Streetwise Professor

Rosneft is scrambling to finance its acquisition of TNK-BP.  The means it is resorting to speak volumes about the gulf between its aspirations to be a supermajor and reality, and also about the risks that lenders perceive in dealing with Russia (and perhaps Rosneft specifically).

Rosneft is raising $10 billion through an oil pre-pay deal with Vitol and Glencore.  Rosneft agreed to sell the oil forward, with deliveries starting this year, and Vitol and Glencore used those contracts as collateral for loans for $10 billion.  The money goes from the banks, through Vitol and Glencore, and then on to Rosneft which will use it to pay AAR and BP.  The use of oil to secure the Rosneft-Vitol/Glencore deal is interesting.   Rosneft cannot borrow the money on its own promise to repay: it did borrow $15 billion from banks on that basis, but individual banks were not willing to take more than $1 billion in exposure to the Russian company: that limited appetite for Rosneft credit risk (which given its asset base is driven by political and legal risk) is quite telling.

Rosneft has to use prepays-a kind of financing usually extended to less creditworthy commodity traders, producers, or processors-to get additional funds.  Big commodity houses like Vitol and Glencore frequently use prepays and offtake agreements to provide funding to smaller producers and refiners.  It’s not the way real supermajors secure credit.

Oil is particularly useful as collateral, because if Rosneft tries to renege on its commitment to the Swiss houses (as it might be tempted to do if oil prices spike well above the agreed price), it will have a difficult time selling the oil as anything it tries to sell would be subject to seizure.  It’s a lot easier to seize oil in tankers or in storage facilities in Rotterdam to collect on a debt than it would be to try to seize a refinery in Russia.

Rosneft is also going back to the China well.  It has approached CNPC for $25-$30 billion dollars, again backed by sales of oil at fixed prices.  It originally denied it was in talks with CNPC, but this appears to be a “meaning of is” thing.  It might not have been in talks right at the instant that the Reuters reporter called them last week, but today Igor Sechin is in Beijing talking to the Chinese about a deal.  That’s not the kind of thing that is stitched up over a weekend.

This is a reprise of a $25 billion loan from CNPC and the China Development Bank to Rosneft and Transneft to fund construction of a pipeline extension to China negotiated at the depths of the crisis in 2009.  As I predicted at the time, that deal soon unleashed conflict between the Chinese and the Russians over the price of the oil that the Russians sold to secure the loan, and the transportation cost. The battle raged for several years, until the Russians agreed to sell the oil at a $1.50/bbl discount to the price they charged other customers buying off the ESPO pipeline.

Again, doing a large loan secured by oil, especially with a counterparty with whom the Russians have had numerous pricing disputes (they still haven’t negotiated a price in a gas deal that was first inked in 2006), is hardly the mark of a supermajor.

I fully expect that any new deal with China will spark future price disputes.

The quite evident limits on Rosneft’s borrowing capacity will constrain its ambitions to expand production in Russia, especially in offshore projects in the Arctic.  Hence, it will be very reliant on JVs with companies like Exxon who will no doubt drive very hard bargains.

The means that Rosneft must resort to in order to finance its purchase of TNK-BP says a lot.  It can’t borrow agains the assets it is acquiring, or its other assets.  Beyond the $15 billion syndicated loan, the only thing that lenders feel comfortable lending against is the oil that Rosneft must sell.  That’s the way middling-to-marginal commodity firms get funding, not supermajors.

A member of my vast, globe-straddling network of sources informs me that at this morning’s session of International Petroleum Week in London, John Kingston of Platts referred to my estimate of the economic surplus created by new pipeline investment.  That number is almost a year old, and Kingston’s mention prompts me to update that computation.

It is a basic welfare triangle calculation that depends on quantity-pipeline capacity-and price differences between LLS and WTI.  At present, the LLS-WTI spread is slightly north of $20/bbl.  The forward spread is above $7/bbl (and nearly $8/bbl) as far out as December 2015.  (These are based on settlement prices from CME Clearport.  There aren’t a lot of trades that far out, so those numbers have to be treated with some caution.  That they are in the ballpark of the forward Brent-WTI spread provides some confidence, but of course, CME might have used the Brent-WTI spread in calculating the settlement price for forward LLS-WTI spreads that didn’t trade.)

According to the EIA, there are 1.150 mm bpd of planned pipeline capacity additions from Cushing to the Gulf, and another 830 m bpd planned capacity additions from Permian to the Gulf (back in the day much Permian oil flowed into Cushing, so the Permian capacity additions are another way of easing the Cushing bottleneck)

Given the uncertainty about when that capacity will come on line, I will make a couple of calculations that will bound the value they create.

If all the capacity is expected to come online by December, 2015, the welfare gain is (.5)($20+$7)(1.98mm)-($2)(1.98mm)=$22.77mm/day.  (The $2 is an assumed marginal cost of transportation.)  Note that there is remaining value to adding even more capacity under these assumptions.  If Q additional bpd of capacity is required to drive the spread to marginal cost, the gain from adding this Q units of capacity is (.5)($7+$2)Q-($2)Q=$2.5Q.

If the capacity is expected to come on line sometime after December, 2015, and it is expected that the spread will go to marginal cost when it does, the value of the capacity is (.5)($20+2)(1.98mm)-($2)(1.98mm)=$17.82mm/day.

Big numbers.

It is possible to calculate a similar number for pipeline capacity going into the Midcontinent.  EIA reports that 1.19 mm bpd of capacity from Canada to Midcon is planned.   Western Canadian Select quotes are available via CME only through February, 2015, and are under -$20/bbl for the entire 2 year period: the nearby number is $-26/bbl.  I’ll make a WAG as to what the spread should be once the transport bottleneck is eliminated (because there are quality differences, and the distances are substantial, I don’t know off the top what that should be)-my WAG is $5/bbl.  That gives us (.5)($26+$5)(1.19mm)-($5)(1.19mm)=$12.5mm/day.  That number swings (.5)(1.19mm) for every dollar change in my WAG.

Frankendodd runs hundreds of pages.  The regulations written to bring it to life run to thousands more.  Every word on every page has the potential to wreak havoc: hell, apropos the position limit case, even the commas matter.

Case in point, the CFTC’s proposed rule on protection of customer funds, most particularly Section 1.22.  Some of the relevant language:

The Commission proposes to amend § 1.22 by clarifying that the prohibition on the FCM’s use of one futures customer’s funds to margin or secure the positions of another futures customer, or to extend credit to another person, applies at all times.

. . . .

Further, the Commission is proposing language providing a clear mechanism to ensure compliance with this prohibition, which is to require an FCM to maintain residual interest in segregated accounts in an amount which exceeds the sum of all margin deficits for futures customers.

This is very inside baseball, but has seismic implications.

The basic thing is that some customers are late in meeting margin calls.  This gives rise to margin deficits.  Under the traditional omnibus model used in futures markets for donkey years, futures commission merchants (brokers-“FCMs”) can cover customers’ margin deficits with the margins of other customers.  Effectively, customers lend one another money to address the timing issues that the rigorous mark-to-market and variation margin processes inevitably create.  Moreover, the FCM is ultimately on the hook to cover the losses of a defaulted customer.  The FCM’s customers can lose only if there is a default by a customer that the FCM can’t cover (resulting in an FCM default).

That is, customers effectively lend to one another, and thus there is “fellow customer risk”-a solvent customer can lose as a result of the default of another customer. The CFTC rule is intended to eliminate this risk.

Problem: the risk can’t really be eliminated, merely shifted around.  Related problem: the likely reaction to this attempt to shift risk.

The CFTC seems to want to shift the risk to the FCMs: the “residual interest” language means that the FCM has to have enough of its own money on hand to cover any margin deficits.  This will require the FCM to hold substantial precautionary balances, because (a) the magnitude of margin deficits is likely to be quite variable, and particularly will be large in the aftermath of a big price move (that can’t be predicted in advance), and (b) there are serious penalties to being undersegregated.  Alternatively, FCMs are likely to require customers to post margins far in excess of exchange margin levels, thereby reducing the likelihood that any customer’s account will have a margin deficit, and the amount of residual interest the FCM must hold to cover any such deficits.

Either way, there will be a substantial increase in the amount of cash tied up, and the needs for customers and FCMs to have access to contingent liquidity.  The omnibus model was an effective way for customers to supply liquidity to, and obtain liquidity from, other customers.  Yes, there are risks, but there are corresponding benefits: the near universality of the omnibus model in futures markets, and its survival for decades, provides compelling evidence that the benefits far exceed the costs.

But apparently that’s not good enough for GiGi and the Gang.

The clearing and collateral mandates-combined with Basel III and other regulatory measures-are already requiring substantial increases in the amount of collateral-liquid assets-that will be tied up to support derivatives trades.  This will just add to that.  And insofar as being a customer protection mechanism: uhm, customers will pay for it.  Don’t act as if your are doing them a big favor. (Raising the question if its so valued by customers, why hasn’t some FCM adopted voluntarily what the CFTC wants to impose by fiat?  If it’s so great, customers would flock to firms offering that model.)

It also comes at a terrible time for the FCM industry.  The economics of the business are terrible.  ZIRP has blown a hole in a major source of revenue, volume is down sharply, and competition is intense.  A recent Celent study details the carnage:

“The leading FCMs in the US are struggling with falling revenues and profits,” saysAnshuman Jaswal, PhD, Senior Analyst with Celent’s Securities & Investments Group and author of the report. “This puts them in an unenviable position, especially when we consider the overall impact and related costs of various regulatory implementations taking place in the next couple of years.”

Another data point: SocGen just wrote down its investment in big FCM Newedge.  This is not a thriving industry, and ladling more costs onto it won’t help it one bit.

The ostensible purpose of this new regulation is to prevent another MF Global or Peregrine situation.

Seriously?

MF Global broke every rule in the book about segregation and the treatment of customer money.  Peregrine’s owner ran a huge fraud for 20 years. So creating more rules for troubled or criminal FCMs to break will help?  If the CFTC or SROs couldn’t enforce the old rules and thereby prevent losses of customer funds, why should we expect they’ll do any better with the new ones?

It’s also hard to see how these rules, if they had been in place, would have prevented either the Peregrine or MFG situations.  Furthermore, there are other ways of attacking the exceptional-and MFG and Peregrine were exceptional-without imposing crushing burdens on the ordinary day-to-day operation of the markets, FCMs and their customers.  For instance, the Peregrine fraud could not have continued if Peregrines regulator (the NFA) had direct electronic access to the firm’s accounts, thereby preventing Wasendorf from altering the paper statements he sent on to regulators to cover up his fraud.  Hell, in the MFG case, having more excess margin in customer accounts would have just increased the money that Corzine could have tapped to cover the company’s losses and own margin calls: it is just that excess margin that disappeared somewhere, somehow.  I would further note that since an FCM is most likely to be tempted to get at customer funds when it is in financial jeopardy (which is what happened with MF), adding to its financial burdens could create more problems than it solves.

The cost-benefit analysis the CFTC advanced in support of the rule is just the kind of joke I’ve come to expect.  This is actually a problem that is amenable to calculation.  Collect data on the distribution of customer margin deficits under current rules.  Figure out the 99.9th percentile of this distribution.  (Importantly, condition this distribution on market conditions-find out what that percentile is during very volatile periods.)    Given the rigor of the rule, it is plausible to assume that additional funds equal to this 99.9th percentile will have to be held by customers, FCMs, or both will be held to ensure compliance.  Calculate the return on this sum lost because customers and FCMs are required to hold low-yielding assets in order to comply with the rule.  That’s one component of the cost.

Another cost is the additional operational cost required to ensure compliance.  This will not be trivial: indeed, one reason FCMs might require substantial increases in customer margins is to reduce the operational burdens required to maintain compliance.

One cost that is important is hard to quantify.  As I’ve written repeatedly, spikes in liquidity needs during periods of market stress can be systemically destabilizing.  This rule will: (a) restrict one vital source of liquidity, namely, intracustomer loans; (b) result in far more liquid assets being tied up in brokerage accounts; (c) lead to increases in liquidity demand during periods of high volatility, as FCMs will either have to hold more liquid assets, or will force customers to hold more excess margin, during high volatility periods in order to maintain compliance (i.e., the 99.9 percentile is much bigger during high volatility periods, requiring more margin to meet this threshold-the distribution of liquidity demand spikes caused by this could be calculated); and (d) result in position unwinds by those unwilling to incur the cost of the elevated margins.  All of these effects are pro-cyclical, and tend to exacerbate market instability/volatility.  Liquidity problems are what create or exacerbate crises.  Derivatives market “reforms” have already imposed substantial liquidity burdens: this will only add another.  That is systemically risky.

Benefits?  Uhm, hard to ascertain.  As noted above, the rule is ill-suited to address either a Peregrine or MFG problem, even though those are the examples the CFTC repeatedly invokes in their support.  Moreover, it must be noted that reducing the amount of loss arising from the default of fellow customers is not necessarily a benefit.  This is primarily a transfer of wealth from one party to another.  The relevant issue is whether one risk sharing rule is better than another.

This is another example of the pernicious effects of attempts to “fix” high profile problems such as MF Global and Peregrine.  In response to truly extraordinary episodes, we get “fixes” that (a) don’t really do anything to address the problems they are supposed to be fixing, and (b) impose substantial burdens on the ordinary operations of the markets, operations that have gone on swimmingly for decades under the old way of doing business, thank you very much.

As a rule of thumb, I think it wise to be very suspicious of rules designed to prevent recurrence of an extreme event or events.  That is especially true in this case.   Another example of all pain, no gain.

Is that the CFTC’s motto now?

There has been a great deal of optimism regarding the future of oil and gas production in North America, and the US in particular.  Fracking has already turned the gas world upside down, and is starting to do the same in oil.  The IEA has made very optimistic forecasts, and the main cloud it sees on the horizon is that the US is not investing enough midstream and downstream to absorb the unexpected upstream bonanza.  Citigroup’s oil analysts just released a similarly sunny prognostication.  (I usually don’t see eye-to-eye with Ed Morse on the speculation issue, but he is very credible on the fundamentals of the physical market.)

OPEC is taking a contrarian view in its latest monthly report:

In its latest report, the group of major oil producers forecast the shale boom in the U.S. would help increase oil production by 520,000 barrels a day this year, giving the U.S. the highest production growth among the non-OPEC countries, but it also played down the positive side of these developments by warning of the challenges facing the industry.

“There are remaining risks associated with the growth forecast on the back of weather, technical, environmental and price factors,” the report said. It said that the heavy decline rate associated with the first year of shale oil production from individual wells in the first year was a major factor that could impact growth.

The decline rates are well-known, and E&P companies are basing their drilling investments based on the best available information.  Yes, decline rates could be faster than assumed, but they could be slower too.  Moreover, the technology here is extremely dynamic, and there is a substantial potential for advances in drilling and reservoir management that could make the forecasts of IEA and others appear unduly conservative.   Learning by doing and the accumulation of knowledge on how to exploit fracking technology, generated by the experiences of numerous companies, lay the foundation for positive productivity shocks.

OPEC’s sour attitude on unconventional oil bears an uncanny resemblance to Gazprom’s initial reactions to shale gas, reactions that were hardly persuasive early in the boom, and which look more pathetic by the day.

It seems that like Gazprom, OPEC is trying to spread Fear, Uncertainty, and Doubt about unconventional oil, in an attempt to try to scare off investment.  Their efforts are likely to be no more successful than Gazprom’s.  The people committing the capital know more about fracking and the formations where it can be used than OPEC, and are learning more every day.

And while we’re on the subject of OPEC and uncertainty, perhaps it could address things it might actually know a lot about, like the reliability of Saudi reserve estimates and the effects of political risk on production in places like Venezuela and Nigeria.

I’m not a Lindsey Graham fan, by any means.  Another RINO with Senatitis. But he did ask a very good question about Obama’s performance when Benghazi was under attack when Panetta testified the other day.

Graham’s questions related to the CIA security team dispatched from Tripoli.  The team landed in Benghazi, but was detained at the airport for hours “awaiting transportation.”  They eventually made it to the besieged Americans, but by then four Americans had been killed.

Graham asked whether Obama did anything to get the Libyans moving.  Did he call anyone?  If so, who? What did he say?  What happened as a result?

I can’t see any good answer to these questions.  It would be appalling if he made no effort to persuade, cajole, dragoon, or threaten the Libyans into action.  But it would not be much better if he tried, but was refused, or just blown off. Empty suit or paper tiger.  Wow.  What a choice.

I disagree with Graham’s placing of holds on  the Hagel and Brennan nominations until he gets these questions answered: Hagel’s nomination in particular should fail because he is not qualified, not because of linkage to Benghazi. But his are legitimate questions, that deserve answers.

Alas, we are unlikely to get them.  For the media in particular treats any questioning of Obama as an intolerable act of lèse-majesté.  There is no better example of this than CNN’s Candy Crowley’s latest service for her liege lord King Barack, when she suggested that the remarkable speech of the even more remarkable Dr. Benjamin Carson at last week’s Prayer Breakfast in DC was “offensive” because he had the temerity to criticize political correctness, crazed government spending, and Obamacare in the presence of said King Barack I.  And if you don’t think that Obama was personally offended, and was seething at Carson’s lèse-majesté, watch the video.

I have it on good authority that Obama is the thinnest-skinned president ever. He and his creatures rage at any criticism.  That peevishness is fully on display as a truly accomplished man speaks truth to power, as the lefties are so wont to say.  (But I forget, truth-to-power reads only left to right.)

How can such a large country have such a little man as president?

Sunshine: The New Subprime.

Spain can no longer afford greendoggles:

The Spanish government’s latest bid to cut its growing debts to the country’s energy sector is expected to slash profits at renewable energy companies as Madrid continues to grapple with a €28bn deficit built up through years of subsidies.

Spain’s most recent reform to the energy sector will force renewable energy operators to choose between a fixed price or market price for their power – and remove a previous subsidy – while renewables subsidies will also be delinked from consumer price inflation and instead aligned with Spain’s core inflation measure.

Shares in Acciona, Spain’s second largest wind power operator, have tumbled almost 20 per cent, with Abengoa, Spain’s largest solar thermal power plant developer, also falling sharply since the changes were announced at the end of last week.

This story about the travails of the Utility Formerly Known as TXU doesn’t mention renewables-notably wind-but it should:

Energy Future Holdings Corp., the struggling Texas power company involved in a record leveraged buyout, could end up splitting as it faces significant choke points on debt and seeks counsel from Wall Street restructuring advisers.

The former TXU Corp. has been getting advice from big-name law firms and investment banks ahead of May, when it must start making cash payments on certain debt. In addition, the company faces nearly $4 billion in debt maturing in October 2014. The Dallas-based company was purchased by the private-equity firms and others in 2007 for $32 billion plus about $13 billion of debt.

After a series of complicated transactions over the past several years that rearranged its finances, the company now appears poised to start contemplating a major debt restructuring, be it through a bankruptcy filing or another means, according to a person close to the situation.

The article rightly notes that the collapse in natural gas prices has cratered generating margins (spark and dark spreads, and especially the later).  This is the main reason for EFH’s problems, but not the only reason.  The large increase in wind generation-which benefits quite nicely from  federal subsidies-has put downward pressure on power prices in Texas, and has led to negative prices for power with some regularity.  This is particularly important because Texas operates an energy-only market, with no capacity market, meaning that capital costs must be recouped from energy prices.  With wind subsidy-supressed prices, traditional generation has a hard time paying for itself.  As PUC Commissioner Donna Nelson said:

Federal incentives for renewable energy… have distorted the competitive wholesale market in ERCOT. Wind has been supported by a federal production tax credit that provides $22 per MWh of energy generated by a wind resource. With this substantial incentive, wind resources can actually bid negative prices into the market and still make a profit.

We’ve seen a number of days with a negative clearing price in the west zone of ERCOT where most of the wind resources are installed…. The market distortions caused by renewable energy incentives are one of the primary causes I believe of our current resource adequacy issue… [T]his distortion makes it difficult for other generation types to recover their cost and discourages investment in new generation.

The impact is greatest in the western part of the state, but wind weighs on prices throughout the state.  Except when it’s hot, because that’s when the wind doesn’t blow-but the power is particularly needed.  And wind also imposes substantial reliability challenges, requiring backup generation resources-which find it difficult to recoup costs due to prices that are often artificially low due to the wind subsidy.

The subsidies completely distort price signals, which in turn distort investment incentives and raise the serious risk of shortages of reliable generation resources that can operate hot or cold, rain or shine.

Other than all that stuff, wind is great.

But regulators are hell-bent on tipping the scales in favor of wind:

It’s no secret why FERC is likely to rule against the homeowners in Iowa and Minnesota. The Obama Administration’s green vision is to make wind and solar an ever-larger share of U.S. electricity production, regardless of costs. Think high-speed rail for the electric power network. The only way to make that happen without a political backlash is to spread the costs far and wide.

Wind and solar power are too expensive to compete with natural gas, coal, nuclear and hydropower without government help. The wind lobby already won an extension of its $12 billion production tax credit as part of the recent tax increase. More than half the states also have renewable energy standards forcing residents to purchase wind power. And now the greens want another subsidy for transmission lines.

Because wind makes such economic sense.  The fact that subsidies (and, in some places, the indoctrination of children) are required to support wind development tells you just how much economic sense it makes.  It is a greendoggle of the first order, and one that you might want to think about when the lights or AC go out, especially in Texas on a hot summer’s day.

For a couple of months after the 9/11/12 attack on the US facilities in Benghazi, I asked repeatedly: what did Obama know? When did he know it? What did he do about it?  I was particularly incensed at the White House’s refusal to account for Obama’s actions while Americans were under attack in Benghazi.

Not that it’s a surprise, we now understand the reason for the administration’s retreat under the Cone of Silence: Obama did nothing.

Under questioning by Senators Ayotte and Graham, outgoing SecDef Leon Panetta admitted that he spoke to Obama about the attack only when news of it came during a meeting between them at the WH.  Panetta returned to the Pentagon, and had no contact with Obama thereafter, during the hours when Stevens and other Americans died:

Mr. Panetta said he and Mr. Obama, along with Chairman of the Joint Chiefs of Staff Gen. Martin E. Dempsey, discussed the attack for 15 minutes in the Oval Office the afternoon of Sept. 11, and also covered an anti-American protest that had broken out that day at the U.S. Embassy in Cairo.

Testifying to the Senate Armed Services Committee, Mr. Panetta said the president told them to “do whatever you need to do to be able to protect our people there,” though when it came to specifics the president “left it up to us.”

Republicans said they were dismayed that the Defense Department’s top officials and Mr. Obama didn’t speak again over the next six hours, during which two attacks claimed the lives of four Americans, including Ambassador J. Christopher Stevens.

“Did he ask you how long it would take to deploy assets, including armed aviation, to the area?” asked Sen. Kelly Ayotte, New Hampshire Republican.

“No,” answered Mr. Panetta.

“He didn’t ask you what ability you had in the area and what we could do?” Ms. Ayotte asked.

“No,” Mr. Panetta responded again. “I mean, he relied on both myself … and Gen. Dempsey’s capabilities. He knows generally what we have deployed to the region; we’ve presented that to him in other briefings.”

Appalling.

No, we don’t want an LBJ attempting to micromanage a combat situation thousands of miles away from the WH.  But the image that is conveyed by Panetta’s testimony is indifference.  Or even worse, Obama’s desire to distance himself from an impending disaster and to avoid any responsibility-let alone accountability-for it.  For the man who has tried to make it seem like he was the first off the helos in Abbottabad, his avoidance of any involvement in, or even interest in, a far less glorious situation in Benghazi is beyond unseemly.  He is perfectly willing to play the strutting Commander in Chief when things go right, but when the going gets tough, Obama goes AWOL.  A profile in cowardice.

Not that “what does it matter?” Hillary was any better: she had zero contact with the Pentagon while her charges were dying.

Panetta’s testimony also confirms what I suspected rather later in the development of the Benghazi narrative.  That it was not that assistance was denied those under siege in Benghazi: instead, it was there was no assistance to give.  The US military was essentially powerless in North Africa, with zero deployable combat power on call.  No armed drones even, let alone AC-130s or rapidly deployable troops.  Given the highly dangerous situation in Benghazi, and the fact that the CIA was doing something there (exactly what, still TBD), it is shocking in the extreme that there was no backup on call-zero, zip, nada.

It is hard to recall an episode that is more discreditable to American political and military leadership.  An utter abdication of authority and responsibility, and a prioritization of avoiding accountability.

Everyone in this affair comes off badly.  Incompetent moral cowards.  The lot of them.  Hillary-MIA.  Dempsey-a pitch perfect example of the political creature cum general, leaping to the defense of the president (note the obsequious volunteering of information regarding the inquiries of the NSC staff): I find him particularly repulsive because I expect little of politicians, but hope for something better from the uniformed military.  Naive me.  Panetta at least seems willing to be honest about what a clusterf*ck occurred on 9/11, but he bears responsibility for the fact that the clusterf*ck occurred in the first place, due to his failure to have forces available to respond to a likely threat.

But obviously the most odious figure in this sorry episode is Obama.  A person (I won’t say “man”) willing to bask in the glory earned by the risks assumed by others, but who retreats to the sanctuary of the West Wing when things get tough.  Remember the old expression: “When the going gets tough, the tough get going”?  Obama got going, all right, but not in the way that aphorism usually connotes.  He got going in the way Sir Robin got going in Holy Grail.  He ran away, and distanced himself from failure.  He has refused to answer questions about these events, and has acted as if they never even happened: endeavors which a courtier press has enabled.  Worse, he attempted to distract attention from what really happened by pushing the offensive narrative about the Mohammed video.  I am hard pressed indeed to find a historical parallel to Obama’s low, feckless, and unseemly performance.

What happened in Benghazi was a tragedy, and almost certainly a preventable one.  Those who could have prevented it know they could have done so.  How can I say that? Their assiduous efforts to consign the events to the Memory Hole speak volumes.  But Obama’s distancing himself from the situation as soon as the looming catastrophe became manifest, and his refusal even to discuss the issue seriously, let alone admit any culpability, are particularly loathsome.

The title of this post says that Obama was AWOL.  That’s actually a slur on deserters. For most deserters do not hold an elevated and prestigious office, and do not bask in the glory of those who achieve great things under their command, but abscond when things go bad.  The ignominy of desertion is proportional to the elevation of the position deserted.  Obama holds the highest office in the land, meaning that the ignominy of his scurrying to the sanctuary of the West Wing on 9/11/12 is very great indeed.

In its utterly cynical effort to expand control over its citizenry and exploiting the Newtown massacre, California is proposing a slew of restrictions on gun ownership, on top of its already onerous restrictions.

When I was at the range last week, I saw a couple of ordinary looking Springfield Armory 40 cal semiautomatics that had “Not Legal For Sale in California” emblazoned on the box.  I asked the clerk why they were banned in CA.  He said: “The color?  Who knows?”

Back in the 50’s “Banned in Boston” was a great way to juice sales of racy paperbacks.  Now “Banned in California” is doing the same thing for firearms.

But back to the new proposals. One of them is to put a $.05/bullet tax on ammunition. Because, of course, “sin” taxes always work so well.

Let’s consider cigarettes, shall we?  New York has deemed ciggys a major sin, and has imposed a punitive tax on them. To what effect? 61 percent of cigarettes in NY are smuggled, thereby enriching organized crime. Well played!

So what will the bullet tax do? It will be like a shot of steroids to the illegal trafficking of ammunition (and magazines and banned weapons) in CA.  And who will have the comparative advantage in supplying that market? Organized crime.  Drug gangs.  MS-13, etc.

A classic example of the Bootleggers and Baptists phenomenon, where bluenose control freaks and psychopathic criminals are in a symbiotic relationship.  And who gets f’d?  Normal, law abiding people doing nobody any harm.  In CA, normal folks just looking to protect themselves will be disarmed, criminal gangs will be empowered, and dipshit politicians will break their arms patting themselves on the back for their moral superiority.  (Resisted using an Onanistic metaphor there. Such self-control.)

It’s at times like this when the ending refrain from this song seems so fitting:

True fact: I am wearing a tee-shirt with that logo (the cover of Rancid 2000) as I write this, and the poster from that album is right in front of me.

Russia is one of the primary sources of child pornography in the world.  This trade goes on with very little effort by the government to stop it, and I’m probably being kind by saying “very little.”  (Keep that in mind whenever you hear the incensed Russian claims of sexual abuse of adoptees by Americans.)  Knowing that, my immediate reaction to the announcement that it would be cracking down on websites that hosted or linked to child pornography (or drug-related information, or discussions of suicide, among other things deemed dangerous to Russian youth) was that this was just a pretext to crack down on political opposition websites.

And I didn’t have to wait long for confirmation:

On Friday, a freedom of speech activist group reported that the Russian government has blocked access to a prominent blog-hosting service that carries many dissident voices from within the countries.

Back in the fall, the Kremlin put into place a much-derided-from-the-West “Internet blacklist.” When it was launched in November, Moscow blocked access to over 180 sites that it deemed were offensive to Russian interests. In particular, this blacklist was meant as a way to protect minors from pornography sites, sexual abuse sites, and sites that provide details about drug use and suicide.

. . . .

LJRossia.org, “a non-profit project created to support freedom of speech, civil society, and encourage the free exchange of ideas,” is reportedly used by Russian journalists who openly speak out against the Putin government, including Andrei Malgin and Vladimir Pribylovsky. The site “has been targeted for publishing a large database of government misdeeds and for disclosing official documents that expose corruption,” according to the American non-profit group, Access.

Access wrote Friday that the entire site has been blocked on at least one Russian ISP, RosTelekom, supposedly over alleged publication of child pornography (Google Translate).

The Russian police and security services are notorious for planting drugs on political opponents and others they want to frame.  Given that history, and the fact that the Russians have a very active cyberwarfare operation, I would bet dimes to donuts that they have and will plant incriminating material on servers to provide a justification for shutting down opposition sites.  I wouldn’t be surprised if that’s what happened here.

I am sure there will be much more of this to come.  Putin and the siloviki are engaged in a python strategy of gradually strangling the opposition.  It is taking it off the streets.  A group that remembers the subversive power of copy machines and faxes (samizdat) certainly understands the far greater subversive power of the Internet.  In their utter cynicism, they will exploit the natural revulsion against child pornography to control political content on the Internet.

PSA update: If you have Kaspersky software, you are an idiot. Kaspersky very tight with FSB. That is all.

While I’m on the subject of commodity spreads and transformations, I’ll turn my attention to another spread story in the commodity news: cash premiums in aluminum.  This is a matter of great interest to people in the aluminum business, but even though I highly doubt such people make up a big fraction of my readers, it’s worth some analysis here because the broader and politically charged topic of the “financialization” of commodities has come to the fore in this debate.

In brief, there is a big differential between the price of aluminum “in store” in LME warehouses, and the price of newly produced aluminum at the factory gate.  Metal outside LME warehouses trades at a big premium to ingots inside them: the premium is about $300 on a price of around $2000.  The premium has become so wide and volatile that banks are offering swaps to hedge this risk.

So we have a spread.  Spreads price transformations.  What is the transformation at issue here?  Turning metal inside warehouses into metal outside of warehouses.  So if the spread is wide, that tells us that there must be a bottleneck in getting Al out of warehouses.  And indeed there is.  It can take more than a year (!) to get some metal out of LME warehouses.  Warehouse operators (including Goldman, JP Morgan, and Glencore) are the subject of bitter criticism from aluminum consumers (e.g,. Coca Cola) for what consumers claim are unnecessarily glacial load-out rates.  File this under There is Nothing New Under the Sun.  Warehousemen and consumers have fought over load-out rates forever in every commodity.  (Look at a history of the warehouse wars in Chicago stretching back to the mid-19th century.)

As a result of the load-out bottleneck, large quantities of aluminum inventory that built up during the financial crisis and period of extended economic weakness in the US and Europe, are trapped in warehouses.  The storage facilities have become the metallic equivalent of Roach Motels: aluminum checks in, but it can’t check out.  Or maybe the metallic Hotel California: aluminum can check in, but it can never leave.

The fact that large quantities of metal are trapped in warehouses means that there are large quantities of metal that have to be carried-and financed, primarily in cash-and-carry trades hedged by forward sales.  What other alternative is there?  It ain’t going anywhere, so it has to be held and financed by somebody.  Moreover, well-capitalized banks (Morgan, Goldman, etc.) can finance the inventory cheaper than anybody else.  So just surely as day follows night, given the fundamentals in the market, and crucially the load-out bottleneck, the well-capitalized banks end up holding, financing, and hedging a big chunk of the inventory.

Here’s where the financialization meme comes in.  Many people-including some who should know better-see the co-existence of financed inventory and premiums, and conclude that it is the participation of financial institutions that is causing the wide premiums.  See! they exclaim.  Look at how the participation of financial institutions in commodity markets is distorting things! Something must be done!

This is totally back-asswards, and confuses cause and effect.  The underlying problem here is the load-out constraint.  The cash premiums clearly signal that is the problem.  Banks are not holding back metal to create profitable financing deals: time spreads adjust so that financing deals break even.  The problem is that insufficient quantities of metal can get out of warehouses.  That’s what inquiries should focus on.  Is the rate too low?  Why?  Are warehousemen exercising market power by unduly constraining load-out?  If so, why isn’t there sufficient competition between them?  (It would also seem that this would have to be an ex post holdup problem: if those storing metal anticipated the exercise of market power via slow load-out, it would reduce their derived demand for storage, thereby reducing the amount of metal stored and the rate the warehouse could charge.  This would tend to attenuate and perhaps eliminate the ability and incentive to exercise market power.  An opportunistic response to an exceptional circumstance not anticipated when metal was put into store could be what is going on.  That is, this could be a time inconsistency problem combined with an unprecedented shock.)

In other words, large financing deals are a symptom of the load-out bottleneck, and the overhang of metal in store resulting from the financial crisis.  It is not the financing deals that are holding back metal.  It is the load-out bottleneck that is holding back the metal, and driving the need to finance the metal.

One last note.  One of the biggest complainers about the situation and the involvement of banks in the aluminum market is the living proof that Neanderthals still walk the earth: Oleg Deripaska.  Yes, Putin’s favorite pen catcher.  Word to the wise: Deripaska’s whines about the causes of the aluminum cash premiums should be heavily discounted, as should always be the case when a highly financially stressed individual loudly talks his book.  Especially when the book talker has, shall we say, a rather testy relationship with banks.