of periodic liquidity crises even in efficiently structured financial markets.  Forcing use of clearing and collateralization of uncleared swaps while simultaneously depriving CCPs or their members of access to central bank liquidity would be like mandating the use of matches in an oil refinery and banning fire extinguishers.

So, not surprisingly, Wretched Gretchen goes the wrong way, yet again.

And speaking of wrong way, ICE has received approval to clear European sovereign CDS.  I’ve written before that clearing sov CDS is very problematic, due to the wrong way risk inherent in these trades.  The sovereign-bank feedback loop means that clearing members-or a CCP’s default fund-are required to make big payouts on sovereign CDS precisely when they are under severe financial strain.

ICE Clear Europe claims that it has taken measures to reduce the wrong way risk.  I am deeply skeptical that these measures are adequate.  (Sorry, Paul-I calls ’em like I sees ’em.)

One thing ICE Clear Europe points to is that margins and default fund contributions will be in dollars, not Euros.  This actually creates a new risk. One thing we’ve seen is that during flare ups of the Eurozone crisis is that European banks have faced serious problems accessing dollar liquidity.  Meaning that in the event of a jump to default by a major European sovereign, Eurozone some banks that are members of ICE Clear Europe may well need to come up with big dollars to pay margin calls, or to cover the costs of a defaulting customer, or to meet default fund contributions, but need to do so precisely when they find dollars very hard to come by.

Meaning that (pace Wretched Gretchen) they will be desperately dependent on Fed support through dollar swap lines.

The other measure ICE has taken is to preclude “affiliates” of a sovereign from clearing CDS on that sovereign. Yeah, have to do that, but that doesn’t really come close to addressing the real wrong way risk.  If Spain or Italy-or even Portugal or Ireland or Greece-jump to default, a Eurozone-wide financial crisis that hits all banks will likely result.  Meaning that all major Eurozone banks-including members of ICE Clear Europe-and not just affiliates of the defaulting sovereign, are likely to be in distress at that time.  Further meaning that they will be in distress precisely at the time they are expected to absorb some costs arising from the default (big margin calls, covering the losses of defaulting customers, or incurring default fund obligations).   That’s the wrong way risk we really need to worry about, and nothing that ICE Clear Europe says in its filing with the SEC provides any inkling that their plan addresses that risk.

I also have serious concerns about the risk modeling here.  Wrong way risk is devilishly complicated, especially in a sovereign risk context especially in Europe (given all the potential cross-country linkages).  I am skeptical in the extreme about the ability to set margins properly, and strongly suspect that any methodology is likely to be highly procyclical.

In brief, I continue to believe that clearing sovereign CDS is highly dangerous.  It’s good that ICE Clear Europe recognizes the inherent wrong way risk problem, but in my (strong) opinion, they haven’t really addressed that problem, and indeed may have introduced another source of wrong way risk via the cross-currency mechanism inherent in their design.

I hope I’m wrong.  I hope for all of us it never comes to a test.

Finally, Deutsche Boerse is going to have to stump up $150 mm or so in new capital for Eurex’s clearinghouse, in order to meet European capital standards.  And that’s cheap! LCH.Clearnet will have to come up with 375 mm Euros (or about $500 mm) in new capital:

However, tough new European regulatory capital rules appear to have caught the industry unaware. Eurex is the second major clearing house to admit to a shortfall after LCH.Clearnet, the Anglo-French group, said it would need to increase regulatory capital by an estimated extra €300m-€375m last month

So much for clearing mandates being a cheap way of mitigating credit risk.

We are just approaching the G-20 deadlines to move most derivatives trading into clearing.  And the fun just can’t wait for the official kickoff.  There will be much more fun-and cost, and risk-to come.

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