Streetwise Professor

I recall being quite amused at those who panicked over Rosneft investing large amounts of money in Venezuela’s cratering national oil company PDVSA, thinking that it gave the Russians a vital foothold in America’s back yard. They’ve outsmarted us again! said this lot.

My thought was the exact opposite: they were utter fools for plunging billions into a country and a company run by socialist lunatics (excuse me, “Bolivarian” lunatics), and figured that it would not go well:

Rosneft lent large money to a deadbeat. It’s not going to get paid back so it is seizing assets, and will end up losing money. Playing repo man is hardly the road to riches. It just mitigates the losses from making a bad loan, and it is the bad loan that is the real story here.

But it gets better!  Repo Man Igor outsmarted himself by getting Rosneft’s collateral in the US in the form of a lien on Citgo’s US refineries.  But given sanctions, the probability that he will be able to repossess them can be rounded up to zero.

Now oil trading firm Mercuria senses weakness, and is involved in an effort to take the collateral off Igor‘s hands:

Commodity trader Mercuria has asked the US Treasury for permission to buy out a $1.5bn loan between Russia’s Rosneft and Venezuela’s state oil company, which had raised the prospect of Moscow taking control of refineries on US soil.

. . . .

“Rosneft would have faced an uphill struggle to get approval to exercise a stake in Citgo so this avoids a potential diplomatic strain between the US and Russia if this deal goes ahead,” said Mr Mallinson.

“If this signals that Russia is looking to reduce its loans to Venezuela rather than offering more support that leaves Caracas with nowhere obvious to turn.”

Rosneft has said it is unwilling to extend further loans to PDVSA, many of which have been secured against crude supplies, as the country’s economic crisis starts to hit oil output from the country. The Russian company is seen as keen to reduce its exposure to Venezuela as oil output falls, with the country seen as precariously close to defaulting on its debts.

Well played, Igor. Bravo! The move was so brilliant, that now he’s desperate–sorry, “keen” doesn’t quite cover it–to get out.

Rosneft’s bargaining leverage is pretty much nonexistent.  PDVSA is circling the drain, with a collapse in oil output and revenues.  It can’t pay back the Russians. The collateral is off limits to them.  So Rosneft faces a choice between a big fat zero, and whatever Mercuria et al deign offer it. Perhaps Rosneft can scare up other bidders, but the company holds a very weak hand, and will be lucky to walk away with kopecs on the ruble.

Keep this in mind whenever anyone tries to convince you of Putin’s or Sechin’s strategic brilliance. In this case, they have brilliantly succeeded in flushing several billion into the Venezuelan cesspool, with no real recourse or exit strategy.

They can take some comfort, though, having lent Venezuela a mere $5 billion. The even more brilliant Chinese lent 11 times as much. So there’s that, Igor!

The left has reached new heights in its paroxysms of rage in the aftermath of the Parkland mass school shooting.  But anger and over-the-top virtue signaling fail both on substance and rhetoric.

In terms of substantive policy, the recommendations range from the utterly ineffectual (another symbolic ban on “assault weapons”) to the wildly overinclusive and utterly impractical (“ban all guns” or “ban all semiautomatic weapons”).  Overinclusive (if practical) because they would penalize the vast majority of gun owners who are not mass murderers–or murderers at all.  Impractical because (a) seizing tens of millions of firearms from tens of millions of Americans is an obvious impossibility, and (b) a country that cannot stop the mass importation of opiates, cocaine, and marijuana would never be able to stop gun running either.  The end result would be disarmament of the law abiding, and the empowerment of the criminals.

It is also rather amazing to see people demanding more laws in the face of the clear and systematic failure of every level of law enforcement in the Nikolas Cruz case.  I noted this failure in the hours after the shooting, and the subsequent days have seen an avalanche of new evidence of this systematic failure.

Episodes like Parkland are not due to guns per se, but to the intersection of guns and clearly disturbed individuals like Cruz, who seems to be a classic psychopath who was pegged as a potential school shooter by many who came into contact with him.  The school, social services, local law enforcement, and federal law enforcement observed his aberrant behavior, or were warned of the risk he posed, multiple times, yet did nothing. Repeatedly.

If the “authorities” can’t intervene to stop Nikolas Cruz, who raised more red flags than a Soviet May Day parade, who can they stop? The question answers itself.

Further: why should we expect more from, or grant more power to, the same people and institutions that proved feckless and incompetent in dealing with Cruz (and many other mass shooters before him)? Talk about a triumph of faith over bitter experience.

Yet further: in the face of this evidence of the inability of authorities to protect the citizenry, few things incite more leftist rage than someone who protests against being deprived of the means of self-defense. The more the institutions fail us, the more we are supposed to surrender to them.

Which brings me to the rhetoric. The left does not even attempt to persuade or understand those who hold different views on guns. For all their bleating about The Other, leftists are the passed masters at treating those who have the temerity to disagree with them as an unspeakable Other that is completely beyond the pale. If you object to their demands that you disarm, if you assert your right to self-defense, they label you a Nazi, a child killer.

This may be emotionally satisfying, and a way of bonding with those of like mind, but it is utterly self-defeating as a matter of practical politics.  Have they learned nothing in the two years? Do they really think that reprising memes about “deplorables” and “bitter clingers” is going to advance their political agenda by cowing people into acquiescence and silence? Shouldn’t they have figured out by now that shrieking invectives only galvanizes the opposition, especially given that much of that opposition consists of prickly Jacksonians?

We are constantly told about the need for “conversation” and “dialog”, but what we actually get are lectures and shout-downs.  The natural responses are to tune out or shout back, and to view every gun control proposal as merely a first step towards ultimate confiscation (because that is the only policy that is consistent with the maximalist rhetoric about the evils of guns–and those who own them). The result is that the left fails politically, because it is not a majority that can impose its rule in a democracy, which only stokes its rage to greater heights.

What’s that about doing the same thing over and over and expecting different results? And these are the Smart People? After all, they constantly tell us so.

Maybe they are smart–but just insane.

The fundamental problem is that a would-be ruling class can’t even govern. This failure is widely understood, which means that demands for more power will produce resistance, rather than submission. This is especially true when the demands are made against the background of as grotesque a failure as could be imagined, as in the tragic case of Nikolas Cruz and the seventeen people he murdered, where “serve and protect” proved to be a sick joke.

One of the most annoying crypto-tropes is the unconditional statement that Bitcoin and its competitors are great because they eliminate the need for trust in transactions. It is annoying because it is repeated ad nauseum despite the fact that it is seriously analytically incomplete. There is no free lunch: the banishment of trust comes at a cost, and a proper comparative analysis of cryptocurrency vis a vis alternatives (e.g., traditional bank-based payment mechanisms, fiat currency) requires a comparison of the costs of each. Which mechanism performs particular types of transactions more efficiently? Which mechanism performs particular economic functions more cheaply?

In Bitcoin, the economic function performed is the elimination of fraud (e.g., double spending, spending what you don’t have) in an anonymous setting. This is achieved via proof of work, which involves the use of real resources–notably, large quantities of electricity and computing power. That is, trustlessness comes at a cost.

The relevant question is whether this cost is higher or lower than the cost of performing the same economic functions (elimination of double spending, spending what you don’t have) using alternative mechanisms, such as traditional bank payment systems that rely on trust.

Trust is not free either. In essence, economic actors can be incentivized to act in a trustworthy way if they earn a stream of rents that would be lost if they betray trust.  But creating a stream of rents requires an increase in the price of an output and a reduction in the prices of the inputs of the trusted entity.  These price adjustments reduce output below the level that would be attained if transactions could be executed costlessly. (Proof-of-stake mechanisms use a variant of this to address double spend problems.)

The answer to this question is likely to differ, depending on the type of transaction at issue. For example, Bitcoin et al are likely to be cheaper for transactions for which anonymity or concealment of the identities of the parties from third parties  is highly desired by one or both of the transactors (which is a condition that may characterize many illicit transactions).*

It has yet to be shown, and there is room for serious doubt, that cryptocurrencies scale as efficiently as traditional trusted payment systems. Unless it scales, crypto will not be a viable replacement for large scale transactions, especially commercial transactions which represent the vast bulk of payments.

Another potential difference in cost involves security.  It is costly for trusted institutions to prevent theft and loss, but as has been seen of late, theft and loss are serious issues for crypto too. It is not clear which  mechanism mitigates theft and loss most cheaply.

Economics is all about the analysis of the costs and benefits of alternative means of achieving particular objectives. An analysis that hypes a feature of one such alternative (no trust required!) without comparing its costs with that for other ways of achieving the same objective (fraud-free transactions) is fundamentally flawed. Yet that is the default mode of discourse in cryptocurrency.

*The use of cryptocurrency in illicit transactions is close to the top of many elite/official criticisms of cryptocurrency–as it is in elite/official criticisms of fiat currency (“the war on cash”). I am at best ambivalent about this critique because the government decides what is illicit, and tends to overcriminalize transactions between consenting adults, and to overtax. As a Swiss friend told me when we were discussing the war on cash: “I would fight any attempt to eliminate cash. Cash is freedom!”

Bloomberg’s Odd Lots podcast from a few days ago discusses “How one of the Most Profitable Trades of the Last Few Years Blew Up in a Single Day.” Specifically, how did short volatility trades perform so well for so long, and then unravel so dramatically in a short period of time?

In fact, these two things are directly related. This trade performed well for a long time precisely because it was effectively selling insurance against an infrequent, severe event–in this case, a volatility spike. In essence, those who shorted volatility (primarily by selling VIX futures either directly or indirectly through exchange traded products like the XIV note) were providing insurance against a volatility spike, collected premiums for a long time, and then ended up paying out large amounts when a spike actually occurred. It is analogous to a company insuring against earthquakes: it’s rolling in the dough collecting premiums until a big earthquake actually happens, at which time the company has to pay out big time.

If you look at a graph of the VIX, you’ll see that the VIX can be well-described as a mean reverting process (i.e., it doesn’t behave like a random walk or a geometric random walk, but tends to return to a base level after it diverges from that level) subject to large upward shocks.  After the spikes, mean reversion kicks in, and the index returns roughly to its previous level.

So if you are short the VIX, you pay out during those spikes.

And that’s not all.  The VIX is strongly negatively correlated with the overall market.  That is, VIX tends to increase when the market goes down:

This means that providing insurance against volatility spikes is costly: the volatility short seller commits to making payouts in bad states of the world.  Thus, risk averse suppliers of volatility insurance will demand a premium to bear the risk inherent in that position.  Put crudely, a short VIX position has a large positive beta, meaning that the expected return (risk premium) on this position will be positive, and large.

The flip side of this is that those with a natural short volatility exposure incur a large cost to bear this risk, and might be willing to hedge (insure) against it.  Indeed, given the fact that such natural short exposures incur losses in bad states of the world, those facing them are willing to pay a premium to hedge them.

In equilibrium, this means that short volatility positions will earn a risk premium.  Since short sellers of volatility futures will have to earn a return to compensate them for the associated risks,  the VIX futures price will exceed the expected future value of VIX at futures expiration.  Thus, VIX futures will be in a Keynesian contango (with the futures above the expected future spot).  Given that VIX itself is a non-traded risk (one cannot buy or sell the actual VIX in the same way one can buy or sell a stock index), this means that the forward curve will also be in contango.*  Further, one would expect that long VIX futures positions lose money on average, and given the spikiness of realized VIX, lose money most of the time with the gains occurring infrequently and being relatively large when they do occur.

And of course, short positions have the exact opposite performance.  Shorts sell VIX futures at a premium over the price at which they expect to cover, and hence make money on average.  Furthermore, losses tend to be relatively infrequent, but when they occur they tend to be large.

And that’s exactly what happened in the period leading up to February 5.  During most of that period, VIX shorts were making money.  When the spike occurred on 2/5/18, however, they were hammered.

But this was not an indication of a badly performing market, or irrational trading.  Given the behavior of volatility and the existence of individuals and firms with a natural short volatility position that some wanted to hedge, this is exactly what you’d expect.  Participants (mainly institutional investors, including university endowments) were willing to take the opposite side of those hedges and receive a risk premium in return. Those short positions would earn positive returns most of the time, but when the returns go negative, they tend to do so in a big way. Again, just like earthquake insurance.

One of the inventors of VIX claims that he doesn’t understand why products such as VIX futures or ETPs that have long or short volatility exposures exist. Really? They exist because they facilitate the transfer of risk from those who bear it at a higher cost to those who bear it at a lower cost.  Absent these markets, the short volatility exposures wouldn’t go away: those with such natural exposures would continue to bear it, and would periodically incur large losses.  Those losses would not be as obvious as when volatility products are traded, but they would actually be more costly.  The pain that volatility short sellers incurred earlier this month might be bad, but it was less than the pain that would have existed if they weren’t there to absorb that risk.

One interesting question is whether technical factors actually exacerbated the size of the volatility spike.  Some sellers of volatility short ETPs (like the XIV exchange traded note that is basically a short position on the front two month VIX futures) hedge that exposure by going short VIX futures.  To the extent that the delta of the ETPs remains constant (i.e., the sensitivity of the value of the product to changes in forward volatility remains constant) that’s not an issue: the hedge positions are static.  However, the XIV in particular had a knock-out feature: payment of the note is accelerated when the value of the position falls to 20 percent of face amount.  The XIV experienced such an acceleration event on the 5th, and to the extent the issuer (UBS) had hedged its volatility exposure this could have caused it to buy a large number of futures, because as soon as the note was paid off, the short VIX position was unnecessary as a hedge, and UBS would have bought futures to close that hedge.  This would have been a discontinuous move in its position, moreover: oh, the joys of hedging barrier options (which is essentially what the acceleration feature created). This buying into a spike could have exacerbated the spike.  Whether UBS actually did this, or whether liquidating its hedge position was big enough to have an appreciable knock-on effect on prices is not known.  But it could have made the volatility event more severe than it would have been otherwise.

Bottom line. These markets exist for a reason–to transfer risk.  Moreover, they behaved exactly as expected, and those who participated got–and paid–in the expected way.  Insurance sellers (those short volatility futures) collected premiums to compensate for the risk incurred.  Most of the time the risk was not realized, because of its “spikey” nature, and those sellers realized positive returns.  When the spike happened, they paid out.  There is never a free lunch.  Yes, the insurance sellers dined out on somebody else most of the time, but when they had to pick up the tab, it was a big one.

*Keynes caused untold confusion by using “normal backwardation” to describe a situation where the futures price is below the expected spot price. In market parlance, backwardation occurs when the futures price is below the actual spot price.  Keynesian backwardation and contango refer to a risk premium, which is not directly observable in the market, whereas actual contango and backwardation are.  It is possible for a market to be in contango, but in a Keynesian backwardation.  Similarly, it is possible for a market to be in backwardation, but a Keynesian contango.  If interest rates exceed dividend yields, stock index futures are an example of the former situation.   No arbitrage forces the market into a contango, but long positions earn a risk premium (a normal backwardation).

Today Mueller indicted 13 Russians for “interfering” in the US election.  The indictment would be hilarious, if it weren’t so tragic: for nigh on a year the country has been transfixed and the government convulsed by an investigation that is descending into farce.

So this is the best that a “dream team” (nightmare would be more like it, given the presence of people like Andrew Weissman) of prosecutors can come up with:

August 18, 2016, Defendants and their co-conspirators sent money via interstate wire to another real U.S. person recruited by the ORGANIZATION, using one of their false U.S. personas, to build a cage large enough to hold an actress depicting Clinton in a prison uniform.

No, really.

The ORGANIZATION. Yeah. Just like the cosa nostra or the Cali Cartel or something. You cannot make up this stuff.

As yet there is no evidence of collusion (which is not a crime, actually), let alone a conspiracy, between anyone in the Trump campaign or administration and any Russian individual or organization. Indeed, the fact that Mueller apparently feels that he can waste his time on such trivialities suggests strongly that there is no evidence of anything untoward, let alone criminal.

Amidst all the harrumphing, all I can say is that if the republic can’t survive such Mickey Mouse efforts as described in the Mueller indictment, it doesn’t deserve to survive.

Deep thinkers like Ben Sasse say that Putin is attempting to raise doubts about American institutions.  That is unnecessary: the institutions are doing a bang up job at that without any foreign assistance.

Further, as I noted in a talk on the forthcoming Russian election at Rice University last week, there is nothing new here. Nothing. The Russians have been doing this (and far worse) continuously since, oh, around November 8, 1917.  They almost certainly did it 99 years later out of habit, rather than conviction, or a sincere belief that it would have any effect.

But it has had an effect, because by obsessing about it the American political class is actually ensuring that Putin and his creatures are succeeding beyond their wildest dreams.  This obsession, moreover, is not driven by the real threat posed by the Russian effort, but by the need of the political losers to excuse their failure, and to destroy the usurper who deprived them of what should have been theirs by divine right.

The indictment is all for show, because the Russians are in, well, Russia, and hence out of reach of US law enforcement. Mueller might as well have indicted Putin–or Grandfather Frost, for that matter–for all the real effect it will have.

But Mueller desperately needs to show that he is actually doing something.  In this he has succeeded. He has shown that he is chasing phantoms, and wreaking havoc in the process.  But since he is accountable to no one, and politically sacrosanct, he will go on and on, to serve the political class and to justify his existence. A perfect illustration of the a-constitutional monstrosity that is a special counsel.

Shut. It. Down.

The horrific school shooting in Florida has elicited the same responses from the same people.  Truth be told, there are no easy answers. Or even hard answers.

What adds to the horror is the realization that it was eminently preventable, and should have been prevented. Not by different laws, or more laws, but by merely minimally competent exercise of existing law enforcement authority.  The hours since the shooting have revealed systematic government failures at every level. The school administration, yes, but especially local law enforcement and especially especially the FBI.

The local police responded to 39–yes, 39–separate calls about shooter Nikolas Cruz, yet he was free to buy guns and to kill indiscriminately. Cruz was a textbook case of a dangerous threat who scared the bejezus out of everyone who came in contact with him. But he skated time after time after time.

Even more shockingly, the FBI had at least two separate warnings about Cruz. Very specific warnings.

One warning pointed them to a YouTube video on which Cruz had made threatening and disturbing comments and identified himself. But the FBI claims it couldn’t find him.

The response to the second warning suggests they didn’t try very hard.  This one came more than a month ago from someone “close to” Cruz and specifically stated that he intended to shoot up a school.  If they knew someone close to him, they should have had no problem finding him, right?

Well, that would require that they tried. And today FBI director Wray admitted that the agency had not lifted a finger in response to this very specific threat.  Not. A. Finger.

After all, the FBI obviously had more important things to do. Like fight furiously to protect disclosure of its actions before, during, and after the issuance of the FISA warrant against Carter Page.  Priorities, dontcha know.

I am literally nauseated–yes, literally–at the juxtaposition between the FBI’s appalling inaction in Florida and its frenzied actions in DC.

And this is not the first time someone that someone on the FBI’s radar has committed mass murder–Orlando, San Bernardino, NY bike path, the Tsarnaevs. And why is Stephen Paddock a mystery to them to this day? Perhaps they have derailed many more plots, but this litany of false negatives is beyond disturbing.

What’s the point of passing new laws when those who would be responsible for enforcing them and the existing laws are capable of such systematic failures of omission and commission?

That is not a rhetorical question. The institutional decay in the United States is beyond obvious. Yet the institutions fight tooth and nail to avoid accountability. Before entrusting these institutions with any more power, it would be far better to fix them–which may require a root-and-branch restructuring–so that we can be confident that they can responsibly exercise the vast powers they already wield.  To say that no such confidence is warranted today is beyond cavil.

The Syrian war has been dragging on for a bloody seven years, but now the sh*t is truly getting real–because now it has become a cockpit for global and regional power rivalries. The most fraught development involves the potential for escalating conflict between Iran and its proxies (notably Hezbollah) and Israel–and that puts Vladimir Putin and Russia into a very difficult position.

Last week an Iranian drone allegedly violated Israeli airspace. The Israelis shot down the drone, and then launched a massive attack that apparently destroyed half of Syria’s air defenses, losing an F-16 in the process.  The Israelis also bombed Iranian forces in Syria. Things have settled down a bit since then, but the potential for escalation is clearly present.

Despite Russia’s long-term (and by long-term I mean centuries-long) rivalry with Iran/Persia, the countries have been de facto allies in Syria because both have a strong interest in saving the Assad regime.  But the interests in Assad are vastly different, and now that the Syrian regime’s survival seems assured, those interests are not aligned.

Iran views the Assad regime as vital because under its control Syria is a vital component of Iran’s anti-Israel strategy.  In particular, Syria is the essential logistic bridge to Hezbollah in Lebanon.  With Syria in unfriendly hands, Hezbollah would be completely isolated.  With Syria in Assad’s hands, Iran can funnel massive supplies to Israel’s arch-foe.  Given the centrality of Israel to Iran’s strategic ambitions, Assad is a vital Iranian national interest, and an ongoing national interest.

Putin’s interests in Syria were always more limited.  A naval base (which would be completely useless in a real shooting war given its isolation and Russia’s lack of a real blue water navy), a few airbases, and an ability to reassert Russia as a player in the Middle East. Those objectives have largely been achieved, and Putin was no doubt hoping that the stabilization of the Syrian regime would permit a drawdown of Russian activities there.

Furthermore, Putin has always tried to maintain good relations with Israel.  Netanyahu and other high-ranking Israelis have made numerous trips to Moscow.

But if Iran pushes issues with Israel, the Jewish state’s heretofore relatively benign approach to the Syrian regime (which has involved no more than occasional punitive strikes and a largely hands-off attitude in the Syrian civil war) will change. The regime is Iran’s and Hezbollah’s center of gravity, and if Iran escalates confrontation with Israel either from Lebanon or Syria directly, Israel will hit Assad’s regime very hard.  This will again put its survival at risk, and cost Putin what he has gained so far.

In other words, it is in Russia’s interest to restrain Iran, but it is not clear that Iran can be restrained. Putin has nothing to gain from an Iran-Israel conflict in Syria and Lebanon, and all that he has gained so far is at risk from such a conflict.  For its part, if Iran decides to escalate, it means that it has decided that the Syrian regime’s vulnerability to local forces has been largely eliminated, and it doesn’t really need Russia anymore.

All of which means that Putin is now largely at the mercy of a highly ideological regime with an agenda that not only does Putin not share (the destruction of Israel), but which he actually opposes.

Note that Russia has also been exploring cooperation with Iran’s other arch-enemy, Saudi Arabia, especially in the field of energy.  Siding with Iran puts that at risk too.

So what will Putin do? Hard to know. But it is clear he has no real good options.

The other big story involving Russia in Syria relates to the devastating American response to an attack mounted on a base of US-supported fighters where some American advisers were located. The US responded with extreme–and I mean extreme–violence. In response to a battalion-sized attack, they threw just about everything in the arsenal at the assault–artillery, F-15Es, MQ-9 drones, AH-64 Apaches, B-52s(!), and AC-130s.

This extremely forceful response was clearly sending a message.  It reminds me of what Mattis told Iraqi tribal leaders: “I come in peace. I did not bring artillery. But if you fuck with me, I will kill you all.”  The assaulting force was f*cking with the US, and Mattis’ military responded by pretty much killing them all.

They’ll think twice next time. And that’s the point.

The biggest mystery is the identity of “them all.” Was it regime paramilitaries leavened with a few Russians, or a force predominately made up of Russian mercenaries? The Russians first denied Russians were killed, but after some widows went public it admitted to the deaths of 5 Russians.  Other reports, supposedly sourced from Russian military sources, put the casualty toll in the hundreds, with 100-200 KIA. (The Russian government dismisses these reports as “disinformation,” but its credibility is near zero.)

The big question is why was the attack made? A purely regime-directed operation that used Russian mercenaries without the knowledge or approval of the Russian military? (Highly doubtful.) An attempt by the Russians to test the Americans, or to send a message? (If so, the answer was given with extreme prejudice.) One theory floating around in Russia is that the mercenaries (from the firm Вагнер) had become inconvenient to the Russian military and government, and were set up to be destroyed.  I have no idea–I just hope that Mattis, Trump, et al do.

Then there’s the conflict between the US and Turkey over support for Kurdish fighters (who were the only anti-ISIS troops who can, in the words of George Patton, “fight their way out of a piss-soaked paper bag”).  Turkey has mounted an attack into Syria, and Erdogan has threatened to give the US an “Ottoman slap” if we interfere. (By the way–did the Ottomans have nukes? Just wondering.)

All in all, Syria makes Game of Thrones look simple, and now the potential for a conflict between the big dogs is greater than ever. It’s hard to see this ending well for anyone–Vladimir Putin least of all.

One thing that seems to have passed without notice in the furore over Carter Page is the utter implausibility of the Russians using him in a high-level clandestine outreach to Donald Trump.  No, implausible not because of Page’s fringe-status–though that would have probably been sufficient–but because of the fact that Page had been in contact with Russian intelligence operatives who were eventually arrested by the FBI.

We now know that Page was one of the individuals (“Male-1”) cited by the FBI agent in the complaint against the three Russians.  Now the Russians might not have known for certain that Page was “Male-1” or anyone else cited in the complaint, but you can be damn sure that they would have identified every American the indicted Russians had been in contact with, and every one of them would have been under suspicion.  Indeed, the detail from the recorded conversation involving Page and his background included in the report would probably have been sufficient for Russian intelligence to identify him.

So we are supposed to believe that less than two years after the indictment, the Russians would have thrown open the doors to Page, granted him an audience with Igor Sechin, and then proceeded to include him in a campaign to bribe an American presidential candidate?  A guy who had already been interviewed by the FBI, and hence was at the very least in the crosshairs of US counterintelligence, and even possibly an asset thereof?  A guy who had been involved in burning three of their operatives?

As. Effing. If.

Except, maybe, as part of an elaborate scheme to spread disinformation about Trump.

But there is no way that that anyone who had come in contact with the indicted Russian agents would have been used as part of a serious operation to bribe a US president.

If the FBI had actually entertained the possibility that the Steele dossier was legitimate (which, of course, they might never have done), they would have had to asked themselves: why would the Russians conspire with a guy that they had every reason to suspect was in league with, or compromised, by the US counterintelligence? That alone should have been sufficient either to discredit the dossier, or conditional on accepting the truth of the dossier, concluding that the Sechin offer was part of a disinformation scheme.

Stephen McIntyre makes an important observation about the dossier’s claims regarding the Page-Sechin meetings.  Specifically, the first mention in the dossier (in July) of the meetings is lacking in specifics regarding (a) the “brokerage fee”, and (b) Page’s assurance that Trump would lift sanctions.  Miraculously, the second mention of the meeting–in a Steele report three months after the alleged meeting–includes these details.  Said details, of course, were included in the FISA application. And get this: the last Steele report that adds these apparently essential details was produced (or should I say “invented”?) 4 days before the FBI approached the court.

You know exactly what happened, don’t you? The FBI tells Steele: “This is all you got? We need more than this.” And like a short order chef, Steele starts cooking, hits the little bell with his spatula, and serves up a steaming pile of hash, made to order.

Which provides further evidence that the FBI knew all along that it was providing fiction to the FISA court.  Unless, of course, you are going to choose option “B”–that the FBI were clueless, credulous morons.  (There is no option “C”.)

In other counterintelligence follies, the NYT reported that the CIA was duped into paying a Russian $100,000 (and had agreed to pay $900,000 more) in exchange for stolen hacking tools and dirt on Trump. The story is sourced to the Russian, and to US officials.

The CIA denies, of course.

It is clear that the story about paying for stolen hacking tools is utter tripe. You don’t pay for what can be–and has been–copied, and what you already own. So if this did happen, it means that what was really bought was dirt on Trump, and that was the intent all along. If this is what went down, then no doubt that the arrangement broke down after the first meeting because the Russian delivered such obvious garbage that even anti-Trump CIA people realized it was worthless.

If this deal did occur, it’s also almost certain that the Russian approached the CIA because word was out that the agency was actively seeking information on Trump, and the Russian sensed an opportunity.

Whether this happened or not is actually far less interesting than why it was leaked.  Maybe the Russian was the one who initiated the contact with the NYT, but somewhere along the line “US officials” corroborated it.

Now who would that be? My guess is that these are pro-Trump officials engaged in a clandestine war with elements in the CIA.

Like Yakov Smirnoff says–“What a country! America–I love it!“

One of the oft’ told horror stories in the runup to the release of the House Intel Committee memo was that it would scandalously harm national security by disclosing sources and methods.

This is largely true! Not the harm national security part.  But the memo did indeed disclose that the FBI used highly disreputable and biased sources obtained by nefarious methods in order to find a backdoor to spying on a presidential campaign, and this is indeed highly scandalous.  If I were the FBI and DOJ, I would want to keep these sources and methods secret too.

It is appalling that this happened in at least one instance.  But it raises an even bigger question: was this truly a one-off (bad enough), or was it representative of a more systematic practice (which would be far worse)?

I can understand why DOJ and the FBI would fight tooth-and-nail (including, if some late reporting is correct, Rosenstein threatening to subpoena House Intel Committee member/staff text and emails) to prevent the revelation of “sources and methods” in this instance.  What was revealed when the rock was turned over was quite shocking, and it cannot rest here. It is necessary to know whether the entire FISA process is routinely corrupted.

The long anticipated–and by many feared–release of the House Intelligence Committee majority’s letter on the origins of the Carter Page FISA warrant came out today.  From the pre-release wailing, rending of garments, and gnashing of teeth over the grave threat that it posed to national security, one would have thought it would have contained nuclear launch codes and shocking revelations about Area 51.  In fact, it was anticlimactic, and demonstrated what any sentient being should have been able to figure out: that the FBI and DOJ relied upon the dodgy, fundamentally tainted Fusion GPS/Steele/DNC dossier to obtain a FISA warrant to spy on Page–and hence on others in the Trump campaign.

Anticlimactic, but damning and disgusting nonetheless. Particularly given the revelation that Andrew McCabe, erstwhile deputy director of the FBI, admitted under oath that but for the dossier, the FISA warrant would never have been sought in the first place.  It was clearly pivotal, despite all of the desperate attempts in the media and among Congressional Democrats over the last few days to insinuate that Page had long been on counterintelligence radar.  (This actually cuts the other way–if the pre-dossier evidence against him was so strong, why wasn’t he under surveillance until after the dossier was obtained?)

The essence of the memo (just described) doesn’t really require much discussion.  Those facts speak for themselves. A few details do deserve some comment.

One is the use of a tactic that I have mentioned as being characteristic of KGB methods (though they are no doubt a staple of all intelligence services): planting “information” in a media source as a way of laundering it, enhancing its credibility, and getting it into circulation.  The typical use of this technique is to get the planted information (or disinformation) into the media foodchain so that it gets disseminated more widely.  Here the use of the technique was far more sinister. It was recycled through a friendly journalist (Michael Isikoff) who was then cited as corroboration in the FISA application.

The memo leaves some wiggle room for the FBI and DOJ to claim that they didn’t know that Steele had approached Isikoff, but this requires them to claim that they can’t add 2 and 2: once they read the Isikoff article, knowing what Steele had told them they had to have known that Steele was the source. (Steele apparently tried to craft a cover story by pointing the FBI to a report containing similar information prepared by Clinton crony Cody Shearer–thereby providing a possible alternative source for the Isikoff story.)    Furthermore, within a few weeks the FBI learned that Steele was talking to journalists, and they fired him–yet they did not inform the FISA court about that their initial application was tainted in their applications for renewal.  (I further note that since the FBI fired him–that means they hired him!)

And the renewals brings up another issue: one of the signatures on at least one renewal was Rod Rosenstein’s.  You know, the guy who appointed Mueller and who is overseeing the independent counsel investigation for DOJ because of Session’s recusal.  What the holy F? Rosenstein’s involvement in the FISA process, which is deeply embedded in the Russia investigation, means that he is conflicted as hell.  He should have had nothing whatsoever to do with the appointment of the Special Counsel, and nothing to do now with overseeing him.  This is particularly true since Rosenstein’s knowledge must have included the fact that the original warrant was the fruit of a poisoned tree, and that he failed to disclose that to the FISA court.

James Comey’s fingerprints are all over this as well.  I can’t wait to hear his deep exegesis on the ethics of swearing to a court about the veracity of “salacious, unverified” (his words!) info produced by a rabid partisan and paid for by a presidential campaign to get a warrant to spy on Americans.  And to the ethics of withholding material information from the FISA court.

This last is particularly and disgustingly ironic given that one of the FBI’s objections to the release of the memo was that it omitted relevant facts. I can’t imagine what omitted fact would reverse the conclusions that flow from those that are included.  Putting that aside, the FBI’s objections give a new meaning to chutzpah.

The pre-release shrieking about the memo was beyond hysterical.  Among the most hysterical claims (made by Leon Panetta and others) was that a release of the memo would unleash a Constitutional crisis.

Just how would the Chief Executive’s declassification of a document about the actions of parts of the executive branch constitute a Constitutional crisis? The President holds ultimate classification authority, and is responsible for the execution of the laws and the conduct of executive branch departments, agencies, and employees. Disclosing information about the misbehavior of executive branch officials does not represent a Constitutional crisis: if anything, it is the misbehavior of those officials during a presidential election that raise the issue of such a crisis.

Some of the reporting and commentary on this issue has been utterly incredible (in many senses of the word).  For example, Trump overruled current-FBI director Wray’s objection to releasing the memo.  The WaPo framed this as “Trump defies Wray.” Um, who the hell works for whom? If there is defiance going on, it is Wray’s going public with his objections to the actions of his Constitutional superior.  Wray should have raised his objections in private to Trump, and if overruled (as he was, in the event), kept his mouth shut in public, or resigned–and then kept his mouth shut. To lobby publicly (and disingenuously, by raising national security concerns) in an attempt to pressure his superior into doing something is beyond the pale.

Or should be, anyways. But one thing that this entire sordid episode has demonstrated is that the bureaucracy generally, and the intelligence and federal law enforcement agencies in particular, consider themselves an independent power, a co-equal–superior actually–branch of government, the Constitution be damned. Trump is deemed the usurper.  Indeed, it is clear that many senior members of the FBI, DOJ, and the intelligence community considered it their right to intervene in the election in order to prevent Trump’s election, and failing that, to kneecap his presidency. And virtually all of the political class in the US is on their side. This is the real Constitutional crisis.

You should view this as a Constitutional danger regardless of your partisan leanings. For ask yourself: would you like the same to be done to your guy (or gal)?

It is also disgustingly ironic that in a fervid controversy about the alleged intervention of the Russian siloviki into an American election reveals that high-ranking American officials in control of the vast powers of US law enforcement and intelligence used siloviki methods (including most likely disinformation planted by Russian siloviki!–you can’t make this up!) in an attempt to influence an American election and then to cripple the winner of that election when their original plotting failed

Indeed, the Russian siloviki have it going for them that they aren’t nauseatingly sanctimonious about their skullduggery–refreshingly cynical is more their style. James Comey and others cannot say the same.

And if you think the siloviki analogy is overwrought, consider the not-so-veiled threats expressed on the pages of the WaPo and NYT and by politicians and political pilot fish (e.g., Ben Rhodes) about how dangerous it is to confront the FBI.  Further proof that this rogue influence must be tamed.

Trump showed stones in confronting the FBI and the political class. But perhaps this just demonstrates that he has a strong survival instinct. He knows that he is in a knife fight for his political life–and perhaps his freedom and fortune–and it seems that he has decided that compromise is impossible so escalation is necessary.

This is not the end.  This is at most the end of a beginning. For the acknowledgement that the FBI and DOJ–and the Obama administration–used under false pretenses a dossier paid for by a political campaign and assembled by rabid partisans to obtain permission to spy on an American just raises other questions. Who other than Page was spied on? Were their names unmasked? What use was made of the information obtained from the Page surveillance? By whom?

Given the Herculean effort required to get the memo released, I doubt that these questions will be answered, and if they are answered, it will only happen in after a political brawl that makes the fight of the last few weeks look like childs’ play. The siloviki and their political handmaidens play rough, and play for keeps.