Streetwise Professor

I have long mocked Gazprom’s obstreperous, and economically unhinged, defense of an oil price peg of its gas sales. So today is another schadenfreude day, as the FT reports that Gazprom’s vaunted gas deal with China is finding that The East is Red (as in ink) because the price was linked to oil and “offers no protection against low [oil] prices.” (And despite the evident risks of going without protection, Russia is contemplating a ban on foreign condoms! Maybe Gazprom needs to be more “strict and discriminating” in its contracting practices.)

Apparently the company took strategic advice from Obama, who when asked by Fareed Zakaria what would happen if the Iran deal failed, said that “I have a general policy in big issues like this not to anticipate failure“:

Asked whether the contract built in protections to ensure that Gazprom would not make a loss in the event of a prolonged period of low oil prices, Pavel Oderov, a director at the company, said: “We have registered high risk appetite for this contract and we do not envisage such an event.”

By “high risk appetite,” I think he meant: “we were freaking desperate and we put it all on black (as in oil) to gamble for resurrection.”

And of course, Putin can’t let Gazprom eat a loss:

Separately, the Russian government is preparing to support the flagship project. According to a document published by the Kremlin on Monday, president Vladimir Putin ordered the Russian government to draw up by the start of September a “comprehensive action plan to ensure government support for the construction of gas transport infrastructure, including the Power of Siberia pipeline”.

Like the Russian government has money to throw around, especially since Gazprom (and Rosneft) are supposed to be the cash cows that feed the rest of its corrupt cronies, and the budget.

Insisting on the oil peg was always nuts. Note that one reason why many buyers of LNG want to move away from the oil-link is to diversify their price risk: that’s exactly why Russia, already a huge oil long, should have jumped at the chance to move away from a 100 percent reliance on oil price linkages. Yes, oil and gas prices are correlated, but imperfectly so, and moving away from oil-based pricing for gas would have reduced the country’s exposure to oil prices. But apparently Gazprom management and Putin believed that oil would always outperform gas, and insisted on the link. Be careful what you ask for, Vlad!

This is just the latest in a litany of Gazprom failures. Along with today’s bad news about the China contract-the cornerstone of Putin’s vaunted pivot to Asia-the company disclosed that production was down and sales to Europe were down in the first quarter. The company’s ruble profits rose only because the ruble cratered: talk about the cloud engulfing the silver lining. Further, the Turkish Stream project appears dead in the water, foundering upon-you guessed it-the inability to negotiate a price. That, and the cracked economic rationale for the project.

The world is finally awakening to the fact that the alleged energy behemoth is in fact an economically incoherent mess. In the US, it would have been taken over, and ruthlessly rationalized. Or put into rehab. Or broken up. But Putin continues to let it blunder on, like a vodka-sotted giant.

Not so long ago, Putin was considered some sort of virtuoso. He apparently thought so too. But now everything that used to work for him is self-destructing. And he seems quite bewildered at his turn of fortune.

In truth, Putin was not a virtuoso: he confused luck–high oil prices–for some sort of strategic genius. He was a huge spec long on oil, and looked brilliant when the price was high. When it is low, not so much. And idiotically, one of his champions insisted on increasing that exposure instead of diversifying away from it.

Well played. Well played.

Today is the 70th anniversary of the atomic bombing of Hiroshima. In commemoration, we are being bombarded with moralizing criticisms of the US’s actions. Japan is playing the victim card for all it is worth, and it is getting considerable support in the predictable quarters of the US and Europe.

These criticisms only survive in a vacuum in which history begins on 6 August, 1945.  Put into proper historical context, Truman’s decision to drop the bomb is readily understood and easily defended.  Real decisions require an understanding of the choices at hand, and Truman’s choices were grim.

The alternative to the bomb was a continued relentless air assault on Japan with conventional weapons, likely culminating with a series of invasions of the home islands, combined with a Soviet assault in Manchuria and then into China. The human toll of this alternative would have far exceeded that of Hiroshima and Nagasaki, especially in Japanese lives.  Curtis LeMay’s firebombing campaign inflicted horrific casualties: the firebombing of Tokyo on 8/9 March, 1945 alone killed over 100,000 Japanese civilians. The collective toll of the conventional bombing campaign was over 300,000 from November 1944-August 1945, and its continuation would have killed more Japanese than the atomic bombs did.

Then there is the invasion itself, for which the Japanese had prepared a last ditch defense that would have put every civilian in the front lines with bamboo spears, grenades and old rifles. On Okinawa, April-June 1945, an estimated one-third of the civilian population died, many by suicide.  The civilian toll on Saipan a year earlier was also large.

Then add in the horrific military casualties the Japanese would have suffered. In  most previous island battles, Japanese death rates were above 90 percent due to the fanaticism with which they fought. The same fanaticism would have been inevitable in a defense of the home islands, with similar results.

And I haven’t even gotten to the American (and British) casualties, which were rightly Truman’s first responsibility. On Okinawa, the US lost 20,000 KIA, approximately 8 percent of the peak US force.

To this add the massive Chinese civilian casualties that would have resulted from an extended Soviet attack.

Many critics of the dropping of the bomb counter that these horrors would have been avoided, because the Japanese were on the brink of surrender. This is the most ahistorical claim of all. Any leader contemplating the recent experience on Okinawa and Iwo Jima would have thought the idea of an impending Japanese surrender utterly delusional. Further, the most fanatical elements of the Japanese military were violently opposed to the idea of surrender even after the bombs were dropped. Officers mounted a last ditch coup in an attempt to prevent the playing of the recording of the Emperor’s surrender statement. There was a large hardcore element in Japan that would have resisted to the last had not the Emperor ordered them to lay down their arms.

In sum, by any reasonable calculus, Hiroshima and Nagasaki, as horrific as they were, saved lives.

Japanese claims of victimhood ring particularly hollow. The fire in the sky was not a bolt from the blue. It was the climax of an orgy of destruction and death brought on by the Japanese, and carried out by them with a ruthlessness perhaps rivaled only the the Nazis in eastern Europe and the USSR. Indeed, Japanese atrocities pre-dated Nazi ones: millions of Chinese died at Japanese hands, often in the most brutal and inhumane ways, starting in 1931 (in Manchuria) and 1937 (in China proper).  Babies on bayonets were not a figment of wartime propaganda. They were a reality. Indeed, the Japanese reveled in such conduct, in large part because of a belief in their racial superiority. And don’t forget that Japan: (a) had its own nuclear program, (b) had an extensive chemical and biological warfare program which involved testing on POWs and civilians, and (c) waged chemical and biological warfare in China.

Further, while the Japanese make a moral claim against the US, they are adamant in their refusal to admit the validity of any such claim against them. Unlike the Germans, who have for the most part come to grips with their past and acknowledge and have paid reparations for the actions of the Hitler government, the Japanese have largely obfuscated and denied what their forebears did with no justification even approaching Truman’s.

Japan sowed the wind, and it reaped the whirlwind. That should be the focus of Japan’s commemoration of Hiroshima.

Some weeks ago, Obama said “ideologies are not defeated with guns but better ideas.” There is at least one instance where that is true. In August, 1945, the violent ideology of Bushido was defeated by an idea. The better idea was nuclear fission.

With considerable embarrassment, Secretary of Defense Ashton Carter admitted to Congress that the US had trained a grand total of 60 fighters in Syria after the expenditure of tens of millions. But his numbers are out of date. For in an arguably criminal move, no sooner had Carter reported to Congress that the US sent this platoon, grandeloquently  named “30 Division” into Syria, in the naive hope that Syria’s Al Qaeda group Al Nusra and other Islamist groups would treat them as allies not enemies. Since when was Al Qaeda fond of American lackeys?

The US was soon disabused of its fantastical notion. Almost as soon as they set foot in Syria, Al Nusra captured many of the 30 division, including its leader. Several of those have thrown over to Al Nusra. Yesterday, Al Nusra attacked the American-trained troops, killing and wounding several.

I have seen various counts of the casualties, one of which states that there are 13 left. So Five Guys isn’t that far off.

In other news of the wretched US policy in Syria, the US and Turkey have reached an agreement on US use of the Incirlik air base. But the Turks consider it a “red line” to use Incrilik-Bcsed aircraft to support Kurds fighting ISIS even though the YPG is the only effective ground force currently fighting the head choppers. And of course, even though Obama ignores his own red lines, he scrupulously adheres to Erdogan’s. Since the US cannot bomb from Incirlik in support of the Kurds, it will either (a) bomb in support of no ground force, meaning that the airpower will be ineffectual, or (b) it will bomb in support of non-Kurdish units in the “safe zone” on the Turkish border west of the Euphrates, most of which are Islamists of one sort or another.

This all makes the Bay of Pigs look like the height of military genius and moral courage.

Acting under the aegis of its most malign agency, the EPA, in its unbending effort to hamstring the US economy, the Obama administration today released its long dreaded CO2 rule. The Rule mandates a 32 percent decrease in CO2 emissions by 2030. This outcome will be achieved by a dramatic reduction in the use of coal powered generation, and its replacement by renewables.

The administration touts its generosity by pointing out that compliance with the Rule has been extended by 2 years.

Great. We get screwed in 7 years, instead of just 5. Gee. Thanks. How thoughtful. You really shouldn’t have.

The Rule is tarted up with a cost-benefit analysis which purports to show massive benefits and modest costs. The benefit is in the form of improved health, in particular through the reduction in respiratory ailments.

But every step of this analysis is literally incredible. Consider the steps. First is an estimate of how the regulation affects climate. The second is an estimate of how climate affects health. The third is an estimate of the value of these health benefits. None of these calculations is remotely plausible, or even is it plausible that they can be made realistically, given the incredible complexity of climate and health.

And note the bait and switch here. The Rule is touted as a solution to the Phenomenon Once Known As Global Warming. But the Rule itself admits that the effect on temperature will be point zero one eight degrees centigrade by 2100. This is effectively zero, meaning that the “Climate Change” benefit of the Rule is zero.

The health benefits come from reductions in particulates from coal generating plants. So why not regulate particulates specifically?

This all points out that cost benefit analysis for large federal rules is basically Kabuki theater. Some laws require this analysis, but since courts give so much deference (under Chevron) to agencies, that this analysis is not subject to any serious scrutiny. Consequently, the process is ritual, not a serious check on agency discretion.

The Rule is grotesquely inefficient even if you believe this Making Shit Up And Calling it Science!® “cost-benefit analysis.” An efficient rule would achieve its results at lowest cost. But the command-and-control EPA rule does not do this.

Originally, the Rule was expected to lead to a substitution of natural gas for coal. But we can’t have that, can we, given that natural gas is a fossil fuel (even if Nancy Pelosi doesn’t think so)? So the current rule encourages the use of renewables.

The economics of renewables (especially wind) are atrocious. They are intermittent and diffuse. Intermittency strains reliability, and requires maintaining backup generation. Germany (and other countries, including Spain) have gone all in on renewables, and it has been a disaster. Energiewende has saddled Germany with high costs and lower quality power that has imposed great costs on German manufacturing. (Fluctuations in wind and sunlight induce fluctuations in frequency that wreak havoc with precision manufacturing processes.) California is already on the verge of reliability problems when the sun sets during winter months due to a sudden drop in solar generation (aka the swan problem) that requires a sudden ramp up of conventional generation: but the supply of solar during daylight hours undermines the economics of conventional generation. Wind power in Texas is leading to frequent bouts of negative prices which reduce the profitability of conventional generation necessary to maintain reliability.

The Rule acknowledges reliability issues, but the response is totally inadequate:

[T]he rule requires states to address reliability in their state plans. The final rule also provides a “reliability safety valve” to address any reliability challenges that arise on a case-by-case basis.

That’s just great. EPA says: “Yeah, we know renewables create reliability issues. Not our problem! You figure it out, states.” Note that this is problematic because the electrical grid is interconnected, meaning that retiring a coal plant in one state can have serious effects on reliability in numerous other states. So how do individual state plans efficiently address these inherently interstate issues? And as for the “safety valve”, the case-by-case analysis is likely to be cumbersome and costly.

Let’s get down to cases. By its own calculations, the proposed Rule will have a risible effect on global temperature. Therefore, there is no cost benefit justification for the control of CO2 per se, the ostensible purpose of the rule. If there are substantial benefits from reducing particulate emissions, then tax these emissions at a rate commensurate with these costs and let utilities and others find the most economical way of complying.

But that’s not the point, is it? Obama and the EPA don’t want efficiency. They have an intense ideological animus against fossil fuels, and a romantic attachment to renewables: many of the Democrats’ largest donors are have a strong investment in renewables. Pigouvian approaches would likely result in the failure to litter the landscape with bird blending windmills and massive solar panels, so they prefer command and control approaches instead.

And did I mention that Obama insinuated that if you oppose the Rule you are racist?

This new Rule is a piece with the last 6 plus years of grotesquely inefficient legislation and regulations. Frankendodd. Obamacare. Net Neutrality. Each of these add huge amounts of new weight that the Atlas of the American economy must bear. An economy subjected to such burdens will survive, but it will not thrive. The EPA’s new Rule will provide no meaningful benefit, and any benefits that it does generate will be gained at excessive cost. But that is the Obama way. That is the leftist way.

In June I visited Stockholm, and was able to fit in a trip to the Swedish history museum. I was quite interested in viewing the Viking exhibit, but was rather aghast when I did. First, the signage disclaimed any Swedish responsibility for the Vikings: “Vikings were not Swedes.” Whatever. Second, another sign claimed  “the Vikings were peaceful.” I’m sure the monks at Lindisfarme and myriad other English monastaries, the inhabitants of any navigable river from the Baltic to the Mediterranean, etc., would beg to differ. And those Sagas. So peaceful! But the best was what a tourguide said: “The Vikings were inclusive people who treated everyone equally.” Sure they were! Talk about anachronism. Who knew the Vikings (who weren’t Swedes!) personified postmodern Swedish values. (But if they did, why the haste to deny that Vikings were Swedes? A little cognitive dissonance?)

To put an exclamation point on how far the people who reside in the country now called Sweden have changed since the 8th century, consider this: “Nine ways to become a truly Swedish man.” At least those 9 ways don’t involve peeing while sitting, which is a subject of raging debate in Germany. So there’s that.

Thank God-or would it be Odin?-that my ancestors got on the boat in the mid-19th century. And if the Swedes are denying they are Vikings, I’m pretty sure the residents of Valhalla are now willing to agree.

Last week the administration breathlessly announced that it had secured Turkey’s participation in the anti-ISIS campaign. This would entail Turkish airstrikes against ISIS positions, and Turkey granting the US use of Incirlik and other airbases for strike and drone aircraft. The straw that supposedly broke the camel’s back was an ISIS suicide bombing of a Kurdish protest on the Turkey-Syria border (by people wanting to cross to Kobane to help in reconstruction) and the subsequent killing of two Turkish policemen by Kurds who blamed Turkey for the bombing.

With great fanfare, Turkey launched an airstrike against ISIS. And then it has spent the last week bombing the snot out of Kurdish PKK positions in Iraq. If Turkey has engaged in further attacks against ISIS, I haven’t seen it reported, whereas there Turkey has attacked Kurdish positions on a daily basis. Nor do I believe that an extensive campaign would be possible without close coordination between the US and Turkey to avoid fratricide, mid-air collisions, etc., if their forces are operating in the same airspace against the same targets. And as I discuss below, it is unlikely such coordination is occurring.

In sum, under the pretext of attacking ISIS Turkey is attacking its real enemy, the Kurds, who happen to be the only effective ground force against ISIS, and who in addition to pushing them out of Kobane have been taking territory from ISIS and pushing it back towards Raqqa. Indeed, the Kurds have pushed ISIS away from virtually all of the Syria-Turkey border. But in addition to inflicting damage on the Kurds, the Turkish attacks will also no doubt divert Kurdish resources into a renewed war against Turkey, thereby further diminishing pressure on ISIS.

Put differently, the allegedly anti-ISIS Turkish campaign is objectively pro-ISIS.

This is not surprising, because Turkey has always perceived the Kurds-especially the PKK-as a true enemy, and has hardly been stalwart anti-ISIS. Indeed, there is much circumstantial evidence that elements in Turkey support ISIS. Turkey did precious little to seal the border with Syria, thereby allowing ISIS to move men from Turkey into Syria. Furthermore, most of ISIS’s oil is sold in Turkey. Turkey says that the PKK are atheist Marxists, but it is more accurate to say that the real beef is that they are not Sunni Islamists like Erdogan, which means that he has more affinity on sectarian grounds for ISIS than he does the Kurds.

Today Egypt went even further, explicitly accusing Turkey of supporting ISIS fighters in the Sinai.

But it gets better! The supposed deal between the US and Turkey for the use of airbases is only a verbal understanding. And we know about the reliability of verbal understandings in that part of the world, don’t we?  (This is why I doubt there is any serious coordination between US and Turkish air forces, and why I believe that there is no serious Turkish action against ISIS.)

Further, no formal deal is expected for weeks:

But the Pentagon said it will take “weeks” before U.S. airstrikes are launched from Turkish soil, as officials are still working out final arrangements. Pentagon spokesman Navy Capt. Jeff Davis told reporters Monday that several bases were being looked at to house U.S. aircraft for missions against the Islamic State.

My guess is that “weeks” will turn into “never.” Erdogan, engaged in an intense domestic political battle following his bruising electoral defeat (to which a Kurdish party greatly contributed) is waging war on the PKK both because he hates them and because it plays well domestically, thereby boosting his position in coalition negotiations or a snap election. He will string out negotiations with the US until he accomplishes his political objectives, and then his enthusiasm for letting the US use Turkish bases will evaporate. Erdogan dangled supporting the US against ISIS to get a US (and NATO) green light to attack the Kurds: he will take the latter and renege on the former.

Even if, against my strong expectation, Turkey does permit US use of its bases, this will matter militarily only if the airpower supports and is coordinated with a strong ground force. At present, the only real ground force is Kurdish, and (a) Turkey is attacking the Kurds and (b) do you really think Erdogan is going to permit the use of the bases in a way that strengthens the Kurds? This is all so farcical.

This is not the first time the US has betrayed the Kurds: it has been a habit for going on 30 years. But this most recent action, betraying them again in the name of fighting ISIS, when in fact this betrayal will undermine the anti-ISIS campaign, is the most shameful of all.

Turkey has been opposed to US interests since Erdogan’s assumption of power. It has thwarted us at every turn. Only a fool would believe Erdogan (one of the leaders whom Obama said he got on best with-ha!) has changed his tune. I will certainly not discount the possibility that Obama and Kerry are fools of the first order, but I think it is more likely that this is a truly cynical ploy, with Obama pretending to have achieved a great diplomatic victory that advances the campaign against ISIS, when in fact it does nothing of the sort (and indeed is likely to do the exact opposite).

Idiocy or perfidy. Hell of a choice.

I have long been certain that there is seething discontent within the Pentagon, directed squarely at Obama. The past several days have made this abundantly clear.

The most brutal takedown was by retiring Army Chief of Staff General Ray Odierno. This certified warrior squarely blames Obama’s Iraq bugout for the rise of Isis. Further, he pointed out Iran’s malign role in the Middle East. He agreed that Iran, and the truly evil Qasem Soleimani in particular (who was un-sanctioned as a result of the Iran deal), were responsible for the bulk of American deaths in Iraq in 2007-2009.

Further, two generals (including the nominee to be Odierno’s replacement) and the Secretary of the Air Force gave testimony before the Senate which squarely undercuts Obama policy. Each identified Russia as the US’s primary threat: one referred to it as an “existential” threat. As if to emphasize that this was off-message, spokesnimrod Josh Earnest said that no one on Obama’s national security staff believes this. This is no doubt true. So much the worse for them.

One of the generals (Milley, I believe) supported arming Ukraine. The testimony also indicated that deploying tactical air controllers to Iraq was advisable. Also not on the Obama agenda.

And note: these are the people that Obama has selected for the top positions in the military. Just think of what those who couldn’t make it through the political filter are saying and thinking.

I am not saying that there is a crisis in civil-military relations under Obama, but it is pretty clear that these relations are in the worst shape in modern memory. What Odierno and the others are saying is likely just a pale shadow of the extreme discontent in the military at their commander in chief.

This story is a Sino-Russian twofer:

The contract between Russia and China for gas supplied via the western route known as Power of Siberia-2 is being delayed indefinitely, Vedomosti cited Russian officials. They say China is reviewing its energy needs due to the economic slowdown.

The demand growth for gas in China is slowing, at the same time access to liquefied natural gas (LNG) is becoming more available in the country, for example from Australia, due to the fall in oil prices, Sberbank CIB analyst Valery Nesterov told Vedomosti on Wednesday.

Repeat after me: Gazprom finalizes about one out of a hundred of the vapor deals it announces. This is especially true where China is involved.

There are three basic problems. First, the pipeline is expensive, primarily because the Russians insist on building it. After all, how else could they tunnel out money? And if they can’t tunnel out money, what the hell is Gazprom good for?

“Gazprom offers CNPC a high price, explaining this by the high cost of the Power of Siberia – 2 construction. China is ready to build the pipeline at a cheaper cost and at public tender, so its companies could participate and for the construction price to be transparent,” the president of the Russia-China analytical center Sergei Sanakoyev said.

Second, the pipeline would go to the western part of China, which is convenient for Gazprom, but it isn’t where China needs the gas.

Third, China doesn’t need as much gas period, because (a) new (LNG) supply is coming on line in Australia, and (b) despite the happy talk of official statistics, every indication is that the Chinese economy is slowing:

The demand growth for gas in China is slowing, at the same time access to liquefied natural gas (LNG) is becoming more available in the country, for example from Australia, due to the fall in oil prices, Sberbank CIB analyst Valery Nesterov told Vedomosti on Wednesday.

So how’s that pivot to Asia working out, Vladimir? Timing is everything in life, and Putin is counting on China precisely when China has its own issues to deal with. If China was continuing to power forward, Putin’s pivot would have turned him into China’s pilot fish. Now even being a pilot fish looks out of reach.

To all those who hyperventilated at the announcements of huge Sino-Russian gas deals: when will you people learn to discount virtually anything Gazprom says down to just above zero? That’s especially true when there was a huge political reason for Putin to hype such a deal. I guess suckers never learn.

The second part of the twofer here is the further evidence it provides of China’s economic troubles. Look at the commodity carnage going around: oil, copper, iron ore, gold, platinum, you name it are in the dumper. China put them there. This is just another pixel in the image.

Today is Frankendodd’s fifth birthday. Hardly time for celebration. It is probably more appropriate to say that this is the fifth year in the Frankendodd life sentence.

So where do we stand?

The clearing mandate is in force, and a large fraction of derivatives, especially interest rate and credit index derivatives are cleared. This was intended to reduce systemic risk, and as I’ve written since before the law was passed and signed, this was a chimerical goal. Indeed, in my view the systemic risk effects of the mandate are at best a push (merely shifting around the source of systemic risk), and at worse the net effects of the mandate are negative.

Belatedly regulators are coming around to the recognition of the risks posed by CCPs. They understand that CCPs have concentrated risk, and hence the failure of one of these entities would be catastrophic. So there is a frenzy of activity to try to make CCPs less likely to fail, and to ensure their rapid recovery in the event of problems. Janet Yellen has spoken on the subject, as has the head of the Office of Financial Research, Robert Dudley of the NY Fed, and numerous European regulators. Efforts are underway in the US, Europe, and Asia to increase CCP resources, and craft recovery and resolution procedures.

This is an improvement, I guess, over the KoolAid quaffing enthusiasm for the curative effects of CCPs that virtually all regulators indulged in post-crisis. But it distinctly reminds me of people madly sewing parachutes after the rather dodgy plane has taken off.

Further, these efforts miss a very major point. The main source of systemic risk from the clearing mandate derives from the huge liquidity strains that clearing (notably variation margin on a rigid time schedule) will create when the market is stressed. There has been some attention to ensuring CCPs have access to liquidity in the event of a default, but that’s not the real issue either. The real issue is funding large margin calls during a crisis.

Moreover, as I’ve also discussed, efforts to make CCPs more resilient can increase pressures elsewhere in the financial system (the “levee effect.”) Relatedly, regulators have not fully come to grips with the redistributive aspects of clearing–including in particular how netting, which they adore, can just relocate systemic risks.

I therefore stand by my prediction that a regulation-inflated clearing system will the source of the next systemic crisis.

Moving on, I called the SEF mandate the worst of Dodd-Frank. In the US, the majority of swap trades are done on SEFs, though mainly through RFQs rather than the central limit order books that Barney and Co. dreamed about in 2010.

There was never a remotely plausible systemic risk reducing rationale for the SEF mandate. Hence, if SEFs are inefficient ways to execute transactions, the mandate is all pain, no gain. As an indication of that this is indeed the case, note that virtually all European banks and end users stopped trading Euro-denominated swaps with US counterparties exactly when the mandate kicked in. The swaps mandate was too onerous, and anyone who could escape it did.

In a piece in Risk, I referred to the Made Available to Trade part of the SEF mandate the worst of the worst of Dodd-Frank. It made no sense to force all market participants to trade a particular kind of swap on SEFs just because one SEF decided to list it. Apparently that realization is slowly sinking in. The CFTC recently held a meeting on the MAT issue, and it seems as if there is a good chance that the CFTC will eventually determine what has to be traded on SEFs.

It is an indication of my loathing for MAT as it currently exists that I consider that an improvement.

Still moving on, Frankendodd was intended to reduce concentration and interconnectedness in the financial system. The actual result cannot really be called a mere unintended consequence: it was the exact opposite of the intended effect. Completely predictably (and predicted) the huge regulatory overhead increased concentration rather than reduced it. This is particularly true with respect to clearing. Gary Gensler’s dream of letting a thousand clearing firms bloom has turned into a nightmare, in which the clearing business is concentrated in a handful of big financial institutions, exacerbating too big to fail problems. And clearing has turned out to be the Mother of All Interconnections, because every big financial institution is connected to all big CCPs, and because pretty much everyone has to funnel the bulk of their derivatives trades through clearinghouses.

I could go on. Let me just re-iterate another risk of Frankendodd: standardization–the regulators’ fetish–is  a major source of systemic risk. Monocultures are particularly vulnerable to catastrophic failure, and the international regulatory standardization that was birthed in Pittsburg in 2009, and enacted in Frankendodd and MiFID and Emir, has created a regulatory monoculture. Some are grasping the implications of this. But too few, and not the right people.

I’ve focused here on the sins of commission. But there are also the sins of omission. Frankendodd did nothing about the Fannie and Freddie monster, which is coming back from the dead. F&F was a real systemic risk, but the same political dynamic that fed it in the 1990s and pre-2008 is at work again. Get ready for a repeat.

Frankendodd should have just focused on raising capital requirements for banks and other financial institutions with liquidity and maturity mismatches, and driven a stake through Fannie and Freddie. Instead, it sought to impose a detailed engineered solution on an emergent order. This inevitably ends badly.

So maybe it would be more accurate to say that we’re in our fifth year on death row. Someday the warden will come knocking.

The US has entered into  deal with Iran that will unfreeze $100 to $15o billion in assets, and which will also unleash an investment bonanza in the country going forward. (With unseemly haste, the German vice chancellor has already run to Tehran to rekindle economic ties.) Iran is a longtime supporter of Hezbollah and the Syrian government, and all sentient beings (and by saying this I understand I exclude John Kerry and Barack Obama) realize that Iran will spend some of this windfall on Hezbollah, Syria, and other equally charming organizations and countries. Indeed, Iran has made plain that it will do so:

In relevant remarks on Monday, renowned political analyst Dr. Mohammad Marandi said that Iranian Foreign Minister Mohammad Javad Zarif told him in Vienna last week that Iran would continue to supply arms to the regional nations even under a final nuclear deal.

“When we were in Vienna, the Arab reporters asked me if Iran would continue arms aids to its regional allies under the final deal, and when I asked Mr. Zarif, the Iranian foreign minister, the question, he told me that Iran would continue the arms supply policy,” Marandi, a Tehran University Professor, said.

“Mr. Zarif told me that Iran would continue its arms aid to the regional nations and he told me that it would be in violation of the UN Security Council resolution (that was adopted earlier today), but it would not be in opposition to the agreement (also known as the Comprehensive Joint Plan of Action),” he reiterated adding that Zarif had not asked him to remain unnamed when reflecting the answer to the reporters.

Simultaneously, however, the US is sanctioning Hezbollah officials for their involvement in the Syrian bloodbath:

The U.S. government on Tuesday imposed sanctions on three leaders of the militant group Hezbollah and a businessman in Lebanon, saying they were key players in the group’s military operations in Syria.

The sanctions were imposed by the U.S. Treasury Department.

“The United States will continue to aggressively target (Hezbollah) for its terrorist activities worldwide as well as its ongoing support to (Syrian President Bashar al-) Assad’s ruthless military campaign in Syria,” said Adam Szubin, the Treasury Department’s acting under secretary for terrorism and financial intelligence.

Jesus H. Christ: Who is the biggest supporter of “Assad’s ruthless military campaign in Syria”? Iran! So we are freeing billions to a country that will use it to support Assad’s butchery but we are sanctioning Hezbollah (which is pretty much a wholly-owned Iranian subsidiary) because it supports Assad’s butchery.

You cannot make up this stuff. It is impossible.