Streetwise Professor

Today the creepy Jay Carney (the most aptly named man in show business) attempted valiantly to deny, against all evidence, that Obama did not deceive when he said-over and over and over-that if you like your health care policy you can keep it:

After the passage of Obamacare, the president has repeatedly insisted that if any individual likes their health care plan, they could “keep it.”

Carney on Tuesday added a crucial caveat to that promise, saying Americans could keep their insurance if the plan is “still available.”

In other words, if the plan is modified, coverage options that don’t meet Obamacare standards could be canceled.

Still, Carney accused Republicans of distorting the impact of the cryptic administrative ruling.

“What we’re talking about here is the 5 percent in the country who currently purchase insurance on the individual market,” he said.

That 5 percent of the country is over 10 million people, but remember what Uncle Joe said about omelets and eggs.

So you unlucky 5 percent: lie back and take it for the Motherland.  And no, sorry, but KY Jelly is not covered under the Bronze, Silver or Gold plans. Read the fine print.

And fine print is exactly what Carney’s-and every other administration flack’s-defense relies on.  If your policy changed in the slightest way, it’s not grandfathered anymore.  So even if you prefer the new version of your old policy, with a different deductible or coverage, to the  Bronze, Silver, or Gold plans you’re SOL.

Think of that any time a prog says s/he is “pro-choice.”  This prog plan is all about limiting choice in order to redistribute. But you shouldn’t be surprised, because that’s what progs are all about.

For those who say “I supported Obamacare until I found out I had to pay for it”, there are many words of wisdom in this clip. Including the “you trusted us” bit, and the part about “it’s gotta work better than the truth” (which is advice the Obama administration has obviously taken to heart:

Both, actually.

The administration’s response to every one of the mounting pile of FUBARs is “Obama didn’t know.”  The latest: Obama didn’t know about impeding Healtcare.gov fiasco.  And he didn’t know that the NSA was collecting electronic intelligence on Merkel and other foreign leaders.  Add this to the IRS, Benghazi, etc., etc., etc.

This happens so frequently that it is becoming as regular a bit in the Obama Show as Sergeant Schultz’s “I know nothing! I see nothing!’ bit was in Hogan’s heroes.  Obama’s denials are about as plausible as Schultz’s.  It’s just not nearly as funny in real life.

As the fiascos mount, scapegoats must be found!  It is going to get very, very crowded under the bus.

The NSA situation is the worst, with Obamacare running a close second.  Sources within the NSA have claimed that the White House and the State Department gave permission for the surveillance of Merkel and others.  The White House denies, denies, denies, and points to a statement from the NSA to support the denial:

With the issue mushrooming into a major diplomatic headache between the U.S., Germany and other allies, the administration stepped up its insistence that Obama knew nothing, though it has yet to explicitly acknowledge that the snooping occurred in the first place. An NSA spokesperson said Sunday that agency head Gen. Keith Alexander “did not discuss with President Obama in 2010 an alleged foreign intelligence operation involving German Chancellor Merkel, nor has he ever discussed alleged operations involving Chancellor Merkel. News reports claiming otherwise are not true.”

Spare me.  That denial is so narrowly drawn that an amoeba could run laps around it in seconds. Taking it at face value, Alexander has never discussed this with Obama.  Fine.  What about any of the thousands of other NSA employees?  CIA employees?  His briefer (when he deigns to have a briefing)?  His briefing books (which Valerie Jarrett assures us that he peruses with god-like discernment).  Hasn’t been a mention of anything that Merkel said not from a public source that would make even the slow witted ask: “How do we know that”?  The specificity and narrowness of the denial seems to be a lawyerly evasion by the agency, and may in fact be so specific and narrow as to signal that yes, indeed the NSA informed Obama: what is left out is the elephant in the room.

This is a horrible situation.  Political survival instinct and Capitol Hill outrage and cowardice will produce a battle between the political branches and the intelligence community, from which the intelligence community will not back down, and in which it has some substantial advantages.  Information is power.  The Bush administration was wounded deeply by the CIA’s war against the White House.  This is a battle that Obama fights with extreme handicaps, but it’s a battle we don’t need period.  Better to just tell the Europeans to grow up, or to ignore them until the storm passes.  (The Schaefer piece provides an analysis of the reasons to monitor Merkel even before she became PM that echo those I made over the weekend.)

The health care situation is not much better.  Today’s storm, overtaking the ongoing website farce, is that the Obama administration knew that millions would lose their individual coverage once Obamacare went into effect.  The administration-sit down, because this may shock you-denies.  The know nothing! They see nothing!

So here’s the choice: either the people responsible for implementing and designing Obamacare failed to anticipate this consequence, which is devastating for millions of people, despite the fact it was eminently predictable, or it is lying.  Great to have choices, ain’t it?

With respect to predictability, it’s clear as day.  To “work” (on its own terms, not that working on its own terms is a good thing), healthy individuals have to be attracted to-or forced onto-the exchanges so they can be charged premiums that exceed the costs that they will incur, in order to subsidize those who impose more costs than they will pay in premiums.  Due to the nature of the individual insurance market, those who are able to buy on this market are likely to be healthy, low risk individuals: indeed, the inability of high risk individuals to get coverage was one of the reasons given for the need to implement Obamacare in the first place.  So the privately, individually insured represented a pool of people tailor made to force onto exchanges.

And how was that done?  By a bait-and-switch.  The Obama promise of “if you like your health insurance policy you can keep it” was supposedly implemented by grandfathering existing policies.  But the grandfathering rule was written so narrowly that any change in the policy-coverage, deductible, co-pay, etc.-negated the grandfathering.  So even modest changes that occur with regularity in these policies have led to mass cancellations of policies that are not grandfathered and do not offer the coverage mandated by the ACA, thereby creating a population of sheep to be sheared on the exchanges.

And speaking of ruminants, of course scapegoats must be found! And you guessed it: the insurance companies are being rounded up and rounded on, most notably by the loathsome, mendacious and incompetent Valerie Jarrett:

FACT: Nothing in #Obamacare forces people out of their health plans. No change is required unless insurance companies change existing plans.

Get ready for the daily five minutes of hate.  Where by “five minutes” I mean twenty-four hours.

Wherever you cast your gaze, your eyes light on a debacle.  Consider that Russia is exploiting Obama’s inept handling of Egypt, where he managed the clever feat of getting everyone to hate him (no Cairo Speech II, I’m guessing-nor Brandenberg Gate II either):

Russian President Vladimir Putin is considering paying a state visit to Egypt to take advantage of frayed ties between Washington and Cairo and possibly gain access to Mediterranean ports, the Sunday Times of London reported.

Nearly 40 years of US policy up in smoke. The Choom Gang rides again.

The headline says it all: it emphasizes that Putin is exploiting the “US vacuum.”  That is the Obama foreign policy in two words: the second coming of the Hoover Administration.

Indeed, the appellation “Hoover Administration” is fitting in so many ways, because you know what vacuum cleaners do, right?

I’ve been beavering away at the clearing section of my next book, which will be titled Market Macrostructure.  It’s been something of a struggle, because there are so many aspects to this issue that it is challenging to organize the material in a logical fashion.  I analogize it to trying to write a history of a complicated battle, where many things are happening simultaneously over space, and these things interact.  Inevitably, the narrative must jump around in either space or time or both, and the writer must summarize some material about one action at one time to relate it to the narrative of what is going on at another place at another time.

So it is with writing an analysis of clearing.  There are many moving parts that interrelate and interact, so there is always the challenge of relating detailed analyses of important pieces to one another, and to clearing as a whole, and to the trading process (execution and clearing) as a whole.

One virtue of this struggle, however, is that it can lead  the writer to new insights.  Conceptualization at a fairly highly level facilitates organization, and the process of conceptualization can lead to new ways of understanding.  So it is, I hope anyways, with the clearing analysis.

This post is my first attempt to crystalize those thoughts; indeed, one of the original purposes of the the blog was to provide a place where I could think out loud and commit to pixels some early thoughts to be refined going forward in more formal writing.

The issue that I have been grappling with is why are some trades cleared, and others not?  Why do we see exchanges that trade cleared contracts operate side by side with bilateral markets trading similar contracts (and sometimes nearly identical ones) that aren’t cleared?  What determines the division of trade between these alternatives?

This is an issue that I’ve been looking at since the ’90s, and I identified some factors, but I was never completely satisfied.  But putting together some pieces that I have written about before, I think I’ve come up with a more complete explanation that captures some of the salient aspects of the economics of clearing and counterparty risk generally.

The first piece is that in theory-and indeed, in most theoretical treatments of clearing by academics (including yours truly)-clearing can operate as a classical risk pooling/insurance mechanism, in which market participants pool counterparty risk.  To the extent that this risk is idiosyncratic, such pooling allocates risk more efficiently and makes risk-averse participants better off.

But as I pointed out in my earliest work, and emphasized more in some later papers, like any risk sharing arrangement, mutualization of counterparty risk creates the potential for adverse selection and moral hazard problems.  Moral hazard problems are likely to be particularly acute.  Clearing participants can affect the distribution of the default losses they impose on the mutualization pool by adjusting the riskiness of their trading positions in the cleared derivatives.  They can also do so by adjusting the risks of their balance sheets, through, for instance, adjusting their trades in non-cleared derivatives (or in derivatives cleared at another CCP), changing their leverage, or adjusting the risk of other assets on their balance sheets

The prospect for moral hazard will inevitably lead to limits on the amount of insurance provided through the clearing mechanism.  That is, not all default risk will be mutualized.

Clearinghouses use margins to limit the amount of risk that is mutualized.  Only losses on defaulted positions in excess of margin posted by the defaulter are mutualized.  The higher the margin cover, the lower the level of risk sharing.

In practice, CCPs utilize a “defaulter pays” model in which margin covers losses on defaulted positions with extremely high probability, e.g., 99.7 percent of the time.  In a defaulter pays model, the amount of risk mutualization is very low.  CCPs are not, therefore, primarily an insurance mechanism.  They insure only tail risks (which has important implications for systemic risk and wrong way risk).

Note LCH.Clearnet’s boast that it had collected far more margin than necessary to cover the realized losses on the Lehman’s derivatives positions that it cleared.   The CME also had more than enough Lehman margin to cover losses on its positions (although there were shortfalls on some product segments that were covered by excessive margins on others).

At the Paris conference I attended in September, the head of Eurex Clearing, Thomas Book, was adamant that the goal of his CCP, and of CCPs generally, was to avoid mutualizing risk if at all possible.  His answer surprised Bruno Biais, whose model of clearing in the paper he presented focuses on the role of the CCP as a default risk insurer.

I confess that I have been inadequately appreciative of this point as well.  Understanding its implications has important consequences, as I hope to show in a bit.

To summarize.  CCPs generally operate on a defaulter pays basis: this is also sometimes referred to as a “no credit” system.  That term will help illuminate the differences between cleared and uncleared markets.  The defaulter pays system means that the amount of risk shared through a CCP is extremely limited.  This limitation on risk sharing is best explained as the consequence of moral hazard.

In contrast to a cleared market operating on the no credit model, dealers in bilateral OTC markets historically extended credit to derivatives counterparties.  Put differently, OTC deals often bundled a derivatives trade with credit provision.  That is, dealers often willingly took on exposure to a default loss when entering into a derivatives deal with a customer.  (This is not true for all types of customers.  For instance, hedge funds typically had to post margin.)  Taking credit exposure is equivalent to extending credit to the counterparty.

Now consider whether a firm will prefer to trade a cleared derivative, requiring the posting of a high margin and which thus embeds no credit, or prefers instead to trade an otherwise identical OTC product that does embed credit.  To fix ideas originally, let’s consider a firm that is cash constrained.  Therefore, if it wants to trade the cleared product, it must borrow to fund the initial margin.  The cleared derivative is a no credit transaction, but that doesn’t mean that moving to clearing necessarily reduces the amount of credit the firm obtains: it can borrow the money needed to post margin, and indeed, may have to borrow it.

One source of credit is dealer banks.  So the firm could either enter into an uncleared bilateral trade with a dealer, or borrow money from the dealer bank to fund the IM.  (The argument doesn’t really depend on dealing with the same bank on the derivatives deal and the borrowing: this just facilitates the exposition.)

Here’s were the loser pays aspect of margin comes in.  Let’s say that the firm is selling a derivatives contract with payoff P. If the firm defaults, the OTC counterparty’s exposure is max[P,0].  But in a loser pays model, the margin M is almost always greater than max[P,0].  Thus, the borrowing from bank to fund margin almost always exceeds the default loss that the bank would incur if it entered into a bilateral deal with the firm.

I can show formally that if the firm already has debt outstanding, under standard pro rata/pari passu default loss allocation mechanisms, holding everything equal,  the bank’s default losses if it extends credit to the firm to fund margin almost always exceed, and never are smaller than*, the default losses that it would incur if it had entered an uncleared bilateral trade with the firm.  This, in turn, will make the cleared transaction more expensive for the cash-constrained firm, and it will prefer to trade the OTC product.

There are at least a couple of reasons why the cleared transaction can be more expensive.  One is what is effectively a debt overhang problem.  In order to induce the bank to lend the margin for posting at the CCP, the firm must promise it higher payments in non-default states than it has to promise the bank in these states when it trades OTC instead.  Since the firm’s managers, acting in the interest of equity, only care about payoffs in non-default states, this means that returns to shareholders are lower when it borrows to fund margin than when it deals OTC.  This can be seen another way.  I can also show formally that the payoffs to the firm’s other creditors are almost always higher, and never lower, if it borrows to fund margin than if it trades OTC.  Thus, the value of the the firm’s non-margin-related debt is higher if it trades a cleared product and funds the margin by borrowing, than if the firm uses the OTC product.  Since the value of the firm’s assets doesn’t differ in the cleared vs. uncleared cases, and since value is conserved, this means that equity is less valuable when the firm trades cleared products than bilateral ones.   Some of the benefit of borrowing to fund margin flows to other creditors; this is where the analogy to debt overhang comes in.

This is most easily seen in the following scenario.  The firm can become insolvent when max[P,0]=0, i.e., the bilateral contract is out of the money to the bank, and the bank suffers no loss due to default, and all the losses of insolvency would fall on other creditors.  However, if the bank had lent the firm money to fund margin, it would suffer a loss on the margin loan in this circumstance.  This loss would reduce the loss suffered by the other creditors.

OTC is cheaper than cleared products in other models of capital structure.  For instance, moral hazard (or adverse selection) mean that the firm will be credit constrained: the amount it can borrow is limited by its collateral, and/or the amount of cash flows that it can credibly pledge to lenders.  The same formal analysis implies that more cash flows in non-default states must go to supporting a margin loan in a defaulter pays clearing model than in a bilateral transaction.  This leaves less cash flows to support other borrowing, so by borrowing to fund margin loans the firm must borrow less to support other investments (which, in this sort of model, it has insufficient equity to fund itself).  Thus, borrowing to fund margins on cleared transactions crowds out borrowing to fund positive NPV investments.

This analysis implies that this cash constrained firm will choose to trade OTC rather than cleared products with defaulter pays margins funded with loans.  The bank is indifferent, because it will price the product or the loan to cover its costs, but the firm is always better off  with the bilateral trade because it has to pay the bank less if it trades OTC than if it borrows to fund margin.

Moreover, the analysis implies that if the firm is forced to clear, it will either scale back its derivatives trading (because the cleared transaction is more expensive), and/or reduce its investments in positive NPV projects. Cutting back derivatives trading is costly if this trading reduces the deadweight costs of debt, for instance.  Indeed, I can show that the cost of margin is especially high when the derivatives trade is a “right way” risk, as would occur when the firm is hedging.

Clearing mandates are therefore expensive for such firms, and there is a legitimate reason to exempt such firms from clearing requirements.  (Note that even if these firms are exempted, other rules affecting dealer banks, e.g., punitive capital charges on OTC derivatives trades, can induce an inefficient use of cleared transactions.)

This analysis explains the preference of many firms, especially corporate end users, for uncleared OTC trades that embed credit, as opposed to cleared transactions that must be funded by increased borrowing.  This, in turn, can explain the growth of OTC markets relative to exchange traded markets from the 1980s onwards.

It is useful to step back a bit here, and understand what is really going on.  In essence, in this model clearing is expensive because it causes one agency problem to exacerbate another.  CCPs adopt defaulter pays because of an agency problem: the moral hazard associated with risk sharing.  Debt is expensive or constrained for firms because of agency problems (e.g., debt overhang problems, or constraints on borrowing due to moral hazard).  Effectively, the firm must obtain more credit to support a cleared position than an uncleared one, and  the cost of debt arising from agency problems makes this higher level of credit more expensive.

This analysis raises the question of why firms would ever choose to clear.  There are a couple of answers to that.

First, there may be other (private) benefits.  For instance, netting economies may be greater with clearing.  Of course, the efficiency effects of netting are equivocal (because netting primarily has the effect of redistributing losses among creditors), but as a positive matter is is pretty evident that netting offers private benefits, and thus the mulitilateral netting that can occur in clearing, but not to the same degree in bilateral trades, could induce some traders to prefer clearing.

Second, the analysis started from the assumption that the firm at issue is cash constrained and hence has to borrow to fund margin on the cleared trade.  Some firms are not.  One example would be an ETF like USO or USNG, which collect the entire notional value of derivatives in cash from their investors.  These firms do not require any credit to meet margins.  Large real money funds, like a Pimco, that collect cash from investors and use derivatives to gain exposure to price risks would be another.

Even many hedgers may not suffer from cash constraints that limit their ability to trade cleared contracts.  Consider commodity trading firms.  They typically use derivatives to hedge inventories of commodities.  Banks, in turn, are willing to lend against these inventories as collateral.  Thus, the commodity trader can fund margin using borrowings secured by commodity inventories, and the lender does not share in default losses pro rata with other creditors.  This type of borrowing is fundamentally different than the borrowing considered above, in which the firm borrows against its balance sheet and default losses are shared with other creditors.

Thus, the simple models would predict that whereas cleared derivatives used to hedge liquid inventories are as cheap or cheaper than uncleared derivatives, it is much more expensive to use cleared derivatives to hedge cash flows on illiquid assets, or to hedge broad balance sheet risks.  This is largely consistent with my understanding of the pattern of usage of cleared and uncleared derivatives.

This model, which combines a model of the cost of risk sharing at a CCP with a model of the capital structure of firms, has both positive and policy implications.  In particular, it can explain the adoption of defaulter pays by CCPs.  It can also explain the disparities between OTC and cleared markets when CCPs utilize defaulter pays.  Moreover, it demonstrates that clearing mandates can be inefficient if they are applied too broadly.  One source of this inefficiency is that the mandate leads to a perverse interaction between agency problems.

Of course, a rationale for clearing mandates is that clearing reduces systemic risk.  Anyone who has read my work will know that I am dubious of that rationale on many grounds, but it is worthwhile to consider the implications of the foregoing analysis for systemic risk.

The model is too sparse to make very strong conclusions, but one consideration does stand out.   If firms borrow from OTC dealer banks to fund margins, holding the rest of the firm’s liabilities and assets constant, these banks suffer larger losses when the firm goes bankrupt if they lend to them to fund margins on  derivatives trades than if they enter into identical uncleared OTC derivatives trades.  As noted before, there is a distributive effect: other creditors suffer smaller losses.  The systemic implications of this redistribution depend on the relative systemic importance of the banks and the other creditors.  Dealer banks are definitely systemically important, but other creditors may be too.  Therefore, it is not evident how this cuts, but if one believes that large financial institutions that serve as OTC dealers are especially crucial for systemic stability, moving to cleared trades would tend to increase systemic risk because clearing actually increases their credit exposures to customers.

But again, caution is warranted here.  The redistribution result holds capital structure and derivatives trades constant, but of course these will be different if firms have to clear than if they don’t.  These changes are difficult to predict, and the systemic riskiness of different configurations is even more difficult to compare given how little we really know about the sources of systemic risk.   But the fact that clearing can lead to adverse interactions between agency problems should raise concerns about the systemic implications of forcing clearing.

*To be more precise.  When P>M, the CCP and the lender suffer default losses, and the sum of these default losses is the same as the bilateral counterparty would incur on an uncleared trade.  Relatedly, other creditors of the bankrupt firm suffer the same default losses in the cleared and uncleared cases when this condition holds.  They suffer smaller losses whenever this condition does not hold and the firm goes bankrupt.

The most recent Snowden revelation published by Der Spiegel (no doubt Putin’s favorite western publication) claims that (a) Merkel’s cellphone has been monitored by the NSA since 2002, and (b) the US has an electronic monitoring facility in Berlin, and numerous other cities around the world.

With regards to (b).  Good!

And especially in Berlin.  Especially.  Come on.  The place has been a viper’s nest of espionage since, oh I dunno, 7 May, 1945.  Please.  The German government has been thoroughly penetrated by first Soviet, and subsequently Russian, intelligence.  And the divided nature of Berlin made it a vortex of espionage.  And if you think that all fell down when the wall fell down, all I can say is: how was the ride on the cabbage truck? I mean other than the part where it hit the big pothole and threw you out like that.  Pity you landed smack on your head.

I only hope that NSA is vacuuming up every comm from Berlin residents Poitras and @ioerror (i.e., Jake Appelbaum).

With regards to (a).  So many things:

• This is typical Poitras/Holger Stark bait-and-switch.  A lot of breathless suggesting that NSA was hanging on Merkel’s every word, but buried in the piece is this:

Thus, the NSA would have targeted Merkel’s cell phone for more than a decade, first when she was just party chair, as well as later when she’d become chancellor. The record does not indicate what form of surveillance has taken place. Were all of her conversations recorded or just connection data? Were her movements also being recorded?

In other words, Der Spiegel is just guessing.  It doesn’t know the specifics of what information NSA collected: it suggests it was listening to everything, but in fact has no fricking clue. The rhetorical questioning is just so much bullshit.

• Given the equivocal nature of the Der Spiegel reporting, Merkel has not taken the honorable course, which would be to defer comment until she and the BND had the opportunity to confer with the US.  Presumably this reflects the fact that she is currently engaged in negotiations over the formation of a government, and hence needs to appease the left in Germany, and to indulge German anti-American neuroses.  Given the tight relationship between the German left (notably, the SDP) and Russia (can you say Gerhard Schroeder? I knew you could), all the more reason to keep close tabs on what is going on in Germany, and to suspect everyone. Everyone.
• Poitras et al control what is released. It is very easy to lie by selective disclosure. That’s why in the US, in court one is required to swear to “tell the whole truth.”  We know what the agenda of Poitras, Holger Stark, Appelbaum, Snowden, etc., is.  Given this knowledge, it is highly likely that they are cherry picking (or pit picking, more accurately) what to disclose so as to advance that agenda.  What in the vast trove of documents that Snowden stole might provide evidence that would validate American suspicions about some German politicians? And if there is evidence of perfidy by some German politicians, why should the US have believed ex ante that Merkel would be beyond suspicion? Especially given her East German upbringing?  The idea that any politician should somehow beyond suspicion is far beyond naive-and stupid.

Face it.  For deep historical reasons the US is rightly more suspicious about Germany than, say, the UK or Australia or Canada.  Which is why the US puts Germany in a different category, and treats it differently.  And for other deep historical reasons, Germany resents this deeply.

Objectively, based on history and basic logic, US intelligence collection in Germany-including on Merkel-is eminently reasonable.

And another point cannot be emphasized enough.  Snowden attempts to justify his theft and disclosure of classified documents as a way of protecting the civil liberties of Americans.  But the information he revealed about the collection of information on Americans was (a) widely known before anyone had heard of the grandiose Millennial Edward Snowden, and (b) in no way identifies any individual whose rights were violated.  Moreover, and more importantly, none of the Snowden revelations since June have been about “spying” on Americans (except for the stupid “loveint” inanity).  Instead, every revelation has been calculated to damage US interests and poison its relationships with historical allies.

I ask again: cui bono? I answer again: Putin bono. Meaning that every (selective) revelation that damages the US and boosts Russia/Putin raises the odds that this was a Russian operation from the beginning. Because I live by Bayes’ Law.

Addendum: This post from Volokh Conspiracy offers some complementary  arguments as to why surveillance of foreign leaders, especially German leaders, is a very prudent thing to do.  In brief: we don’t know what we don’t know; what you don’t know can hurt you; and you won’t know unless you try to find out.

The Economist has come a long way since Bagehot.  I said long way, not good way.

The latest case in point: its support for two “whistleblowers”, Edward Snowden and Hervé Falciani:

WHAT Edward Snowden is to mass surveillance, Hervé Falciani is becoming to private banking. In 2008 the now 41-year-old native of Monaco walked out of the Geneva branch of HSBC, where he had worked for three years, clutching five CD-ROMs containing data on thousands of account holders. The theft lobbed a bomb into Europe’s private-banking market, spawning raids and tax-evasion investigations continentwide. In the latest, this week, Belgian agents swooped on the homes of 20 HSBC clients, including some with ties to Antwerp diamond dealers.

I am having a devil of a time trying to reconcile this simultaneous boosterism of Snowden and Falciani.  The pro-Snowden narrative is that he has revealed a vast program of government collection of information on private individuals.  So what did Falciani do?  He stole information on private individuals from his employer, HSBC, and provided it to governments.  So if you are hung up on the government having access to your private information, maybe-maybe-you could lionize Snowden.  But then you’d have to hate on Falciani.  But not The Economist.  It loves both of them.

And here’s a big difference between them. A huge difference, and one that makes The Economist’s position even more bizarre.

In the US and UK, there are extensive measures in place to prevent the information collected by NSA and GCHQ from being used in criminal prosecutions.   Indeed, one of the most recent Snowden leaks is that GCHQ waged a long fight AGAINST using intercepts in criminal prosecutions. (The Guardian is pathetically spinning this as another huge scandal.  WTF?)

But governments, notably the French and German governments (doesn’t that peg the irony meter?) are gleefully using the information Falciani stole from his employer to prosecute individuals.

So I guess intrusive surveillance of your private information, including your financial information, is A-OK with The Economist as long as it is for the purpose of ensuring that you render unto Caesar what is Caesar’s.  But collection and retention of some private information (e.g., metadata) that may be used if it is subsequently connected with known terrorists, and only then under rigorous protocols, is somehow an outrage.

Look, people. If you are concerned about your liberty and privacy, you have far more to fear from your country’s tax authorities than its intelligence services.  Quite frankly, the NSA couldn’t give a rat’s ass about your financial affairs, unless those somehow intersect with the financial affairs of terrorists.  The IRS, on the other hand, cares very much.  Very much.

And let’s get one thing straight right now.  Let’s drop any pretense that Snowden’s actions were driven by his deep, deep, deep concern for individual privacy.  Yeah, that was the teaser in his original disclosures: and those disclosures weren’t really news.  That’s the story that he uses to wrap himself in the mantle of righteousness. But virtually every Snowden leak since June has been about US government intelligence operations directed at other countries.  Which is, you know, what intelligence services do.  And which you should be damned glad the NSA, CIA, etc., do in fact do.

If you have any doubts, consider the following.  Snowden stole 30,000 documents from the Defense Intelligence Agency. How is that related to US civil liberties and privacy?  It is infinitely more likely that such documents would be related to the US military’s attempts to monitor and understand and analyze US enemies and potential enemies.  What was my first clue? Maybe “Defense” in the title of the agency whose documents Snowden stole.

And lo and behold, what is the first piece of information released from this ill-gotten trove? A revelation that a NATO country is collecting information on the Russian military:

In one case, for instance, the files contain information about a program run from a NATO country against Russia that provides valuable intelligence for the U.S. Air Force and Navy, said one U.S. official, who requested anonymity to discuss an ongoing criminal investigation. Snowden faces theft and espionage charges.

Let’s shave with Occam’s Razor again, shall we?  Snowden hides out in the Russian consulate in Hong Kong. Snowden decamps to Russia. Snowden hides out with the FSB. (Spare me the BS about him not being in control of Russian security services. I didn’t fall head first off the cabbage truck.) Snowden’s lawyer is a well-known FSB apparatchik. Snowden steals US military intelligence documents. One of these documents is released revealing the cooperation of a NATO country with the US in an intelligence collection operation directed against Russia. (Good!-and I mean good that we’re collecting such information, not that this is being revealed.) Not to mention that many of Snowden’s revelations are wreaking havoc with America’s relationships with its allies.  And never forget Putin’s zero sum mindset: what hurts the US, helps Russia.

So what’s more likely?  That Snowden (and his enablers Poitras and Greenwald) are oh-so-concerned about the privacy of Americans and Europeans and Brazilians? Or that this lot is-and likely has been all along-tools of Putin and Russian intelligence, and are revealing information that is damaging to the US and beneficial to Russian interests?

The Romans had an expression for this: cui bono? The answer in this instance: Putin bono. So Snowden is either a useful idiot, or an active collaborator.  As Orwell would have put it: He is objectively pro-Russian, and pro-Putin.

Snowden and Poitras and Greenwald are rendering unto Putin.  Every damned day. It’s beyond obvious.  But it’s never pointed out, particularly by those who should know better. And yeah.  I’m looking at you, Luke Harding.  Why won’t you investigate the nexus between Snowden and The Mafia State?  It seems a natural.  What are you afraid of?

If you want a sick laugh, read this: “US Newspapers Biased Towards NSA in Snowden Coverage-Study.”

That’s funny.  I hadn’t noticed.

But it’s from the Columbia Journalism Review, AKA The Prog Tattler, so take it with a grain of salt.

I mean, seriously.  The papers studied include the NYT, the LAT, and the WaPo.  The NYT is actively cooperating to distribute Snowden information, and ran the Risen “interview” with Someone Claiming to Be Snowden, where by “interview” I mean “stenographic transmission” (and where I really mean something that is sufficiently vulgar that I will leave it to your imagination).

And if you want to see how pro-NSA the @washingtonpost  (the outlet of Snowden fanboy and Poitras co-byliner Bart Gellman, so ya, it’s in the tank for the NSA) is, for another gag-worthy read check out this article. Page 2 is basically a regurgitation of Snowden’s self-justifications, embroidered with rah-rahing from Thomas Drake, and no-none, zero, zip, nada-contrary opinion.  It’s like a legal brief for Snowden.

And consider the substance of the disclosure:

U.S. officials are alerting some foreign intelligence services that documents detailing their secret cooperation with the United States have been obtained by former National Security Agency contractor Edward Snowden, according to government officials.

. . .

In one case, for instance, the files contain information about a program run from a NATO country against Russia that provides valuable intelligence for the U.S. Air Force and Navy, said one U.S. official, who requested anonymity to discuss an ongoing criminal investigation. Snowden faces theft and espionage charges.

“If the Russians knew about it, it wouldn’t be hard for them to take appropriate measures to put a stop to it,” the official said.

But yeah. Snowden is all about transparency and human rights and protecting US citizens from unwarranted intrusions by the US government, and would never ever EVER do anything that would jeopardize US security. And no way-NO WAY-he’s doing anything to help out the Russians.  He’s totally a free agent. His own man. After all, he tells us so.  (The usual caveat applies: someone on an encrypted communication emanating from, er, Russia, claiming to be Edward Snowden tells us so.)

I say again: Edward Snowden is objectively pro-Russian, pro-FSB/GRU/SVR.

Only those who are being deliberately obtuse fail to see this.  There are none so blind as those who will not see.

The Columbia Journalism Review notwithstanding, that category includes most of the journalistic establishment. The most disappointing representatives being those who are very well aware of how malign Russia is, its security services in particular.  I am thinking specifically of Luke Harding (and to a lesser degree, Edward Lucas).  The author of Mafia State suffered first hand at the hands of the FSB, but he refuses to connect the dots between Snowden and Russian security services. Perhaps its because he works for the Guardian, which is totally invested in the Snowden narrative.  Perhaps he believes the Snowden narrative, and given the choice between the US and Russia, he choose the latter despite his personal experience.  Or perhaps he just doesn’t want to become an outcast from the journo tribe.

When called out on this on Twitter (not by me, btw), he responded in a very craven fashion, claiming he’s too involved in writing a book.

The journalistic tribe is rallying around Snowden.  Worse than that: it is flacking for him.  For the CJR to say the exact opposite is beyond travesty.

In September, the CFTC’s new SEF rule threw swap market participants into a panic when they realized that footnote 88 buried within the rule would require instruments that were thought to have been outside the scope of the rule to be traded on the new SEFs:

Further muddying the waters is a footnote that was written into the margins of the final rules that could end up having a major impact. Footnote 88 requires certain entities that offer trade execution of swaps on a multiple-to-multiple basis to register as SEFs, even if they only execute or trade swaps that are not subject to the trade execution mandates.

This could lead to a significantly expanded SEF universe, which is already expected to be crowded. Trading participants would have to code and test to these various SEFs, some of which will have hastily assembled their platforms in order to be compliant. The on-boarding process will be rushed for participants in order to generate needed liquidity at the Oct. 2 starting point.

“For some of our members who have decided that they’re going to connect to each one of the platforms that’s available, they’re going to need this unique coding and connectivity to these new platforms,” Nevins says. “That’s a lot of work in a very short period of time.”Those who don’t want to connect to each venue will have to decide quickly which SEFs they want to work with, and they still need to hurry the coding and connection of pipes to the SEFs.

But two can play the footnote game.  Today Bloomberg reports that the banks have found a footnote in the rule that allows them to shelter some trades from the SEF execution mandate.  Footnote 513.  (The number itself should give an indication of how bloated and complex the rule is.)

Wall Street, trying to preserve profits from swap trading in the face of tougher scrutiny from Washington, has found a new way to keep some of its overseas deals private. It’s called Footnote 513.

Banking lawyers have seized on the wording of the footnote, contained in an 84-page policy statement issued in July by the main U.S. regulator of derivatives. The largest banks told swap brokers in late September that the language means certain swaps still don’t fall under the agency’s new trading rules, according to three people briefed on the discussions.

London-based ICAP Plc (IAP), one of the largest swap brokers, told the banks it didn’t agree with their interpretation, said the people, who spoke on condition of anonymity because the discussions weren’t public. Other brokers accepted the banks’ position and have been trading billions of dollars in contracts outside the new regulatory system, the people said.

The deals in question include swaps for foreign clients that are arranged by U.S.-based traders or brokers and then booked through a U.S. bank’s overseas affiliate. Bank lawyers say that if the trade goes through an affiliate it can stay private and doesn’t need to be handled on one of the public electronic trading platforms approved by the Commodity Futures Trading Commission, two people said.

Other than lawyers, who thinks this Duel of Footnotes is anyway to run a railroad?  (I know, I know: most lawyers think this is stupid too.  It’s just that they’ll be about the only ones that profit from it.)

And remember it’s not just footnotes.  It’s commas too.  As I wrote about a year ago, the decision overturning the CFTC’s position limit rule hinged in part on the placement of commas.

The whole structure is still under construction, and it is already requiring a plethora of ad hoc fixes, in the form of exemptions and no action letters, which Commissioner Scott O’Malia trenchantly criticized.

And it’s not just in the US.  The rules and paperwork are metastasizing in Europe too.  As one commentator puts it, “Regulation descends into a Kafkaesque bureaucracy.”  Yeah.  This will work.  Especially when their Kafkaesque bureaucracy clashes with our Kafkaesque bureaucracy.  Kafka squared. Woot!

And it’s not just derivatives.  It’s hedge funds.  And I could go on.

The hedge fund article also points out something I’ve been hammering on for years now: perversely, since compliance costs have a huge fixed cost element, the regulatory onslaught creates scale economies that favor concentration and consolidation, and which can potentially reduce competition.  You are seeing it in hedge funds.  You are seeing it in banking.  You are seeing it in FCMs.

And I do mean perverse, because among the ostensible purposes of these regulations were mitigating the too big to fail problem, and promoting competition.  The dramatic increase in regulatory overhead that favors the big over the small is completely at odds with these purposes.

Moreover, don’t forget another point that I’ve made.  These rules are systemic in nature, in the sense that they affect myriad financial market participants, and in pretty much the same way.  Meaning that if one of the rules is fatally flawed, it could lead to a serious systemic problem.

Which raises the question: what footnote-or what comma-in what rule will create a future crisis?  Perhaps that’s a little hyperbolic, but not outrageously so.

Apropos the ongoing discussion in the comments regarding Russia’s desperate need for an enemy, at all times, and perhaps especially now.  In the aftermath of the attack by a Muslim Black Widow* on a bus in Volgograd, Putin blamed Islamic terrorism in Russia on . . . foreigners.  You knew he would:

“Some political forces use Islam, the radical currents within it … to weaken our state and create conflicts on Russian soil that can be managed from abroad,” Putin told Muslim clerics meeting in Ufa, Bashkortostan’s capital, in southern Russia.

“Tensions between the West and the Islamic world are rising today, and someone is trying to gamble on that by pouring fuel on the fire,” he added.

Where to begin?

The most important point: Russia pours all the fuel on the fire that’s needed, and has been doing so for hundreds of years, especially since the early-19th century.  Consider this description of General Yermoloff, sent to “pacify” Chechnya in 1816(!), from Paul Johnson’s Birth of the Modern:

Unlike a General Rosas in the Argentine, who was equally cruel but who possessed the means to make his cruelty effective, Yeroloff created problems rather than solved them. [Sound familiar?]  He served in the Caucasus for a decade and seems to have learned nothing there. [Where have I heard this before?] His approach was simple.  The entire region, in his view, was already legally part of the Russian empire, whether actually conquered or not.  All its inhabitants were therefore Russian subjects, and their submission must be total.  Anything less was rebellion; and the punishment for rebellion was death. . . . His attitude indeed was closer to that of a Roman legionary commander of the 2d century AD than that of an educated man born at the end of the Enlightenment. . . .

But the fact that the campaign to subdue the region was still going on in the 1850s is the best testimony of the failure of Yermoloff’s methods.

1850s? Ha! It’s still going on 197 years after Yermoloff.  And consider this:

This horrific reprisal, far from ending Chechen resistance, provoked a jihad, or holy war.  Indeed, it did more than that.  It gave rise to a new and intense form of Muslim fundamentalism known as Muridism.

In other words: managed from abroad my [insert body part of choice here, depending on your sensitivities]. It’s mismanaged from Moscow.  And it has been for hundreds of years. Period.

This speech by Putin provides a perfect illustration of how he is a prisoner of the Russian past. And the Russian past and present and sadly future in the Caucasus provide a perfect illustration of Einstein’s definition of insanity: doing the same thing over and over and over again, and expecting a different result.

*Except she’s not really a widow, apparently.  Her husband-or boyfriend, the accounts vary-a Slavic Russian whom she recruited to radical Islam, is alive, and a very wanted man.

The tragic farce that Obamacare lurches from our nightmares into our reality.  The Healthcare.gov website is the poster child for an IT FUBAR.

But if only the Tsar had known!  Then none of this would have happened! Because the Tsar is omnipotent-just not omniscient, apparently. (h/t @MaryForbes14).

I actually don’t want to put too much emphasis on the website clusterf*ck, because it will probably be fixed. Eventually. (Cue the “Comeback Kid!” narrative.)  Indeed, I sincerely wish that the website worked, so that people could learn about the complete economic dysfunction that is Obamacare.  (One hypothesis to explain the insane website design that doesn’t permit shopping for plans until you’ve registered is that the government spider doesn’t want you little flies to know what you’re in for until you’re well and truly stuck.)

The Obamacare train wreck shares a lot of similarities with another train wreck from the real land of the Tsars.  Namely, the implosion of something that is supposed to explode, in a very big way: the Bulava missile.

I’ve written about its myriad failures before.  For a while it seemed that the program had been fixed, and was on track.  But then another test failure occurred.  As a consequence, Russia “return[ed] of all its systems to the manufacturer” and suspended sea trials of the subs (the Nevsky and Monomakh) designed to carry it.

This is apropos the discussion going on in the comments regarding the sanity, or lack thereof, of Putin’s defense buildup, and especially his throwing trillions of rubles at the Russian Navy.

Read this, and I think you will see the parallels between Bulava and Obamacare:

Although Defense Minister, Army-General Sergei Shoigu and Deputy Prime Minister Dmitry Rogozin publicly clashed over the Bulava issue, the commission was due to complete its investigation by October 1. Many specialists, however, believed it would take much longer (RIA Novosti, September 18; Rossiyskaya Gazeta, September 19). The first deputy general director of the Votkinsk factor, Sergey Proskurin, remained cool about the investigation, insisting that his company was “prepared for any commission. We have had inspections after other failed launches of the Bulava, but in no case was a fault of the Votkinsk factory discovered. We assemble the missiles according to the design-engineering documentation, and the level of quality is sufficiently high, and there is proof of this” (Vzglad, September 26).

In short, the Russian answer is that no one is to blame, apparently leaving the Kremlin with the explanation that the Bulava is simply supernaturally jinxed. Independent Moscow-based defense analyst Aleksandr Golts notes that more than 650 defense companies are involved in the overall manufacturing and design and eventual “success” of the Bulava project, and sees the recurring nightmare of repeated failures as a symptom of the weaknesses of the domestic defense industry. “Generally, the rearmament of the Russian Army is entering a new cycle. Without any kind of results,” Golts concludes (http://kommersant.ru/doc/2280505).

It seems that the situation is no better for the much vaunted Bulava; failure to launch has become a national embarrassment. Bulava production must reach an estimated 128 missiles and many more warheads, overcome system design issues, planning flaws, technical and defense industry weaknesses. It has thus become synonymous with failure and with all that is wrong in Russia’s defense industry. In this context, as steps are taken to correct these flaws and eventually introduce Borei-class submarines equipped with Bulava missiles as part of the nuclear triad, Western governments should remain highly skeptical about other claims from Moscow about progress toward advanced conventional forces or, yet more farcical still, the long promise of “cyber-warfare command, which, like the Bulava, remains good on paper but not as a working instrument. More mysterious still, in this context, is the fact that Shoigu and Rogozin remain in their posts. [All emphasis added.]

The last part is particularly apposite.  Just replace “Shoigu and Rogozin [The Ridiculous!]” with Sebelius [The Stooge!] and the fit is perfect.

Obamacare.  Bringing the best of Russian defense contracting to a doctor near you! Or maybe not.  Because the doctor near you may be out of network, and the doctor in your network may not be near you!

Catherine Fitzpatrick is less than convinced of the importance of the seeming contradiction between Snowden’s early claim that he vetted every document, and his current claim that he has no control over the documents and has outsourced all of the decisions regarding what to release to Greenwald and Poitras.  I get that there are ways to reconcile the statements, but they fail the Occam’s Razor test, IMO.  The simplest explanation for the statements is that they are in contradiction with one another.  Other scenarios are far more convoluted.

The fact that his June and October remarks are in stark contrast should at least prompt journalists to raise questions, and to demand that he reconcile the statements.  You know, journalists like James Risen, who just basically transcribed Snowden’s remarks and did not ask a tough question.  Or if he did, Snowden didn’t answer it, and Risen didn’t tell us that salient fact.

Catherine suggests that maybe Risen was unaware of Snowden’s previous remark.  If so, all the worse for Risen.  This interview-if it was really with Snowden, and if it was, whether Snowden was free to respond as he liked-is a major get.  Any respectable journalist preparing for such an interview should conduct exhaustive research and familiarize himself with things the subject has said before in order to prepare questions and to be ready for any inconsistencies.  I do expert witness work, and from that experience I know that every lawyer prepping a witness familiarizes him or herself with everything the witness has said or written on even tangentially related subjects: catching contradictions is the name of the game.  And for crying out loud, Snowden has been virtually silent for months, so there’s not that much to read.

But the contradictions don’t end with Snowden’s Hong Kong and Russia statements.  He and Greenwald also offer conflicting accounts of their collaboration.  In the Risen interview, Snowden claimed “he did not control what the journalists who had the documents wrote about” in order to “divorce” his “own bias” from the “decision making of publication.”

But Greenwald told a Dutch audience that he collaborates with Snowden closely, and is communication with him every freaking day.  (The same caveat of whether it’s really Snowden he’s communicating with holds here.):

But in an hour-long discussion on stage with a Dutch journalist, Greenwald suggested that his life was now immensely complicated. A New York lawyer before turning into a high-profile blogger in 2005, he revealed that he was in daily contact with Snowden—a fact that came as a surprise to most in the audience—in what is an active collaboration to sift through the mountain of documents Snowden carried out of the U.S. Snowden contacted Greenwald and U.S. filmmaker Laura Poitras after taking the information to Hong Kong.

Again, perhaps there is a way to square Greenwald’s description of a daily, active collaboration to sift through a “mountain of documents” with Snowden’s characterization of a relationship in which he has nothing to do with the documents, what Greenwald and Poitras write about, etc.  But the most straightforward reading is that the two descriptions are in total conflict.  Snowden describes his role as already washed his hands of both the documents and the decisions on how to use them.  Greenwald says Snowden is very hands on.   And how do they collaborate to “sift through a MOUNTAIN of documents” if Snowden doesn’t have them?  Again, they might be sitting somewhere and Snowden can access them electronically, but that seems to be a highly risky method of operation.  And it also would mean that Snowden’s statement that the journalists have the documents, and the related insinuation he doesn’t, is slippery at best.

Again.  Would somebody ask them?  Both of them?

Yes.  I understand. Eddie is so hard to ask.  And I repeat: why is that?  Can’t do YouTube? Can’t meet journalists face-to-face in a secure setting?  Can’t do Skype?

In other words, Eddie’s unavailability for questions is exactly what should be raising questions.  Including questions about his veracity.  And there are enough contradictions even in the existing thin record to make these questions very serious ones.

But nobody asks the principals, and indeed, virtually no one even raises the questions rhetorically in stories on Snowden. Most likely because journalists are largely invested in the Snowden narrative, and don’t want to pull on any threads that could make the whole thing unravel.