Streetwise Professor

June 18, 2014

The For-Profit Exchange Red Herring Are Running Again

Filed under: Derivatives,Economics,Exchanges,History,Politics,Regulation — The Professor @ 7:28 pm

One of the reddest of herrings is that the movement to for-profit exchanges is the source of our current woes in securities and derivatives markets. The herring were running today in DC, at a hearing on HFT held by  the Permanent Subcommittee on Investigations. One of the witnesses, Andrew Brooks of T. Rowe Price testified thus:

We question whether the functional roles of an exchange and a broker-dealer have become blurred over the years creating inherent conflicts of interest that may warrant regulatory action. It seems clear that since the exchanges have migrated to “for-profit” models, a conflict has arisen between the pursuit of volume (and the resulting revenue) and the obligation to assure an orderly marketplace for all investors. The fact that 11 exchanges and over 50 dark pools operate on a given day seems to create a model that is susceptible to manipulative behaviors. If a market participant’s sole function is to interposition themselves between buyers and sellers we question the value of such a role and believe that it puts an unneeded strain on the system. It begs the question as to whether investors were better served when exchanges functioned more akin to a public utility. Should exchanges with de minimus market share enjoy the regulatory protection that is offered by their status as exchanges, or should they be ignored?

This is tripe from beginning to end. The idea that exchanges ever “functioned as public utilities” is a joke. Non-profit, mutual exchanges were clubs that operated in the interest of the brokers and market makers that owned them. Period. The public be damned.

Not-for-profit is not a synonym for public-spirited. As I showed over 15 years ago, exchanges adopted the non-profit form as a way of reducing rent seeking battles between heterogeneous members. It had nothing to do with serving the public interest.

Jeff Carter has a great blog post about how not-for-profit exchanges really operated. He gives some very good examples of something I emphasized in my 2000 JLE piece: the primacy of committee governance as a way of refereeing rent-seeking squabbles between very, very profit oriented members:

Exchanges prior to demutualization were run by members.  As a board member, I chaired, co-chaired or served on several committees.  I was lobbied constantly by members.  I cannot remember the exact number, but I think we had some 200 committees, sub-committees and ad hoc committees.  We had 40 board members.  It was almost impossible to get anything meaningful done.

Here is an example.  We had a rule that if a contract reached an average daily volume of 10,000 or more, in financial futures it could no longer be dual traded.  The Nasdaq pit was taking off and somewhere in 1999, it went over 10k ADV.  Locals wanted dual trading to end.  Brokers didn’t want it to end.  As a board (and local), I thought we should end it because that was the hard and fast rule.

Nasdaq brokers threatened to quit if we banned dual trading.  The board agreed not to ban it.  That doesn’t happen in a for profit environment.

Another example.  We needed to adjust a pit configuration.  It is tough to put in a blogpost the level of argument that ensued, the amount of committee time and lobbying that took place, and the number of committees that had to check off a relatively minor adjustment.  But, that’s the way things worked because real estate was extremely valuable.  One foot higher, lower to the right or left could mean the difference between survival and life.

And if you think that there were no conflicts of interest in traditional not-for-profit exchanges, I have several bridges to sell you. And I’ll throw in some Arizona coastline, just to show what a swell guy I am.

With respect to self-regulation, my work from over 20 years ago demonstrated that traditional exchanges had little incentive to adopt and enforce rules that reduced certain forms of inefficient conduct (such as manipulation) because (a) they didn’t internalize the benefits of doing so, and (b) these rules could be exploited to redistribute rents among members, and a primary purpose of exchange organization and governance is to mitigate such distributive conflicts.

Unpublished work, which I might dust off, compared and contrasted the incentives of for-profit and not-for-profit exchanges to self-regulate efficiently. I showed that FP exchanges actually have superior incentives to prevent and deter some forms of inefficient conduct.

But the main point to keep in mind is that there was never, ever, ever, any Golden Age of public spirited exchanges acting in the public interest. Indeed, the entire reason that laws such as the Securities and Exchange Act, and the Commodity Exchange Act, were passed was that exchanges were widely-and correctly-perceived as being extremely flawed guardians of the public interest.

I say again. Not-for-profit exchanges shouldn’t be confused with charities, like the United Way. The non-profit form, and the committee-driven governance that Jeff describes, had one objective, and one objective only: to benefit (greedy) exchange members. Technological changes, specifically the move to electronic trading, eliminated the need for ownership and governance structures that protected specialized intermediaries like locals and floor brokers. Once that happened, exchanges demutualized. End of story.

There are serious issues about the incentives of exchanges, be they for-profit or non-profit, to adopt and enforce efficient rules. That’s where the focus should be. Superficial invocations of some non-existent Golden Age do not advance the debate. They put it in reverse. So let’s give that a rest and focus on the real issues, shall we?


The Klearing Kool Aid Hangover

Back in Houston after a long trip to Turkey, France, Switzerland, and the Netherlands speaking about various commodity and clearing related issues, plus some R&R. Last stop on the tour was Chicago, where the Chicago Fed put on a great event on Law and Finance. Clearing was at the center of the discussion. Trying to be objective as possible, I think I can say that my critiques of clearing have had an influence on how scholars and practitioners (both groups being well-represented in Chicago) view clearing, and clearing mandates in particular. There is a deep  skepticism, and a growing awareness that CCPs are not the systemic risk safeguard that most had believed in the period surrounding the adoption of Frankendodd. Ruben Lee’s lunch talk summarized the skeptical view well, and recognized my role in making the skeptic’s case. His remarks were echoed by others at the workshop. If only this had penetrated the skulls of legislators and regulators when it could have made a major difference.

And the hits keep on coming. Since about April 2010 in particular, the focus of my criticism of clearing mandates has been on the destabilizing effects of rigid marking-to-market and variation margin by CCPs. I emphasized this in several SWP posts, and also my forthcoming article (in the Journal of Financial Market Infrastructure, a Risk publication) titled “A Bill of Goods.” So it was gratifying to read today that two scholars at the LSE, Ron Anderson and Karin Joeveer, used my analysis as the springboard for a more formal analysis of the issue.

The Anderson-Joeveer paper investigates collateral generally. It concludes that the liquidity implications of increased need for initial margin resulting from clearing mandates are not as concerning as the liquidity implications of greater variation margin flows that will result from a dramatic expansion of clearing.

Some of their conclusions are worth quoting in detail:

In addition, our analysis shows that moving toward central clearing with product specialized CCPs can greatly increase the numbers of margin movements which will place greater demands on a participant’s operational capacity and liquidity. This can be interpreted as tipping the balance of benefits and costs in favor of retaining bilateral OTC markets for a wider range of products and participants. Alternatively, assuming a full commitment to centralized clearing, it points out the importance of achieving consolidation and effective integration across infrastructures for a wider range of financial products. [Emphasis added.]


A system relying principally on centralized clearing to mitigate counter-party risks creates increased demand for liquidity to service frequent margin calls. This can be met by opening up larger liquidity facilities, but indirectly this requires more collateral. To economize on the use of collateral, agents will try to limit liquidity usage, but this implies increased frequency of margin calls. This increases operational risks faced by CCPs which, given the concentration of risk in CCPs, raises the possibility that an idiosyncratic event could spill over into a system-wide event.

We have emphasized that collateral is only one of the tools used to control and manage credit risk. The notion that greater reliance on collateral will eliminate credit risk is illusory. Changing patterns in the use of collateral may not eliminate risk, but it will have implications for who will bear risks and on the costs of shifting risks. [Emphasis added.]

The G-20 stampede to impose clearing focused obsessively on counterparty credit risk, and ignored liquidity issues altogether. The effects of clearing on counterparty risk are vastly overstated (because the risk is mainly shifted, rather than reduced) and the liquidity effects have first-order systemic implications. Moving to a system which could increase margin flows by a factor of 10 (as estimated by Anderson-Joeveer), and which does so by increasing the tightness of the coupling of the system, is extremely worrisome. There will be large increases in the demand for liquidity in stressed market conditions that cause liquidity to dry up. Failures to get this liquidity in a timely fashion can cause the entire tightly-coupled system to break down.

As Ruben pointed out in his talk, the clearing stampede was based on superficial analysis and intended to achieve a political objective, namely, the desire to be seen as doing something. Pretty much everyone in DC and Brussels drank the Klearing Kool Aid, and now we are suffering the consequences.

Samuel Johnson said “Marry in haste, repent at leisure.” The same thing can be said of legislation and regulation.

June 15, 2014

Obama Wants to Reverse Bush’s Iraq Mistake In the Worst Way, and Has Succeeded

Filed under: History,Military,Politics,Russia — The Professor @ 9:15 pm

Jeez, I take off a few days for a conference in Amsterdam, a quick trip to Bern to discuss commodity trading firms with the Swiss government, and some R&R, and the world careens to hell in a rocket propelled hand basket.

During this brief hiatus, Russian tanks and Grad rocket launchers conducted a probe into Ukraine, and a transport plane carrying Ukrainian paratroopers was shot down, killing all aboard. What’s more, the world’s most vicious, brutal, and crazed jihadist group, ISIL (aka ISIS) captured Iraq’s second largest city (Mosul), where it immediately instituted a reign of terror. Not content with this, ISIL surged south, capturing Tikrit, reached the outskirts of Samara, and threatened to assault Baghdad. ISIL captured large quantities of US-supplied weapons and equipment, and bolstered its finances by looting hundreds of millions of dollars from the Mosul branch of the Iraqi central bank.

In response, the Kurdish Peshmerga seized Kirkuk, and the Iranians dispatched three battalions of its Qods force to prop up the Shia-dominated Iraqi government.

ISIL’s advance was made possible by the utter collapse of at least two Iraqi army divisions.

Obama’s response? A peevish statement that basically told the Iraqis they are on their own, delivered in front of Marine One before embarking on a-what else?-golfing and fund-raising weekend. Obama blamed (with some justice) Iraq’s government for these developments, and said more about what the US wouldn’t do than what it would. Later it was announced that he would take a few days to figure out what to do, even though during his original statement he said that the developments were not a surprise: if not a surprise, why weren’t contingency plans in place? Why the need to mull over responses to anticipated developments?

Today the US announced that a carrier (the George H. W. Bush) would be dispatched to the Gulf. Perhaps the time to think about what to do was nothing the sort. Perhaps we just didn’t have the resources in place to respond rapidly: that would be a repeat of previous problems, notably Benghazi. (This also illustrates the potential dangers of reducing the US carrier fleet below 11 decks, as some are proposing.)

US airpower could do a great deal to stop ISIL’s advance. The further it drives into the heart of Iraq, the longer its communications and supply lines become. These are vulnerable to air power. Similarly, any ISIL assault on Baghdad or Samara would be at the mercy of precision air ordnance.

Although I doubt that ISIL has the capability to attack Baghdad successfully, especially the face of US airpower, reversing its gains will take brutal, close-in fighting in urban terrain. The best military in the world was able to achieve this at considerable cost in places like Fallujah and Ramadi. I doubt the Iraqi military has either the capability or the will to achieve it. Thus, get ready for ISIL to control an extensive territory in the heart of the Middle East.

The Maliki government supposedly asked for US air support in Mosul, but we declined. Presumably, the experience of the last week will lead to a reversal of such decisions.

But one cannot be sure with Obama, especially where Iraq is concerned. He believes fervently that American involvement there in 2003 was a  colossal error, and has wanted in the worst way to reverse Bush’s mistake, and has succeeded.

Whatever you think about the decision to invade in 2003, it happened. It is a historical fact.

Sunk costs are sunk. You can’t undo what has already been done. You can just deal with the consequences of past decisions-including past mistakes-the best you can.

The US did this in a fashion that brings to mind Churchill’s aphorism that the US always does the right thing, after trying everything else first. After years of missteps, the Surge and the associated Anbar Awakening produced a stable (by Iraqi standards) situation that held out hope for progress in that cursed country. As a result, Obama inherited a manageable situation, which he then proceeded to mismanage in every way possible. He snatched defeat from the jaws of a hard-fought victory, paid for in the blood, sweat, and tears of American soldiers and Marines.

This mismanagement was rooted in Obama’s fixed belief that American involvement in Iraq was a blunder and a sin. Based on this belief, Obama was willing to exit Iraq under almost any terms. Even though it was widely predicted at the time that a complete American withdrawal would create a serious risk of a resurgence of the Sunni terrorists (like ISIL), in part due to the fact that our absence would permit the Shia Maliki to engage in a sectarian purge that would undo everything accomplished in Anbar and elsewhere, Obama single-mindedly pursued a course that ended with the departure of all American troops. He made only a token effort-at best-to negotiate a status of forces agreement that could have allowed Americans to remain in the country. It is arguable that he actually deliberately undermined the achievement of such an agreement.

With the Americans gone, training of Iraq’s army effectively stopped, Iraq’s intelligence capability plummeted, and Maliki pursued his sectarian agenda. All of these factors contributed significantly to the current disaster.

Now Obama is allegedly conditioning the commitment of American air power on the negotiation of more inclusive political arrangements in Baghdad. Yes, such arrangements are necessary to create an Iraq that is not a cockpit for Sunni-Shiite-Kurdish war of all against all. But they will take a long time to negotiate, and the immediate military problem is too pressing to await the completion of such a process. What’s more, political negotiations are unlikely to succeed while the country is under existential threat. This is especially true given that no sane Sunni leader will negotiate while the head choppers of ISIL are in ascendence. ISIL must be cut down substantially before new political arrangements can be crafted. This all means that Obama’s gambit is doomed to failure.

Which may be his intention. He is so inveterately opposed to American involvement in Iraq that I can easily see him imposing impossible to meet conditions in order to preclude US re-engagement.

Obama campaigned in 2012 on the theme that he had ended the war in Iraq. War can never be ended unilaterally, except by surrender. The enemy has a say. And that enemy-ISIL-is now having that say in a very convincing way.

Whatever you think of the situation Obama inherited in 2009, you cannot dispute that he has made it immeasurably worse. America’s two most dangerous enemies in the Middle East-radical Sunni jihadists and the radical Shia Iranian government-have been empowered. Indeed, in his desperation Obama is pursuing direct talks with Iran to coordinate a response to the ISIL threat.

Right now the best we can reasonably hope for is a stalemate, with a de facto division of Iraq, with two segments under control of American enemies.

And this isn’t the sole disaster in the making. There’s Ukraine, too, where American and European pusillanimity are encouraging Putin to pursue his asymmetric warfare strategy.

When I contemplate the further damage that Obama can do in the next two-and-a-half years, I am tempted to go on a permanent hiatus. It is just so discouraging to watch a great nation stumble so badly, all due to the extreme misjudgments of its chief executive. It is perhaps even more discouraging to recognize that despite the evidence of failure that lies wherever one looks, the author of this disaster is utterly convinced that his judgment has been unerring. There are few combinations more dangerous than extreme incompetence, insufferable arrogance, and an unwillingness to acknowledge empirical reality. But Barrack Obama combines those things, by the gross.

June 6, 2014

Putin & the Lilliputians at Normandy: Doing a Grave Disservice to Those Who Performed Heroic Service

Filed under: History,Politics,Russia — The Professor @ 3:29 pm

Today was the 70th anniversary of the D-Day landings. Sadly, this solemn occasion was overshadowed by the grotesque attendance of Vladimir Putin. Given the Putin-driven crisis in Ukraine, and the friction between western nations and Russia (including in international waters of the Black Sea and off Japan, where Russian aircraft buzzed an American ship and aircraft, respectively), it was inevitable that the tensions between Putin and the western heads of government and state would dominate the event and its coverage, and intrude on commemorations that should have been focused laser-like on the few remaining veterans in attendance, and those who are no longer with us, some not having been with us since 6 June, 1944.

June 6 should not be about Putin. It should not be about the other Lilliputians representing their nations either: Hollande, Cameron, Obama,  Merkel or Harper (the latter two arguably the best of the lot, but that is saying very, very little). It should not be about current crises. It should be about those who stormed the beaches or jumped into flooded fields in the dark or piloted landing craft pitching wildly in the heavy surf or flew cover over the vast armada. Period. To degrade this with the trivialities of who sat how far from whom and who ate dinner with whom and how so-and-so looked at such-and-such is beyond appalling.

Primary responsibility for this travesty rests with the littlest Lillliputian: Hollande. He invited Putin, and did everything to make him welcome. Moreover, he also had the temerity to whine about impending fines on BNP Paribas (for violating US sanctions on Sudan and Iran) and peevishly defend the sale of Mistral assault ships to Russia. You want to bitch to Barry about how mean the US is to your big bank, François Gérard Georges Nicolas? [Seriously, that’s his name.] Pick up the damn phone. This was neither the time nor the place. Not about you. Not about BNP Paribas. Not about current France.

Yes, Ukraine and Russian revanchism are big deals. But there are many other forums in which those issues can be hashed out. There is only one 70th anniversary of D-Day. There are only a precious few survivors, and there will be even fewer alive for the next big commemoration.

We are governed by dwarves who are vastly over impressed with their own talents and importance. The way they observed D-Day today did a grave disservice to those who performed heroic service 70 years ago. They should be ashamed, but that would be to expect far, far too much.

Putinomics: The Gazprom-China Deal

Filed under: China,Commodities,Economics,Energy,Politics,Russia — The Professor @ 6:16 am

Before the financial crisis, Gazprom CEO Alexi Miller boasted that his firm would be the first $1t market cap firm. Six years on, he’s only off by an order of magnitude: the company’s market cap is around $100 billion. Moreover, it sells for a comical 3x earnings (a little less, actually). The company’s capex is notoriously inefficient, and it is frequently cash flow negative. Other than that, it’s a financial marvel.

But that big China deal must surely have provided a boost for the company, right?

Apparently not. The other day Putin mooted the possibility that the company would have to be recapitalized by the state, i.e., receive an additional injection of capital from one of the state investment funds.

If the China deal were indeed favorable to Gazprom, it would have no problem financing the necessary investment in pipelines and greenfield production through the banks and/or the capital markets, rather than through the state. Putin’s suggestion of state funding strongly suggests that the economics and the risks of the deal are not favorable, and the necessary investments could not be funded externally: direct state funding would also suggest that Russian state banks are either unwilling or unable to fund it (or both), which speaks ill for the economics of the deal, and perhaps the financial strength of the banks. A further implication of this is that politics rather than economics was the main driver of the deal (if it exists, in fact), and that as a project intended to achieve state objectives, the state must fund it.

Reinforcing this perceived need for state rather than external funding  is the fact that obtaining outside funding would require Gazprom to divulge many more details of the deal than it has so far. This would be highly embarrassing to Putin and the government and Gazprom if these details show that Russia got the short end of the stick. So keeping the details out of public view by avoiding outside funding also suggests that there is something to hide, namely, that the Chinese exploited Putin’s needs.

If the government indeed recapitalizes Gazprom, it will be just the latest of a long line of economic policy failures. Another example of where politics or corruption/rent seeking has prevented Russia from putting its natural resource firms on a commercially sensible footing, and another example of where state funds that were generated by resource rents in the first place were ploughed back into inefficient state-controlled resource producers, rather than to help diversify the Russian economy.

This, my friends, is Putinomics. This is why Russia will remain on the hamster wheel from hell.

A Model Solution?

Filed under: Economics,Financial crisis,Regulation — The Professor @ 5:55 am

Europe and the US have diverged in significant ways on post-crisis financial regulation. This has had myriad consequences, including fragmentation of liquidity (especially in the swaps market), which in turn leads to less competition as it is harder for US banks to compete for the business of European clients and vice versa; greater cost; and greater complexity.

One area where there was some prospect of a unified global framework was capital rules for banks, where it was hoped that the US would adopt Basel III. But evidently the Fed is resisting that, and will move forward with its own stress test-based framework, rather than the Basel III framework which permits banks to utilize their own models to evaluate risk and hence capital.

Not that Basel III is perfect, by any means, but this approach creates the problems mentioned above, plus some more in the bargain. One is mentioned in the article: a one-model-fits all approach creates a monoculture problem that is vulnerable to catastrophic failure. I wrote about this problem quite a bit in 2009.

There is another problem as well. Although the stress test has some merits as a way of periodically evaluating capital adequacy, it  is not immediately clear how banks can evaluate the capital implications of particular transactions on a day-to-day basis in this system. If you can’t do that, you can’t price deals right or make capital allocation decisions. This is especially true if the details of the Fed model are kept secret, as will almost certainly be the case.

If you have a Basel III compliant capital model you can calculate the impact on capital due to an incremental change in a portfolio, and can hence price deals rationally and structure portfolios to achieve capital efficiency. This will be harder to do in a black-box stress test model. Not impossible but not easy either.

June 5, 2014

Get Obama (And No, that Doesn’t Mean What You Might Think)

Filed under: Military,Politics — The Professor @ 1:13 pm

In the 60s sitcom Get Smart, when trying to explain his way out of an embarrassing situation with his boss or a nemesis, protagonist-secret agent Maxwell Smart would tell some outlandish tale. When met with disbelief, he would change his story, and begin with: “Would you believe?”

The administration has reached the “would you believe?” point in the Bergdahl-Taliban mess. The first justification given for not notifying Congress was that time was too pressing given Bergdahl’s allegedly shocking physical decay. But that was based on something filmed in December, and during the six subsequent months in which negotiations continued, the administration said nothing to Congress. Congress was therefore not appeased, but was angry, and did not accept this explanation as plausible: if so pressing, why wait so long?

So according to AP, the administration is now saying: “Would you believe . . . we didn’t notify Congress because the Taliban threatened to kill Bergdahl if word of the negotiation leaked?” Putting aside why the Taliban would say that, given that negotiations have been an open non-secret for years (being reported on in Rolling Stone and elsewhere), and given that there is no possibility that the Taliban could monitor secret meetings between the White House and Congress, the only way that what the administration told Congress could become public is if Congress leaked it.

So Obama’s new defense is: “We didn’t tell Congress-including the intelligence committees-because we don’t trust Congress not to leak.”

That surely will mollify Congress, won’t it? Sure it will!

Actually, it will just make an already hostile group of lawmakers even more furious. And not just Republicans. Diane Feinstein is already livid, and hates it when an administration-any administration-keeps things from the intel committees.

Well played. Well played. The only question is whether they are that stupid, or whether the truth is so bad that telling a story certain to infuriate Congress is better than coming clean.

There is some sage advice that the administration should take right now, although given it’s belief it can talk its way out of anything, I doubt it will take it.

First, as Twain said, better to remain silent and be thought an idiot, than to open your mouth and remove all doubt.

Second, if you are in a hole, stop digging.

The Smart Approach-“Would you believe”-is almost never smart. But that’s what Obama and his minions have decided to do.



You Got Some ‘Splainin’ to Do, Barry

Filed under: China,History,Military,Politics,Russia,Uncategorized — The Professor @ 10:50 am

Looking back at Obama’s West Point speech helps one comprehend the otherwise incomprehensible Bergdahl-Taliban imbroglio. You can see his mind, such as it is, at work. He is too clever by half, too convinced of his own brilliance and righteousness, and possessed of some acute blind spots, particularly regarding the military, and especially those serving in the ranks whom he does not have any experience with whatsoever.

In the speech, Obama effectively declared victory in Afghanistan. The Al Qaeda “leadership” had been decimated. The Afghan security forces were able to step up. The Taliban were not even mentioned.

So time to declare victory and end the war and go home. And one of the signifiers of the end of a war is the exchange of POWs. Hence, the negotiation of a trade of Bergdahl for five Taliban hardliners. (“Dead-enders”, as Rumsfeld would have called them.) Moreover, once five really bad actors are released from Gitmo, what is the basis for keeping the rest? Thus, the next stage would have been additional releases.

But then things spun out of Obama’s control, and the contradictions in the policy, its ham-fisted implementation, and inane justifications exploded into view-and in Obama’s face.

First there was the strong skepticism about the prudence-or sanity-of releasing Taliban hardliners. Then there was Bergdahl himself, and Bergdahl’s father. Because of Obama’s blindspot about the military-one shared by most of his administration-he did not expect the furious reaction from the ranks, especially from those who had served with Bergdahl or served in the same area at the same time and therefore bore the brunt of the fallout from his apparent desertion. No doubt the perfumed Pentagon princes assured Obama that everyone would be pleased to have a comrade come home. But this was to misjudge the widespread belief in the ranks that Bergdahl had broken the code with his comrades, and that soldiers died as a result.

This was compounded by Obama’s very public-and literal-embrace of Bergdahl’s father, an avowed Taliban supporter who has called on God to avenge the deaths of Afghan children. Deaths he clearly blames on the US, not on the Taliban. Meaning that avenging the deaths of Afghan children would involve the deaths of US servicemen and women.

Blindsided by the furious onslaught, the administration responded in typical fashion. It trotted out Susan “Say Anything” Rice to claim that Bergdahl had been “captured on the field of battle” (almost certainly false) and had served with “honor” (again, almost certainly false). When this just re-vectored the blowback onto Rice’s sorry backside, Jay Carney interrupted his way out the door to support her, claiming that Bergdahl did serve with distinction because he had volunteered and put on the uniform.

Um, Jay, that may be a necessary condition for honorable service, but it isn’t a sufficient one. Indeed, if just putting on the uniform is all that matters, why are there distinctions made when one takes it off? Most are discharged honorably, but some depart the service with dishonorable or less-than-honorable discharges. Implying that one’s conduct while in uniform matters. Some people dishonor the uniform through their conduct while in service. The issue here is whether Bergdahl did that.

But perhaps Jay Carney isn’t aware of the concept of dishonorable discharges. Though he should be. John Kerry’s discharge status was an issue in 2004.

Which brings us to the next administration response: slime the soldiers who have accused Bergdahl of desertion in the face of the enemy. Yesterday it was reported that people in the administration were accusing these veterans of “Swift Boating” Bergdahl. A lot of fire is being delivered in the direction of these guys. You see, Bergdahl is honorable. They stayed and fought, but they are psychos (as one Obama administration staffer put it). How lovely.

But we’re not done yet. There is also the issue of the process and the timeline of the deal with the Taliban. The administration claimed that it had to act in haste, without giving Congress the legally-mandated 30 days notice of the release of Gitmo detainees, because of its grave concern about Bergdahl’s physical and mental condition. But these concerns were allegedly based on a video taken in December and received, via the Qataris, in January. The five month lag belies any serious alarm about the imminence of Bergdahl’s medical peril.

Belatedly the administration allowed several Senators to view the tape, to mixed reviews. Some, like the awful Dick (and I do mean Dick) Durbin toed the administration line. Others were less impressed. And not all of the unimpressed were Republicans. Manchin and Feinstein did not see evidence of imminent danger.

The health justification is especially dubious given the fact that this deal has been in the works for years. Years. At least since 2011. Moreover, there are indications that the motivation for the deal had a large political component:

President Obama [has] announced that the United States will now pursue “a negotiated peace” with the Taliban. That peace is likely to include a prisoner swap – or a “confidence-building measure,” as U.S. officials working on the negotiations call it – that could finally end the longest war in America’s history. Bowe is the one prisoner the Taliban have to trade. “It could be a huge win if Obama could bring him home,” says a senior administration official familiar with the negotiations. “Especially in an election year, if it’s handled properly.”

I would bet you dimes to donuts that the “senior administration official” is Susan Rice, especially in light of her history of viewing geopolitical issues through a domestic political filter:

At an interagency teleconference in late April, Susan Rice, a rising star on the NSC who worked under Richard Clarke, stunned a few of the officials present when she asked, “If we use the word ‘genocide’ and are seen as doing nothing, what will be the effect on the November [congressional] election?” Lieutenant Colonel Tony Marley remembers the incredulity of his colleagues at the State Department. “We could believe that people would wonder that,” he says, “but not that they would actually voice it.” Rice does not recall the incident but concedes, “If I said it, it was completely inappropriate, as well as irrelevant.”

Previous attempts to do the deal had been derailed by serious people, like Leon Panetta, Robert Gates, and yes, Hillary. People who take national security seriously. Obama has succeeded in getting rid of serious people, replacing Panetta with the pathetic Chuck Hagel, for example. What’s more, he deliberately set up the process to review the deal to exclude any possibility of a veto this time. The military was expected to “suck it up and salute.” Which the perfumed princes apparently did, whereas the rank and file did not.

In sum, Obama had been trying to close the deal that was done last week for years, as part of a broader diplomatic and political agenda. He had been stymied by fierce opposition within his own administration. He short circuited that opposition through key appointments (Hagel, Rice) and the creation of an ad hoc process that gave no opportunity for serious opposition to assert itself. Thus, the “health concerns” justification is completely at odds with the history of this situation: it is an ex post defense of a policy that Obama can’t defend on its merits.

Obama is clearly desperate-desperate-for a deal. No doubt as a part of his ongoing Legacy Project. How desperate? This desperate:

Clinching it was a phone call Obama made two days later, on May 27, with the emir of Qatar, Sheikh Tamim bin Hamad al-Thani, who said Qatari officials had agreed to measures to prevent at least an immediate return to the battlefield of the five Taliban prisoners, the officials said.

“Prevent at least an immediate return.” These guys have to go on time out for a while, to have a somewhat decent interval before returning to the fight. And even then, Obama admits that it’s “absolutely” possible these guys will kill again.

We’ve seen this movie before. You give Obama a fig leaf, and he will grab it and give you everything you want. (The Syrian chemical weapons deal is the classic example of that.)

For their part, once the deal was done, the Taliban punked Obama by releasing a video of the handover, along with much more extensive coverage of the joyous reception given the five released terrorists in Qatar.

And speaking of Qatar, which obviously played a huge role in all this, that could be the worst part of this sorry episode. Again in his desperation to deal, Obama has gone all in with the Qataris, who are truly malign actors whose interests are definitely not aligned with the US. Qatar has deep ties with the Muslim Brotherhood and was pushing its efforts in Egypt. Qatar is engaged in a struggle with Saudi Arabia to exert influence, and even achieve dominance, throughout the Middle East. Farming out key roles to these people is a dangerous game. (Interestingly, Obama met with the former emir of Qatar at West Point.)

So Obama has some serious explaining to do to justify this fiasco. So far his explanations have done worse than fallen flat: they’ve unleashed a firestorm of criticism. So you know what will happen: dismissing this as a manufactured DC controversy (which has already happened), attacks on the messenger (already well underway), and spin, spin, spin. Indeed, many of the media dervishes are whirling away as we sit here.

But not to worry. It’s not like anybody is noticing that Obama is feckless and incompetent, and taking advantage of that. Well, other than Putin, of course. And the Iranians. And the Chinese:

On the surface, this may look reckless. But one theory gaining traction among senior officials and policy analysts around Asia and in Washington is that the timing is well calculated. It reflects Mr. Xi’s belief that he is dealing with a weak U.S. president who won’t push back, despite his strong rhetorical support for Asian allies.

Mr. Xi’s perception, say these analysts, has been heightened by U.S. President Barack Obama’s failures to intervene militarily in Syria and Ukraine. And it’s led him to conclude that he has a window of opportunity to aggressively assert China’s territorial claims around the region.

I’ve often said that I hope Bismarck (“There is a special providence for fools, drunkards, and the USA”) and Adam Smith (“there is a lot of ruin in a nation”) are right. Obama is putting both aphorisms to the test.

June 3, 2014

The Bergdahl Leak Campaign Reveals a Deep Divide in the Administration

Filed under: History,Military,Politics — The Professor @ 1:54 pm

The Bergdahl story has escaped into the wild, despite the administration’s desperate attempts to keep it tamed and caged.

The military is leaking like a  sieve that’s been used for shotgun practice. The upshot: it was established very early on that Bergdahl deserted. Furthermore, this information makes it plain that he lied when he said he had been captured while on patrol. Other stories include one that the US knew where he was, and consciously decided not to use special forces to retake him because they were not about to sacrifice operators for a deserter. Further detail: there is an intel file on him a mile deep, and widespread suspicion that he provided material assistance to the Taliban. Including instructing them on bomb making and ambush techniques. And the latest leak is that his farewell note including a renunciation of his American citizenship.

All leaked, yes, so therefore unverifiable. Precisely why a full inquiry is warranted. But the leaking itself is informative: it is the bureaucracy’s way of waging war against administration policy that they detest but cannot oppose openly. The military has been ordered to shut up publicly, so it wages asymmetric warfare by leak.

But  the situation regarding further inquiry is very murky. Some leaks say that Bergdahl is “too fragile” to stand a thorough investigation. How convenient. But the WSJ just reported that a new investigation is underway.  Relatedly, Hagel and Rice said that grave concerns about Bergdahl’s health required the hurried negotiation. But US military doctors said that he was “in good shape.”

These conflicting stories about investigations suggest a battle within the military on how to proceed.

One thing is not murky: there was no way that the record available to the administration supported Susan Rice’s claim that Bergdahl served honorably and was captured on the field of battle. Just as there is no way that the record supported her statements about Benghazi. Proving that she is the go-to-gal when there’s bull to be slung: hell, even Carney apparently has his limits.

She is a good little courtier, who will say anything to defend her liege lord. And if you examine this whole affair, and other recent events, you will see that the best model for understanding DC generally, and the Obama administration in particular, is that of a European royal court. This, sadly, includes the military, where courtiers in epaulets obfuscate the truth in order to serve the king.

This started from day one, when the military required those in Bergdahl’s unit to sign an NDA stating they would not discuss him, his disappearance, or the efforts to retrieve him.

But far below the rarified atmosphere that the perfumed princes inhabit, the rank-and-file are seething. And the parents of some of those who died because of Bergdahl want answers, and claim that the military has deceived them.

There are also inklings that there has been a political battle within the administration over the prisoner swap for a long time. Hillary and Panetta supposedly refused to sign off on a deal. But they are gone: ciphers (Hagel most notably) are in their place, and are willing to comply. This is all part of Obama’s efforts to end wars, not win them. And there is a political component to this, and always has been. From 2012:

“It could be a huge win if Obama could bring him home,” says a senior administration official familiar with the negotiations. “Especially in an election year, if it’s handled properly.”

This is all why a clearing of the air is needed. The whole thing smells. But don’t expect the most transparent administration ever to do that.

The Bergdahl story is just the tip of an iceberg. Or perhaps more accurately: the top of a very putrid pile. Which is precisely why the administration is going to go to DefCon 1 in its attempt to control the damage. Meaning Susan Rice will probably be collecting overtime.

The Bergdahl story is deeply interconnected with Obama’s efforts to negotiate with the Taliban. This has apparently been divisive within the administration: just wait until it becomes a full-blown partisan battle. Bergdahl is important in his own right, but to the extent that it shows just how far Obama is willing to go, and how much he is willing to obfuscate, in order to bug out of Afghanistan, he has become a matter of national and international importance.

This is not going away. It is going to get bigger.

June 2, 2014

The Families of Six Servicemen Deserve the Truth About and the Accountability of Bowe Bergdahl

Filed under: History,Military,Politics,Uncategorized — The Professor @ 3:16 pm

I noted yesterday that the upper brass and the grunts had a very different take on Bergdahl. That has become even more clear. The national security establishment, including both the civilian and military sides of the Pentagon, seems quite pleased with developments, and is more than willing to gloss over the circumstances by which Berghdahl fell into Taliban hands. Some are even willing to engage in a wholesale whitewash, most notably the execrable Susan Rice (no shock there), who says flat out that Bergdahl “served with honor and distinction” and was “captured on the battlefield”. She should really join the band Say Anything.

Many US soldiers currently in Afghanistan are more ambivalent. The circumstances of his capture sit uneasily with them.

Then there are those who who served with Bergdahl, or who were involved in the frantic operations mounted to find him after his disappearance. Very little ambivalence there. The consensus is that he is a deserter.

What’s more, there is considerable anger among those who were engaged in the search because people died as a direct result of Bergdahl’s disappearance. That people died searching for him is not in dispute. Six soldiers were killed on operations to try to find him. Moreover, it is possible that his disappearance indirectly killed Americans because resources (air support, drones, etc.) were diverted to the mission to find him, making other bases that were attacked more vulnerable. Then there is the issue of whether Bergdahl provided information or other support to the Taliban that cost American lives (though this is more speculative.) (Or maybe not so speculative.)

This is why it is imperative that there be a formal proceeding, along the lines of what is set out in the Code of Conduct, to determine just how Bergdahl wound up in enemy hands, and what he did while a captive. Yes, Bergdahl is home. Yes, his parents can rejoice in his return. But there are mothers, fathers, wives, and children of at least six American servicemen who will never experience such a reunion. Because of what Bergdahl did: there is no way to escape that fundamental fact. They deserve the truth about what he did. And they deserve the knowledge that if Bergdahl deliberately abandoned his unit, thereby setting in train the events that resulted in the deaths of their loved ones, that he has been held accountable.

In other words, this isn’t about Bob Bergdahl. It is about Clayton Bowden, Kurt Curtiss, Darynn Andrews, Michael Murprhey, Matthew Martinek, and Morris Walker.

There are stories circulating that he did not desert, e.g., that he was captured while at the latrine. I consider this unlikely: note that not one other US soldier was captured in Afghanistan (a remarkable feat), meaning that if Bergdahl was indeed captured without his intending to fall into enemy hands  he was truly the very unlucky and unique exception that proves the rule. (There are other reasons to disbelieve the latrine story, which originated in Taliban radio chatter.) Again, let’s assemble the evidence, including his testimony, and decide accordingly.

I am not prejudging the results of any such inquiry, or the appropriate punishment. What I am saying is that there must be a formal fact finding procedure with legal consequences based on these findings. (I note that the Army had previously determined that Bergdahl walked away. But it did not have his testimony, obviously. Now we can get it.) The results could range from a commendation (in the unlikely event that the story as we know it is all wrong), to dishonorable discharge, to something more severe. The torments he might have suffered over the past five years may be grounds to ameliorate  punishment, but not to avoid assembling the facts and reaching a verdict.

One of the most well-established facts about men in combat is that they fight first and foremost for their buddies. The guys in their squad or platoon. There is a formal Code of Conduct in the US military, but there is a timeless code that binds soldiers: I will die for you because I know you will die for me.

People died for Bowe Bergdahl. That is incontrovertible fact. What remains unclear is whether they died because he violated the trust, the code, that should have bound him to his comrades.

The facts of his disappearance support that. But so too does the fact that it appears that Bergdahl didn’t have any buddies. He expressed scorn for his comrades, and was always an outsider who was independent, and likely to be reading when those in his unit were partying together. He was a man apart, at first figuratively, and then it seems quite literally.

If you want to be individualist, and follow your own lights and desires, that’s fine. But the military isn’t the place for that: go be an individualist somewhere else, and believe me, you’ll be much happier. And once you commit to the military, at times lives depend on you, and you have to put your wants aside, and choke down any disillusionment (a common excuse made for Bergdahl) and do your duty. Do it for your comrades, who may be disillusioned or lonely or unhappy or miserable or pissed off too: in fact, in combat generally, and Afghanistan particularly, it’s pretty much a lock that they all would rather be someplace else.

It’s cliche but it’s true: you surrender much of your individuality when you put on a uniform. The surrender is consensual in a volunteer military.

Much that we have been told implies that Bergdahl did not do that. He indulged himself, with no regard for the consequences his actions would have for those he left behind. (Bergdahl has more than a little in common with Snowden, by the way.)

Finding the facts and holding Bergdahl accountable for his actions is important for the good of the service, and for the memories of those who died trying to find him. But I fear that petty political considerations will trump such serious concerns. Trading hardcore Taliban for a GI is controversial enough. Trading hardcore Taliban for a deserter who cost the lives of good soldiers who sucked it up and endured the hardship that Bowe Bergdahl apparently felt he did not deserve is infinitely more so. Which means that the truth, and even the effort to find the truth, is likely to be the last casualty of this sorry affair because the truth could be extremely inconvenient for Barack Obama. If Susan Rice’s encore performance is anything to go by, the whitewash is well underway.

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