Streetwise Professor

The days after the alleged consummation of the nuclear “deal” between Iran and the the US and other P5+1 nations bears a strong resemblance to the famous Kurosawa film Rashomon: the participants have totally different accounts of what happened, and what was agreed to.

In the US version, Iran agreed to many terms that will make it impossible for it to “break out” to build a bomb in less than a year during the 10 year term of the deal. Centrifuges will not process uranium. Stockpiles of processed uranium will be neutralized. There will be intrusive inspections. Sanctions will not be eliminated immediately.

In the Iranian version, none of these things are true. Indeed, the Iranians characterize them as “lies”. In particular, sanctions will be lifted immediately, and there will be no inspections of military sites.

So which version is true? Who knows? All we have to go on is the accounts of the participants. No document detailing the understandings reached has been released. Instead, each side has released “fact sheets” which are wildly contradictory. At least in Rashomon the basic contours of every story were the same, even if key details differed. Here, one wonders if these people were even in the same room.

Astoundingly, even if the American account is accurate, the US has made major concessions on every key issue. Obama had originally said Fordow (the hardened uranium processing facility) and Arak (the heavy water reactor) would be closed. Both will remain open, although allegedly they will be repurposed. For a while, anyways. There will be no accounting of past Iranian violations, making it impossible to establish a baseline against which to evaluate future actions. There will be no snap inspections. And on and on. All of these reflect dramatic concessions from the original American negotiating position. Iran made no similar concessions.

Remarkably, the CIA director John Brennan claimed the Iranians finally agreed to a deal because the Iranian economy was “about to go down” due to the existing sanctions regime. If that’s true, why didn’t our crack negotiating team present Iran with a take it or leave it offer that forced Iranian concessions on every matter, rather than fold on issue after issue? Why did the allegedly stronger party make all the concessions? Why didn’t Obama play good cop to the Republican bad cop, and tell the Iranians “unless you take give up your nuclear program, these crazy Republicans will impose even more sanctions”, instead of fighting the Republicans tooth and nail? Either (a) Brennan is wrong, (b) Obama is the world’s worst negotiator, or (c) Obama really had no desire to force Iran to give up its program.

Given the utterly ineffectual, inept and/or feckless American negotiating strategy, it is hardly surprising that the Iranians are now demanding yet even more concessions. In particular, they are saying that immediate elimination of sanctions is a red line: no lifting, no deal. They are also saying that there will be no inspections of Iranian military facilities. Another red line.

Obama apparently operates under the delusion that a revisionist, revanchist, and messianic power that is involved deeply in conflict throughout the Middle East, and which has made “Death to America” words to live by for the last 37 years will somehow become a normal, non-aggressive nation when sanctions are eased, the money flows, and it is on its way to getting the bomb, in 10 years even if Obama is accurate in his description of the deal and his belief that Iran will adhere to it, or even sooner if he isn’t. This is delusional. Iran didn’t become an aggressive, revanchist, terrorism-supporting nation because it was isolated from the international community: it was isolated from the international community because it has been aggressive, revanchist, and terror-supporting. Now it will be able to pursue its messianic and imperialist goals under far less constraint. Yes, this will work out well.

Outside of Obama’s amen corner, virtually everyone in the foreign policy establishment is aghast. Eminences grise Henry Kissinger and George Schultz wrote a long and devastating oped in the WSJ that eviscerated virtually every aspect of the deal. The administration’s response? State Department interim spokesidiot Marie Harf (whom I would say is right out of a dumb blonde joke, except that would be insulting to the subjects of dumb blonde jokes) said that the Kissinger-Schultz piece was “sort of” full “a lot big words and big thoughts.” Wow. What a telling riposte to the two most experienced diplomats of the post-WWII US.  The only more inane response would have been “Is NOT!”

And then there’s Obama himself, dishing out his usual sneering disdain at critics. For instance, he said that those who opposed the deal were taking “a foolish approach” and needed to “bone up on foreign policy.”

Maybe what he meant to say is that they need to be boneheads on foreign policy, and therefore more like him. This is a guy who has lurched from one foreign policy misjudgment (or disaster) to another. The examples are endless. Calling ISIS the JV is one. The recent FUBAR with the Chinese International Development Bank is another. But my favorite, because it illustrates Obama’s unique (and toxic) mixture of warped judgment and narcissistic belief in his own Olympian discernment, was his response to Romney’s statement that Russia is the US’s greatest geopolitical threat: “The 1980s are now calling to ask for their foreign policy back because the Cold War’s been over for 20 years.”

Hahahahaha. Touche! What a zinger! Silly Romney, living in the past, not like the progressive, hip, future-focused Obama.

Well, the problem with that is that Putin is living in the past too, and is itching to refight the Cold War. But our Barry knows better.

So yeah. Based on his stellar track record of being wrong 99.8 percent of the time we should totally trust his judgment that his “deal” with the Iranians will tame them and thereby usher in an era of peace and tranquility to the Middle East. In fact, the opposite is true, and we see more evidence of that daily, as Arabs gear up for a civilizational and sectarian war with Persians (with Yemen being only the first theater in this conflict).

Obama is the Mr. Magoo of foreign policy. He blindly and happily tools along in his jalopy, thinking he is accomplishing great things, totally oblivious to the chaos and destruction that he is leaving in his wake, proudly proclaiming “Oh, Obama! You’ve done it again.”

Yes. Yes he has. And every time he does it, the nation-and the world-moves one step closer to the abyss.

The CFTC has filed a complaint against Kraft and Mondelez Global, accusing the companies of manipulating the December, 2011 CBT Wheat Futures Contract. A few comments, based on what is laid out in the complaint (and therefore not on a full evaluation of all relevant facts and data):

1. A trader executes a market power manipulation (i.e., a corner or a squeeze) by taking excessive, and uneconomic, deliveries on a futures contract. This causes the calendar spread to increase, and the basis at locations where delivery does not (or cannot) occur to fall. The complaint alleges that Kraft took large deliveries. The relevant calendar spread (December-March) rose sharply, and according to Kraft emails cited in the complaint, the basis at Toledo declined. Thus, the facts in the CFTC complaint support a plausible allegation that Kraft and Mondelez executed a market power manipulation/corner/squeeze.
2. A cornerer takes uneconomic deliveries. That is, the deliveries taken are not the cheapest source of the physical commodity for the cornerer. The complaint does not provide sufficient detail to determine with precision whether this was the case here (but discovery will!), but it does include circumstantial evidence. Specifically, Kraft took delivery on the Mississippi, whereas it needed physical wheat at its mill in Toledo. Further, Kraft did not use most of the wheat it bought via delivery. Instead, it sold it, which is consistent with “burying the corpse.” In addition, given cash bids in Toledo and the futures price at which the defendants took delivery, it is highly likely that it was cheaper for Kraft to buy wheat delivered to its mill in Toledo than it was to take delivery (at an opportunity cost equal to the futures price) and pay load out and freight costs to move the wheat from the Mississippi to Toledo. Again, though, the complaint doesn’t provide direct evidence of this.
3. A cornerer liquidates a large fraction of its futures position: whereas it loses money on the deliveries it takes, it makes money by liquidating futures at a super competitive price. Kraft liquidated more than half its futures position. This provides further evidence that it did not establish its futures position as a means of securing the cheapest source of cash wheat, and is consistent with the execution of a corner/squeeze.
4. A processor hedging anticipated cash purchases doesn’t buy calendar spreads. The complaint quotes an email stating that Kraft did.
5. One clunker in the complaint is the allegation that Kraft’s actions “proximately caused cash wheat prices in Toledo to decline.” Market power manipulation when Toledo is not the cheapest to deliver location (as was evidently the case here, as deliveries did not occur in Toledo) would be expected to reduce the Toledo basis (i.e., the difference between the Toledo cash price and the December futures price), and there is some evidence in the complaint that this occurred. But this is different from causing the flat price of wheat to decline, which is what the CFTC alleges. Any coherent theory of market power manipulation implies that a corner or squeeze would increase, or at least not reduce, the cash price at locations where delivery does not occur, but that the rise in the cash price at these locations is smaller than the rise in the futures price (and in the cash price at the delivery location). This results in a compression of the basis, but a rise (or non-decline) in flat prices.
6. In sum, the complaint presents a plausible case that Kraft-Mondelez executed a market power manipulation.
7. But the CFTC doesn’t come out and allege a corner, squeeze, or market power manipulation: these words are totally absent. Instead, the agency relies on its shiny new anti-manipulation authority conferred by Frankendodd under section 6(c)(1) of the Commodity Exchange Act, and CFTC Rule 180.1 that it adopted to implement this authority. This is essentially a Xerox of the SEC’s Rule 10b-5, and proscribes the employment of any “deceptive or manipulative device.” That is, this is basically an anti-fraud rule that has nothing to do with market power and therefore it is ill-adapted to reaching the exercise of market power.
8. The CFTC no doubt is doing this because under 6(c)(1) and Rule 180.1 the CFTC has a lower burden of proof than under its pre-Frankendodd anti-manipulation authority. Specifically, it does not have to show that Kraft-Mondelez had specific intent to manipulate the market, as was the case prior to Dodd-Frank. Instead, “recklessness” suffices. Further, it does not have to demonstrate that the price of wheat was artificial. In my view, the straightforward application of economics permits determination of both specific intent and price artificiality, but earlier decisions like Indiana Farm and in re Cox make it difficult to for the CFTC to do so. Or at least that’s what CFTC believes.
9. Although I understand the CFTC’s choice, it has jumped from the frying pan into the fire. Why? Well, to mix metaphors, there is a square peg-round hole problem. As I’ve been shouting about for years, fraud-based manipulations and market power manipulations are very different, and using a statute that targets fraudulent (“deceptive”) actions to prosecute a market power manipulation is likely to end in tears because the legal concept does not fit the allegedly manipulative conduct. The DOJ learned this to its dismay in the Radley case (which grew out of the BP propane corner in 2004). Even though BP executed a garden variety corner, the DOJ alleged that the company engaged in a massive fraud. Judge Miller found this entirely unpersuasive, and shot down the DOJ in flames. The CFTC risks the exact same outcome. Tellingly, it asserts in a conclusory fashion that Kraft-Mondelez employed a “deceptive or manipulative contrivance” but doesn’t say: (a) what that device was, (b) how Kraft’s taking of a large number of deliveries deceived anyone, (c) who was deceived, and (d) how the deception affected prices.

It will be interesting to see what happens going forward. The CFTC is obviously using this as a test case of its new authority. Perhaps it thinks it is being crafty (or would that be Krafty?) but I fear that by using a law and rule targeted against fraudulent conduct to prosecute a market power manipulation, the agency will just be finding a new way to screw up manipulation law, thereby undermining, rather than strengthening, deterrence of market power manipulation.

So will the Beastie Boys be singing about the CFTC? We’ll see, but I’m not hopeful.

The Industrial Energy Consumers of America has submitted a comment letter on the CFTC’s position limit rule making. The letter contains this libel:

If one looks at the agenda from the February 26, 2015 meeting (see below), other than CFTC presenters, every presenter has views that are not consistent with CFTC action to set speculative position limits. Professor Pirrong has a long history of client paid studies in this area and will need to identify who paid for the underlying data and study for his results to be credible on this subject.

Rogozin the Ridiculous™ is in charge of the massive Russian Vostochny Cosmodrome project. It is not going well. The project is way behind schedule, and way over budget. It is beset by corruption, running into the hundreds of millions of dollars.  Labor problems are rife.

And apparently Russia’s financial difficulties are also starting to bite. It can’t pay the light bill. Workers haven’t been paid since January, and are starting a hunger strike. The delays and the labor problem are leading Rogozin to conscript college students in “Soviet-style work gangs”  to complete the project. In the winter. So, how was your internship, Yuri?

In response, Rogozin is acting like the simulacrum of a Stalinist. He has installed “an array of webcams to be able to personally monitor construction from Moscow, some 7,000 kilometres to the west.” He has fired several construction managers, and has initiated some criminal prosecutions for corruption. He rages about sabotage and has threatened to “rip the heads off” anyone who impedes completion of the project.

If someone, Putin say, ripped off Rogozin’s head, would anyone notice a difference? Other than improving his looks, that is.

The only surprise is that Rogozin is not blaming he delays on the evil Americans, and their diabolical HAARP.

In fact, Rogozin is a faux Stalinist. All bluster. A farcical, pale imitation.

This project, invested with all the prestige and rubles Putin can manage, is a very public demonstration of the dysfunctional nature of the Russian state, and the utter impracticality of an economy dominated by state  corporations engaged in megaprojects. Putting someone like Rogozin in charge just provides some comic relief.

Keep this all in mind when evaluating Yakunin’s proposal for a superhighway, pipeline and rail route spanning Siberia and permitting one to drive from Moscow to Alaska. Read this, and have a good laugh:

The scheme was unveiled at a meeting of the Moscow-based Russian Academy of Science.

Dubbed the Trans-Eurasian Belt Development (TEPR), the project calls for a major roadway to be constructed alongside the existing Trans-Siberian Railway, along with a new train network and oil and gas pipelines.

“This is an inter-state, inter-civilization, project,” the Siberian Times quoted Yakunin. “The project should be turned into a world ‘future zone,’ and it must be based on leading, not catching, technologies.”

This in a country that does not have a highway connecting its two largest cities, and which is renowned for its horrific roads.

And its fools, of whom Rogozin is only the most prominent.

(h/t to commenter Ivan for pointing me to this story.)

The Options Clearing Corporation (“OCC”) and the exchanges that own it (Chicago Board Options Exchange, Incorporated, International Securities Exchange, LLC, NASDAQ OMX PHLX LLC, NYSE MKT LLC, and NYSE Arca) are embroiled in a dispute with virtually everyone else in the options business regarding its new capital plan. Pursuant to its designation as a “Systemically Important Financial Market Utility” (“SIFMU”) under Frankendodd, OCC was required to boost capital from $25 million to nearly $250 million. Part of this will be obtained through retained earnings, with an additional $150 million via a capital injection from the four owner-exchanges. In addition, CBOE et al promise to inject up to $117 million in the event of “unexpected losses”, which would be most likely to occur during a financial crisis.

In return, the owner-exchanges receive in essence preferred stock, which pays a dividend in perpetuity. The exact amount of the dividend is not known publicly, but those objecting to the plan (including BATS and KCG) claim that it could be as much as 16-19 pct, at least in the first few years of the plan’s operation.

Non-owner exchanges like BATS and market users like KCG are furious, claiming that the the capital plan allows OCC’s owners to “monetize” the rents accruing to its status as the monopoly clearer for options transactions in the US. They believe that OCC will pay for the dividend by charging super competitive fees that will impair competition among exchanges (advantaging the owner exchanges over the non-owners) and will burden market users.

This is a difficult issue, the nature of OCC. Here are some thoughts:

1. OCC is a regulated monopoly, and arguably a natural monopoly.This creates the traditional conflict between the owners of the utility and its customers, which include other exchanges that aren’t owners (like BATS) and clearing firms and market users (like KCG). This is in many ways very similar to a dispute between a traditional electric utility and its ratepayers heard before a state utility commission, with the exception that this is before the SEC.

2. Like a traditional are case involving a regulated utility, the dispute here is over what is a fair rate of return on capital. BATS and KCG are objecting to the rate of return the 4 exchange owners of OCC are being promised for their capital contribution, and the process by which the SEC approved this rate of return.

3. It is particularly challenging to determine a “fair” rate of return on this capital because of the unique risks that the OCC exchanges are assuming. This capital is at risk of taking a big hit, and the owner-exchanges are potentially obligated to make additional capital contributions, during periods of financial crisis (the “dire circumstances”) referred to in BATS’s letter to the SEC. This tends to make this capital very expensive, and it should therefore earn a relatively high rate of return (high dividend). Capital that has bad returns when the market is doing poorly overall-“high beta”, if you will-is expensive capital. The type of capital being provided is fraught with wrong-way risk: it is likely to take a hit precisely when the capital suppliers are least able to afford it. Determining how much of a risk premium is warranted is a challenge, because of the exceptional nature of the risk. In essence, the exchanges are assuming tail risk, i.e., the risk of exceptional events, and it is inherently difficult to evaluate and price these risks.

4. The other exchanges and firms like KCG benefit from the risk bearing capital supplied by the owner exchanges. Otherwise, they would have to bear the risk. But of course they would like to underpay for this benefit, just as the owner exchanges might want to overcharge for it.

5. In other words, this situation is tailor made for disputes. Monopoly rate setting to determine fair rates and a fair rate of return on capital with very unusual and hard to evaluate risks.

6. The fears about the effects of pricing on inter-exchange competition in execution service are misdirected. Yes, it is possible that the owner exchanges will capture monopoly rents accruing to the OCC’s dominant position, but traditional “one monopoly rent” analysis implies that they don’t have an incentive to use OCC pricing power to advantage their competitive position in execution services. Indeed, the opposite is true.

This also highlights some organization, ownership and governance issues that I addressed in my research on exchanges that culminated in my 2000 JLE piece. Exchanges (and clearinghouses) have market power, and serve disparate and heterogeneous interests. They can use pricing to redistribute rents (which accrue in part due to market power) from one group of intermediaries to another. Not-for-profit status and mutual ownership (having the exchange or CCP operate as a non-profit “utility” serving disparate intermediary-owners is a way of reducing rent seeking and mitigating the use of pricing to redistribute rents.

But non-profit, mutual organization comes at a cost. It requires highly participative, committee-heavy governance that slows decision making and often creates gridlock that makes it difficult for the exchanges/CCPs to respond to technology, regulatory, or market shocks. (Look at the CBT in the 1990s and early-2000s if you want an example.) If everybody has a voice and a vote, it is very difficult to get things done.

In sum, “financial market utility” pricing and governance is inherently messy and controversial.  It has all of the problems associated with public utility regulation, and then some. The problems are particularly daunting when it comes to capitalizing, allocating and pricing the systemic and wrong way risks that CCPs bear. Given these complexities, I won’t venture an opinion here, except to say that (a) I can see both sides of the argument here, and (b) this ain’t going away anytime soon.

Rodney Garrett and Peter Zimmerman of the NY Fed have produced a paper studying the effect of clearing on derivatives counterparty risk exposures. It is basically an extension of the Duffle-Zhu paper from a few years ago. It studies more realistic networks and a more diverse set of scenarios than D-Z. It demonstrates that with a variety of network structures, clearing actually reduces netting efficiency and increases counterpart risk exposures. This is especially true with “scale free” or “core-periphery” networks, which are more realistic representations of actual derivatives markets than the all-to-all structure in D-Z. They show that when the system relies on relatively few crucial nodes, as is the case in most dealer structures, clearing reduces netting efficiency. This, as Garrett and Zimmerman note, could explain why clearing has not been adopted voluntarily. It also raises doubts about the advisability of clearing mandates, inasmuch as the alleged benefit of clearing is a reduction in counterparty credit exposures.

A few comments. The results, taken on their own terms, make sense. In particular, networks connecting dealers and customers via derivatives transactions, are endogenous. And although network structures are not necessarily efficient due to network externalities and path dependence, there are forces that lead to minimizing credit exposures. thus, although it would be Panglossian to assert that existing structures minimize these exposures, it should not be surprising that interventions that lead to dramatic alterations to networks increase counterparty risk exposures as existing networks are configured at least in part to reduce these exposures.

More importantly, though, there is the issue of whether counterparty risk exposure in derivatives transactions is the proper metric to evaluate the effect of clearing mandates. As I have noted for  years (as has Mark Roe), when participants in derivatives transactions have other liabilities, changes in netting efficiency in derivatives primarily redistribute wealth to or from one group of creditors (derivatives counteparties) from or to other creditors (e.g., unsecured lenders, commercial paper purchasers, deposit insurers). Netting and offset essentially privilege the creditors that can use them, at the expense of others who cannot. So telling me policy A reduces counterparty risk exposures by netting provides me very little information about the systemic effects of the policy. To understand the systemic effects, you need to understand the distributive effects across the full set of creditors impacted by the change in derivatives netting efficiency induced by the policy–and that would be every creditor of derivatives market participants. This paper, like all others in the area, does not do that.

Put another way. Papers in this literature say little about systemic risk because they only analyze a piece of the system. The derivatives-centric approach is of little value in assessing systemic risk. To analyze systemic risk, you need to analyze the system, not a piece of it.

What’s more, shuffling around credit risk is probably not the most important effect of clearing mandates, even though it receives the vast bulk of the attention. As I’ve written repeatedly in the past, including here, clearing reduces credit risk by increasing liquidity risk, most notably, through variation margining which results in the need to obtain cash in a hurry to meet margin calls, which can be large when there are large market shocks. The expansion of clearing to OTC markets which dwarf listed derivatives potentially leads to orders-of-magnitude increases in liquidity needs.

It is these liquidity demands which create huge potential systemic risks. Financial crises are usually liquidity crises: mechanisms such as clearing increase demands for liquidity in stressed market conditions, and do so in a way that increases the rigidity and tightness of the coupling in the financial system. This is extremely dangerous. Tight coupling in particular is associated with system failure in a variety of real world systems including both financial and non-financial systems.

Indeed, all of the attempts to make CCPs invulnerable all tend to exacerbate these problems. This raises the possibility that CCPs could be bastions surviving in the midst of a completely rubbled financial system.

In sum, papers like the Garrett-Zimmerman work are very elegant and technically sophisticated, and help answer a question: Does clearing reduce derivatives counterparty risk exposures? But all the elegance and technical sophistication is likely for naught given that the question is the wrong question, or a very incomplete one.

The Bergdahl case is similar to American Sniper: it is a Rorschach Test that reliably separates the progressive from the non-progressive.

After months of investigation, the Army bucked the pressure from the White House, and charged Bergdahl with desertion, and misbehavior in the face of the enemy. The sentiment in the military, and in particular among the soldiers in Bergdahl’s unit, is strongly supportive of the court martial. The right by and large shares this sentiment. The left, not so much.

The New York Times presented the case for the defense:

Sergeant Bergdahl, who joined the Army in 2008, was among the legion of recruits who were granted eligibility waivers to join the military during a period when it was struggling to attract applicants because of the multiple lengthy deployments to Iraq and Afghanistan that were common. His attempt in 2006 to join the Coast Guard was short-lived; he was discharged 26 days into basic training because of concerns about his psychological state. Before Sergeant Bergdahl walked out of his base in Paktika Province on June 30, 2009, it was clear to some of his family members back home, and some of his comrades in Afghanistan, that he was emotionally distressed and at times delusional. Citing an Army investigative report, his lawyer, in a letter to the military, describes his client as “naïve and at times unrealistic.”

. . . .

But trying him for desertion and misbehaving before the enemy — for allegedly engaging in misconduct that endangered his unit — stands to accomplish little at this point. A conviction would most likely deprive a traumatized veteran of benefits, including medical care, which he will probably need for years. A dishonorable discharge would make it harder to rebuild his life as a civilian.

In fact, one of the things that angers veterans most about Bergdahl is the possibility that he would get the same benefits as they do for dedicated service. They embraced the suck, and didn’t run. Giving the same benefits to a man they consider a deserter-and whom they blame for resulting in the deaths of those that served honorably-devalues them in their eyes.

If Bergdahl has a defense-including an insanity defense-he can make it at a court martial. If there are extenuating circumstances, those can be taken into consideration when determining punishment (if he is found guilty). But the good order and discipline of the service require that he face judgment. The Code of Conduct should matter. Accountability should matter.

But the NYT is not the real problem. The problem is from within the administration. It continues to push the view, expressed by Susan Rice immediately after the deal that secured Bergdahl’s release, that Bergdahl served honorably and that we always get our soldiers back, whatever the price. Most notably, the nauseating Jen Psaki said this:

“Was it worth it? Absolutely,” Jen Psaki told Megyn Kelly on Fox News’ “The Kelly File.” “We have a commitment to our men and women serving in the military, defending our national security every day, that we’re going to do everything to bring them home if we can, and that’s what we did in this case.”

Yes. She really said that. You can watch the video. Remarkable, isn’t it?

If the charges are correct, Bergdahl did not defend our national security. Quite to the contrary: he abandoned his duty to defend national security. Desertion is the antithesis of defending, making Psaki’s statement quite Orwellian. Slavery is freedom. Deserting is defending.

There is also the issue of what damage was done to national security by trading away five truly dangerous Taliban for Bergdahl. That we should attempt to secure soldiers that have fallen into enemy hands does not mean that we should pay any price. That can endanger more soldiers, sailors, airmen, and Marines than it saves.

This is yet another example of the administration’s government by narrative. They construct some story, some narrative, that is at complete variance with the facts but which serves a political purpose. Then they relentlessly repeat this narrative, even in the face of incredulous questions. (Yemen is another example: more on that over the weekend.)

Even worse, there are apparently “senior officials” within the Pentagon who are defending Bergdahl via a leak campaign:

 But the three tweets from CNN’s National Security desk reference two defense officials who say Bergdahl walked off his post to “report what he believed to be problems with ‘order and discipline’ in his unit.” The direct quote from the “second official” reinforces the impression that he and his colleague are speaking to Starr on background, and that rather than merely reporting what Bergdahl “says,” they are endorsing a version of events that is in Bergdahl’s legal favor.

The Army officers charged with investigating this have reached the exact opposite conclusion. They have determined, after a long-and indeed, overlong-investigation that the facts support a charge of desertion. They no doubt weighed, and rejected, the arguments the “senior officials” are raising. Meaning that said “senior officials” should STFU and let the duly constituted authorities carry out their duty.

If these individuals are indeed “senior”, their leaks can be viewed as an attempt to exert command influence, and thereby subvert justice. The administration’s public statements also smack of command influence, as do the White House’s efforts to pressure the military into not prosecuting Bergdahl.

This should have been a military matter first, last, and always. But after politicizing the release with the egregious deal that secured it, and the equally egregious Rose Garden ceremony with Bergdahl’s parents, Obama and his creatures are so invested in this flawed man that they cannot let the proper authorities perform their duty without interference.

This defense of Bergdahl for political reasons is a profound insult to those who served honorably. If anyone should value a “commitment . . . to do everything to bring them home”, it is these men and women. But they obviously believe a distinction should be made between those who are captured while performing their duty, and someone who deliberately runs into the enemy’s camp. The deserter abandons his comrades, and has no claim on his comrades-or his country-to rescue him. And if his freedom is secured somehow, that should not immunize him from accountability for his actions.

Trying to short-circuit formal proceedings also casts a slur on the military. It suggests that the Army is incapable of judging fairly, and taking extenuating circumstances into account when passing sentence in the even that judgment is guilty.

There is clearly a colorable case that Bergdahl deserted his comrades. Let a court martial determine that. Political expediency should not subvert accountability: the military cannot operate without it. Political narratives don’t win wars. Armies with accountable soldiers do. Bowe Bergdahl should be held accountable, Obama’s tender ego be damned.

Obama.

The world spins into chaos, and Obama is so detached and indifferent, fiddling while it all burns. But maybe the comparison with Nero is unfair. To Nero. After all, Nero allegedly had a purpose in mind when burning Rome: it allowed him to bypass the Senate and rebuild Rome to his grandiose plans. (Bypassing the Senate . . . maybe there are more parallels than I thought!) Obama just appears to not want to be bothered. Or perhaps he is like Major Major Major Major, promoted well above his competence and knowing it, and retreating to the confines of his office and quarters in order to avoid confronting things he is incapable of solving.

Exhibit 1. Yemen is exploding, with Iranian-backed Houthis seizing power and the desperate Saudis striking back with air strikes. This obviously raises the possibility of conflict between the Saudis (and the rest of the GCC) and Iran. But the administration still defends the “Yemen model” as a success. No. Really. Spokesman “Josh Earnest” (that has to be a made up name, right?) says the concept of relying on foreign governments to fight terrorism is right, even though the government we relied on in this case has utterly collapsed.

Exhibit 2. Even though the tension between Russia and Nato is at Cold War levels; even though Russia is making nuclear threats against Nato members; even though the easternmost nations in Nato are increasingly anxious that Putin has them in his sights; even though there are doubts about the credibility of Section V of the Nato treaty; and even though Nato is struggling to find a way to respond to hybrid war, Obama is refusing to find time in his busy schedule to see the new head of Nato, Jens Stoltenberg. No doubt because Nato (through Stoltenberg, his predecessor Rasmussen, and military head Breedlove) have been the most hawkish on the need to confront Putin. This is something Obama has zero appetite for.  Don’t think for a moment that Putin doesn’t notice this obvious signal of Obama’s indifference to what is transpiring on Nato’s eastern flank, and will escalate there soon.

But perhaps I am being harsh in saying that Obama doesn’t care about defeat after defeat. After all, there is a collapse that makes him distraught. . . that of his NCAA bracket.

But while he remains utterly detached from crises that threaten the world order, he persists in his Ahab-like pursuit of a deal with Iran. Empowering the mullahs (as a deal would do) will only further contribute to the already perilous situation in the Middle East, as a combination of national self-interest and religious hatred will force Gulf Sunnis (and arguably Egypt too) to confront a resurgent Iran freed from the shackles of sanctions, and progressing towards nuclear weapons.

And how does Obama rationalize negotiating a nuclear deal with a country that is openly supporting the overthrow of a government that he repeatedly identified as a major ally against Al Qaeda, and upon which the US has lavished billions of dollars in aid (much of which is in the hands of the Houthis, not to mention a major cache of US intelligence documents, which the Houthis obligingly turned over to Iran)? These are the people he trusts?

As I read somewhere: if he wanted to undermine America’s national interests, what would he do differently?

My latest white paper, “Not too big to fail: Systemic Risk, Regulation, and the Economics of Commodity Trading Firms” was released today. A video of me discussing it can be found here (as can my earlier white papers on commodity traders and LNG trading).

The conclusion in a nutshell: commodity trading firms do not pose systemic risks, and therefore it is inappropriate to subject them to bank-like prudential regulations, including capital requirements. Commodity trading firms are not systemically risky because (a) they aren’t really that big, (b) they are not that highly leveraged, (c) their leverage is not fragile, (d) the financial distress of a big trader is unlikely to result in contagious runs on others, or fire sale problems, and (e) their financial performance is not highly pro cyclical. Another way to see it is that banks are fragile because they engage in maturity and liquidity transformations, whereas commodity trading firms don’t: they engage in different transformations altogether.

Commodity traders are in line to be subject to Capital Requirement Directive IV starting in 2017. If the rules turn out to be binding, they will cause firms to de-lever by shrinking, or issue more equity (which may force them to forego private ownership, which aligns the interests of owners and managers). These will be costs, not offset by any systemic benefit. All pain, no gain.

It is my understanding that banks obviously think differently, and are calling for “consistent” regulations across banks, commodity traders, and other intermediaries. Since these firms differ on many dimensions, imposing the same regulations on all makes little sense. Put differently, apropos Emerson, a foolish consistency is the hobgoblin of little minds. Or bankers who want to handicap competitors.

The white paper has received some good coverage, including the Financial Times, Reuters, and Bloomberg. I will be writing more about it when I return to the states later in the week.

It’s been quite a week for Russia. In a documentary about Crimea, Putin said he would have put Russian nuclear forces on alert had the west contested his anschluss. Further, the Russian military deployed nuclear capable Tu-22M3 Backfire bombers to Crimea, and Iskander nuclear capable missiles to Kaliningrad. They launched massive maneuvers in the Northern and Western Military Districts, and threw another hissy fit over very small, largely symbolic US operations in the Baltics and Poland. Latvia accused its gentle giant neighbor of sending submarines to probe its waters, and Sweden claimed that one-third of Russian “diplomatic” personnel were intelligence agents engaged in preparations for Russian military action against its western neighbor. (Remember the Great Northern War and Charles XII!) Quite a week!

But they weren’t done! They saved the best (by which I mean worst) for last, when the ambassador to Denmark threatened the tiny Scandinavian nation’s navy with nuclear annihilation for having the temerity to incorporate its air defense frigates (of which it has a grand total of 3) into the Nato anti-missile defense network. Talk about overkill: nuclear weapons to target 6500 ton frigates? Really? What, does Russia doubt the accuracy of its conventional weapons, so it has to go with the close-counts-in-horseshoes-and-nukes theory?

Actually, you know that’s not it. It is just another example of Russia channeling its inner Travis Bickle. You know, the title character from Taxi Driver, played by Robert De Niro. “You talkin’ to me? You talkin’ to me? You talkin’ to me? Then who the hell else are you talking… you talking to me? Well I’m the only one here. Who the fuck do you think you’re talkin’ to?” [whips out nuclear weapon concealed inside sleeve].

The only question before the house is whether this is all an act intended to intimidate the neighbors into acceding to Russian demands, or they are descending into madness under the stress of events, just like Travis. I honestly don’t know, but don’t discount the second possibility altogether.

Regardless, it is apropos that this occurred right around the time of the death of Singapore’s  Lee Kwan Yew, who said “Russia has an enormous nuclear arsenal, but what else?”

One particularly disturbing aspect of this is that Vanin is not one of the real mouth breathers. He is a career foreign service man, who was once closely associated with the Yeltsin “family” and Roman Abramovich while serving as Chairman of the State Customs Committee. He was deeply involved in the Three Whales scandal. Three Whales was a FSB-connected furniture shopping center that was running a smuggling operation. The State Customs Service launched an investigation, which set off a war between Vanin’s people and the siloviki. Vanin was one of the casualties, losing his job when Putin reshuffled the organization of various ministries in 2004.

So the guy rattling the nuclear saber against a nation of 5.6 million people that was last a military power in the 10th and 11th centuries is not one of Russia’s real siloviki thugs. Comforting thought, eh?

The Pentagon, Nato and the Europeans are fretting about how to deal with Russia’s hybrid warfare. (Note I omit Obama from that list: I doubt he gives a damn.) They need to give more thought to the real reason why hybrid warfare can work: it is conducted under a nuclear shield wielded by madmen, or those who are content to give a portrayal  of one that de Niro could appreciate.