Streetwise Professor

The Fed is reeling at the violent market response to Bernanke’s statements regarding the eventual taper of Quantitative Easing.  High level Fed officials flooded the zone last week, making soothing noises and arguing that the market had overreacted to Bernanke’s words.

There is some solid economic theory that predicts that the public release of “small” pieces of information can lead to big changes in behavior and market outcomes.  Specifically, the theory of Global Games (see a variety of paper written by Morris and Shin, in particular) predicts that the release of objectively trivial information can lead to a discontinuous jump from one equilibrium to another in coordination games.  The Fed is quite consciously playing a coordination game: it is trying to coordinate the expectations of market participants with the understanding that market outcomes depend quite crucially on consensus beliefs and expectations that tend to be self-fulfilling This is precisely why the market hangs on every Fed statement, every Bernanke utterance.  And this is precisely why a seemingly benign public statement with little information content can lead to a big market move.  It’s inherent in the game the Fed is playing.  They really shouldn’t be all that surprised.

The game the Fed is playing is actually even more complicated than those analyzed in the Global Games literature.  Specifically, there is a reflexivity and endogeneity in the Fed expectations game.  That is, in the real world game game, the Fed responds to the market’s response to the Fed’s actions, and on and on.   That’s not taken into account in the Global Games models, makes things even more complicated, and adds another level of beliefs on which the players of the game (which includes the Fed, prominently) must coordinate.

This is why QE and other exceptional monetary policies are so fraught with danger and risk.  This makes chess look like checkers.  Mistakes will be made.  You will pay for them.

Outgoing CFTC Commissioner Jill Sommers always struck me as a careful, precise, controlled person.  Certainly not a bombthrower, or someone prone to outspoken outbursts.  Which is precisely why I did a double take when I read this:

“No one has ever accused Gary Gensler of being reasonable,” Sommers said in her statement. “I may not totally agree with it, but Commissioner Wetjen has put a reasonable proposal on the table that would achieve multiple goals. He understands the importance of working in good faith with other global regulators.”

Whoa. Well said, Commissioner.

Truth be told, Gensler has pretty much worn out his welcome in DC-not to mention the rest of the world.  He is on his way out in July, and there will be few that will lament his departure.  I was just in London, and my criticism of Gensler (you’re shocked, I’m sure), and in particular of his obsession with moving forward with proposed guidance on cross-border regulation, went over quite well.  Based on my observations in London, the EU, and Canada, Gensler is viewed as the Ugly American, intent on imposing his worldview benighted furriners.

But even in the US Gensler has worn out his welcome.  A group of 6 Democratic senators-including Chuckie Schumer, for crissakes-wrote a letter asking Gensler to back off.

Despite his lame duck status, Gensler is stubbornly holding out against this near unanimous criticism.

Or perhaps I should say, because of his lame duck status, Gensler is stubbornly holding out.  For his insistence on plunging ahead in the face of near universal opposition gives every appearance of being the product of pique at not being reappointed to another term as Chairman.

But he has an enthusiastic supporter in Elizabeth Warren.  So there’s that.

Need I say more?

The WSJ’s ChinaRealTime blog asks that question.  The answer is fairly obvious.

Recall about a week ago that China was experiencing an acute liquidity shortage, resulting in the spiking of repo rates to 25 percent intraday.  The PBOC remained aloof.  Then it intervened, providing liquidity and making soothing noises.  Interbank rates (SHIBOR) and repo came back down, though they still remained at elevated levels.

The narrative is that the PBOC was trying to teach banks and shadow banks (trust companies, marketers of wealth management products and the like) a lesson: cut down on the extension of dodgy credit, or else!

But as I noted in my post last week, the PBOC was in a bind.  It could refuse to supply liquidity, and watch the system blow up.  Or it could supply liquidity, and undermine the credibility of its “or else” threat.  Not surprisingly, PBOC chose the latter course.

The ultimate result is likely to be quite different than the PBOC had hoped for.  Banks and shadow banks will likely conclude that the PBOC will always come to the rescue.  The “or else!” threat is incredible.

Meaning that Chinese credit will continue to grow, and the ultimate reckoning-which must occur-has been merely delayed.

I have read some reports questioning where money invested in WMPs will go at the end of the quarter, when they mature.  Well that’s the problem, isn’t it?  If the WMPs can’t roll over, if the money invested in them goes somewhere else, the rather dicey assets they hold can’t be funded, with the following consequences: (a) some WMPs will default, (b) others will call on the (implicit) liquidity puts extended by banks, thereby communicating the contagion to the banks, and/or (c) WMPs will dump assets on the market, depressing prices, with deleterious consequences for others holding similar assets.

The PBOC is riding the tiger. Its relenting at the last minute makes it clear that it is loath to dismount.  Market participants will note this, and respond accordingly.  Meaning that the supposed teaching moment will not provide the lesson that the PBOC intended.  It will instead convince market participants that they will be rescued if it looks like the system is about to crack.

Again: the reckoning with China’s extreme financial imbalances and malinvestment has merely been deferred.

And in other news of the completely predictable, Russia announced that it was backing off on its privatization plans:

The Russian government halved its privatisation target for next year on Thursday, as Kremlin officials loyal to President Vladimir Putin tightened their grip on economic policy.

And I bet that half will be halved.  And that quarter will be halved . . . until in the limit it will approach zero.

And, of course, the reason is that the price isn’t right.  The price is never right.  Bob Barker could never earn a living in Russia:

“The current state of financial markets is such that it would, with rare exceptions, be impossible to avoid lasting damage from selling stakes in these companies,” Olga Dergunova, head of the State Property Agency, told ministers.

Singing the Sechin tune. Russian companies are undervalued! We can’t sell them now!  It’s funny, that.  They’re always undervalued, regardless of the state of the financial markets, frothy or depressed.

And speaking of Sechin, there was no mention of the privatization of Rosneft.

If you are surprised at that, you probably wake up at 4 o’clock in the morning and look west, thinking that today is the day that the sun will rise there.

An arbitration tribunal dealt Gazprom a major blow with a ruling in a case involving the company’s contract with German utility RWE:

Russian gas export monopoly Gazprom’s efforts to keep a link between the price it sells gas and costlier oil were dealt a blow on Thursday, when a court ruled it had to include market pricing in the rates it charged Germany’s RWE.

Gazprom must also reimburse Germany’s second-largest utility for overpayments it made on gas purchases, RWE said on Thursday, adding to pressure on the Russian firm from European clients who say they have lost billions of dollars on long-term supply deals agreed at higher prices than current market spot rates.

Citing a ruling by the International Court of Arbitration of the International Chamber of Commerce, RWE said Gazprom had to reimburse it for gas purchases since May 2010, but declined to comment on the size of the expected payout.

Analysts said it was the first court ruling to impose spot pricing on Gazprom, which includes some spot pricing in its contracts, but has largely stuck to reducing oil-linked pricing to placate customers that have suffered losses on its gas.

The money matters, but that’s about the past.  What’s important going forward is the imposition of the spot pricing mechanism.  Gazprom has fought this tooth and nail, claiming inadequate liquidity in the European spot markets.  But it’s preferable to have gas contracts priced off a relatively illiquid (as compared to oil) spot market in gas, than off oil prices, given the low correlations between gas prices and oil prices.  Moreover, as I’ve noted many times, there is a virtuous cycle: moving to hub pricing will encourage trading at hubs, and the development of hedging instruments with payoffs tied to hub prices, which will encourage more trading at hubs, and so on.  This happened, and quickly, in US gas soon after the deregulation of pipelines in the late-80s and early-90s.

This is a world trend.  Asia, and Japan in particular, are pushing to move away from oil indexed pricing and pricing LNG imports based off of gas prices. This is particularly ironic in that Gazprom wants to use the Japan Crude Cocktail formula to price future LNG exports to Asia.  (Assuming, perhaps heroically that Gazprom is ever able to do this in a serious way.)

It must suck to be Gazprom right now.  Nothing makes me happier.

There’s bonus material in the article!:

“For me it is an evidence of huge shift in the European attitude towards the sanctity of contracts,” Tatiana Mitrova, the head of the oil and gas department at the Russian Academy of Sciences Energy Research Institute, said.

It’s always a matter of amusement whenever the Russians talk about the “sanctity of contracts.”  The devil, as they say, can quote scripture for his purpose.

If you’re Russian.  For the Russian Finance Minister Sulianov has stated that Russia can survive a Fed taper, and that “Russia, as opposed to other developing countries, will be less impacted by that occurrence.”

Why afraid? Because recall that Putin and Medvedev said in September 2008 that Russia was an “island of stability.”

Yeah.  That worked out.  Russia had the biggest decline of any major economy in 2008-2009, and has experience moribund growth since.

Expressions of Russia’s ability to weather world economic storms are delusional. Russia is a high beta economy, due to its extreme exposure to highly pro cyclical commodity prices, meaning that if the taper (and the fraught situation in China) lead to an economic slowdown.  Indeed, the relatively steep declines in Russian stock prices in the tumult of the last days illustrates this point.

But this was not the most risible part of Sulianov’s statement.  This was:

Russia is also investing $70 billion into its upcoming global sports events, the Sochi Winter Olympics 2014 and the 2018 World Cup. However, Siluanov told CNN said the investment was not purely designed for growth.

Sochi, the cost of which is reportedly $50 billion and rising, was “never meant to be a purely economic growth stimulating initiative,” he said. “It was always an infrastructure project.”

According to Siluanov, “it is designed to improve life in the region,” and “make it more popular and attractive for our citizens.”

I’m dying here.  Seriously.  Improving life for whom in the region? The corruptocrats? That I can believe.  As if the typical “citizen” of “the region” is going to see anything but crumbs, while many billions disappear into bureaucratic and oligarchic rat holes.

I have written for some time about my doubts about the sustainability of Chinese growth (driven by massive credit expansion that is delivering progressively less and less bang for the renminbi), and my concerns about the stability of the Chinese financial system, especially the shadow banking system.  So far these prognostications have not been realized, but events over the last few days relate directly to these doubts and concerns.

Specifically, China is in the grips of a full-blown liquidity crisis, with overnight repo rates approaching 30 percent, and one week rates well over 10 percent.  The Chinese yield curve has become steeply inverted, which is never a good sign.  The word “panic” is being bandied about quite freely.

News accounts make it seem that the liquidity shortage is the deliberate  policy of the People’s Bank of China.  Indeed, these accounts suggest that the PBOC is withholding liquidity from the market precisely because it too believes that credit-fueled growth is unsustainable, and that the banking and shadow banking sectors have over expanded and need to be cut down to size:

China’s interbank funding costs surged again on Thursday, with the two shortest-term rates hitting record highs, as the central bank again ignored market pressure to inject funds into the market, despite fresh evidence that the economy is slowing.

The People’s Bank of China (PBOC) told the market that it would not conduct repo business in its regular open market operations on Thursday, frustrating widespread expectations that it would use reverse repos to inject cash to ease an acute market squeeze over the last two weeks.

. . . .

“The central bank appears to be determined to force banks and other financial institutions, such as funds, brokerages and asset managers, to de-leverage,” said a trader at a major Chinese state-owned bank in Shanghai.

“That hardline stance suits the recent government policy of clamping down on non-essential businesses by financial institutions, such as shadow banking, wealth management, trust operations and even arbitrage.”

Yes, deleveraging is probably a good idea: the economy had become over leveraged as the result of previous stimulus policies that fed a credit boom. The question is: how to deleverage?  Quite often system-wide deleveraging is a chaotic process, beset with externalities.  Companies that can’t fund dump assets in fire sales, which puts pressure on other institutions holding the same or similar assets: they often join the fire sale stampede.  Institutions start hoarding credit and liquidity, which drives up rates and puts yet further pressure on financial institutions.

In other words, system-wide deleveraging often occurs through a financial panic that causes massive economic damage.  Usually central banks try to stem this process by flooding the system with liquidity.  Bizarrely, China, it appears, seems to be trying to start the process by starving the system of liquidity.  Central banking with Chinese characteristics, as it were.

One interpretation is that the PBOC has found that jawboning and other less drastic policies have failed to stem the growth in credit and shadow banking, so it feels obliged to take stern measures to curb these activities.  But this is a dangerous way to do it, and I am not sure that it is the optimal strategy in the game between the PBOC and other market participants.

Let’s say the PBOC relents and says “You’ve been warned: don’t let it happen again.”  Many market participants will infer that the PBOC’s threats are not credible, and that it will supply liquidity if the system appears on the verge of failure.  The will therefore have little incentive to curb their activities, viewing the PBOC as a paper tiger.  The economy will continue to be over leveraged.

Conversely, let’s say to demonstrate its credibility the PBOC sticks to its guns and refuses to supply liquidity: then there is a risk of a full-blown panic and crisis-and right now.

China is having an episode not unlike the one that hit world markets in August, 2007, when funding markets signaled the onset of the crisis, with the difference being-and it is a big difference-that this appears to be a crisis of choice, and one that could morph from onset to a Lehman moment in days or weeks, not months.

Perhaps the PBOC believes that the situation is so dire that a purgative crisis now is preferable to a worse one that chooses its own time to appear.  If so, it has no one else to blame.  If China’s financial system was hurtling down the road too rapidly, it was because the PBOC (and the Chinese government) had jammed down the accelerator with its credit-driven stimulus measures.  Now it is responding by jamming on the brakes.  A policy of alternating extremes seldom works out well.

There is an apocryphal belief that in Chinese the word “crisis” is represented by the characters for “danger” and “opportunity”.  (JFK is responsible for popularizing this belief.) The most charitable interpretation of the PBOC’s starving the market of liquidity is that it doesn’t view that belief as apocryphal, but as gospel.  That it is running a great danger to seize an opportunity to put the Chinese financial system on a firmer foundation.

Maybe.  But that suggests a conceit on the behalf of policymakers: it presumes that once a panic is sparked, they can control it, and the panic will make financiers more prudent in the future by putting the fear of God into them today.

That’s a very, very risky bet that has a very, very high probability of turning out very, very badly.

And now for something completely different.

HFT has been a bugbear for several years now.  The monster that would eat the equity markets, and then move onto derivatives for dessert. But HFT has apparently fallen on (relatively hard times).  HFT volumes are down.  HFT market shares are down.  And most interestingly, HFT profits are down, by about 50 percent on a per share basis, more on a gross basis because volumes are down.

This should not really be a surprise.  Basic economics predicts when profits in a particular activity are high that entry, the expansion of existing firms, and the development of competing technologies will dissipate those profits.

It’s interesting in this context to think about Schumpeter’s argument in Capitalism, Socialism, and Democracy.  One motivation for the book was to examine whether there was, as Marx and earlier classical economists predicted, a tendency for profit to diminish to zero (where costs of capital are included in determining economic profit).  That may be true in a totally static setting, but as Schumpeter noted the development of new, disruptive technologies overturns these results.  The process of creative destruction can result in the introduction of a sequence of new technologies or products that displace the old, earn large profits for a while, but are then either displaced by new disruptive technologies, or see profits vanish due to classical/neoclassical competitive forces.

Whether it is by the entry of a new destructively creative technology, or the inexorable forces of entry and expansion in a technologically static setting, one expects profits earned by firms in one wave of creative destruction to decline.  That’s what we’re seeing in HFT.  It was definitely a disruptive technology that reaped substantial profits at the time of its introduction, but those profits are eroding.

That shouldn’t be a surprise.  But it no doubt is to many of those who have made apocalyptic predictions about the machines taking over the earth.  Or the markets, anyways.

Dark pools are under a regulatory and legislative assault, in Europe, Canada, and the US.  Scott Patterson wrote a long piece in the WSJ about FINRA’s scrutiny of Dark Pools:

The Financial Industry Regulatory Authority, Wall Street’s self-regulatory body, last month sent 15 examination letters to operators of “dark pools”—lightly regulated, off-exchange trading venues that have been a rising concern for regulators and some investors as more activity shifts away from exchanges.

Finra is seeking details about how the increasingly popular venues operate, what they disclose to clients and whether they adequately police trades. It could bring enforcement action against dark-pool operators or issue recommendations for tighter oversight, depending on the answers it receives and additional examinations, said John Malitzis, executive vice president of market regulation at Finra. The letters are a follow-up to an initial round of questions the regulator circulated last fall.

“We want to understand whether [dark pools] are disclosing to their customers how their orders work [and] whether customers are informed who their orders will interact with,” Mr. Malitzis said in an interview. “A big part of this is to get an understanding of practices that may or may not be problematic.”

Here’s an interesting bit:

Dark pools don’t disclose traders’ buy or sell orders and only publish trade data after transactions occur. About 13% of all stock-market action takes place on dark pools, up from about 4% five years ago, according to Tabb Group, a market-research firm. Most dark pools are run by broker-dealers—firms overseen by Finra that buy and sell assets on behalf of customers as well as trade for their own accounts.

While dark pools command an expanding slice of trading volume, regulators still have little idea about how they operate since, unlike exchanges, they aren’t required to regularly disclose detailed information about their trading systems.

I see.  “more activity shifts away from exchanges”; dark pools “command an expanding slice of trading volume”; their volume has more than tripled in 5 years.  Growing volume! Growing market share!  That sounds sinister, doesn’t it?

Note that the possible nefarious practices under investigation, if they occur, would result in the users of dark pools are getting screwed.  If that’s true, why are they flocking to the pools in increasing numbers?  The most plausible explanation for a growing market share is that dark pools offer better value-not worse-to those who have the opportunity to choose where to trade.

I am particularly skeptical about the idea that dark pools are hugely exploitive because sophisticated buy side firms are among the most extensive and loyal users of dark pools.  Buy side firms analyze their execution costs with considerable detail.  They evaluate execution costs in lit and dark markets, and slice and dice the data in sophisticated ways, uncovering the circumstances under which it is cheaper to execute in one venue or another, and allocate their trades accordingly.

In other words, if they decide to execute more in dark markets, it’s because they have decided after thorough analysis that they are more likely to get screwed in broad daylight on exchanges.

This isn’t rocket science.

There is a potentially more intellectually reputable case against off-exchange trading.  Dark pools utilize a variety of techniques that are designed to screen out informed, or opportunistic, traders.  Uninformed traders-firms or individuals trading for portfolio balance or cash flow or hedging reasons-suffer losses when dealing with the informed.  They can reduce execution costs by trading in venues where there is a lower likelihood of dealing with a better-informed trader.

But this “cream skimming” of uninformed order flow by dark pools that screen out the informed increases the trading costs of those uninformed traders who for whatever reason cannot avail themselves of dark markets: those left behind have a higher likelihood of dealing with someone with better information, and incur higher trading costs (due to adverse selection).

Dark pools free ride off the price discovery in lit markets, and cream skimming impairs price discovery.  Thus it is possible-possible-that this externality reduces welfare.

Possible, but not necessarily so.  The free riding externality reduces welfare if there is no other inefficiency in the lit markets.  But that is not necessarily the case.  As I pointed out about 15 years ago, there are other sources of inefficiency on exchanges.  For instance, exchanges may exercise market power.  In this case, second best considerations imply that the free riding externality may improve welfare because the benefit of increased competition for order flow from the dark market may more than offset the cost of degraded price discovery.  I have produced formal models that show that this can occur under conditions that have existed in securities and derivatives markets.

As another example, much informed trading can be a form of rent seeking.  Market participants expend real resources to produce information because this allows them to profit at the expense of the uninformed.   This profit is a transfer from the uninformed, and unless there is some external benefit arising from more informative securities prices, the real resources expended to gain this transfer are a pure waste.  By reducing the profitability of informed trading, dark pools reduce this rent seeking and improve welfare.

Both of these analyses are applications of the theory of the second best, which says if there are multiple departures from “perfect” conditions (perfect competition, no externalities), eliminating one imperfection may actually make things worse, not better. In the dark pool case specifically, if there are other imperfections (imperfect competition on and between lit markets, rent seeking informed trading), dark pools’ ability to free ride on exchange price discovery may improve welfare because it mitigates these other inefficiencies.

Determining the welfare impacts of dark pools in the presence of these various departures from first-best conditions is devilish hard.  For instance, it is arguably impossible to determine the costs and benefits of informed trading.  It is also difficult to determine the degree of imperfect competition in lit markets, and the costs of this market power.

But what can be said is that the kinds of things FINRA is looking at are totally irrelevant to addressing these issues.  FINRA is focusing on activities that would be agency problems, or fraud.  But it is hard to square the proposition that these problems are widespread with the observation that dark markets are growing relative to lit ones, especially given that most of the patrons of dark markets are quite sophisticated, and devote considerable attention to evaluating the cost and quality of the services that they obtain.

So what is going on here?  Quite likely political economy, capture, and rent seeking.  For the past couple of months exchanges have been importuning regulators to do something about dark pools, precisely because they are bleeding business.  This headline from Bloomberg says it all:

Stock exchanges seek curbs on dark pools to curb exodus.

In other words: exchanges are losing a competitive battle, and are recruiting regulators and legislatures to hamstring the competitors that are eating their lunch.  A very, very, very old story.

I have to give the exchanges credit.  They have done a marvelous job of shaping the narrative, playing skillfully on the quite different connotations of light and dark.  The exchanges are like a Scout master telling a ghost story beside a campfire, his face scarily illuminated by a flashlight.  They have proven masterful at scaring regulators into action against the evils lurking in the dark

My bottom line?  It is possible that dark pools are, on net, inefficient, but the case has not been made.  Moreover, their commercial success should be considered as evidence that they actually enhance welfare.  Indeed, their commercial success is almost impossible to reconcile with claims that dark pools are somehow deceiving or defrauding those who trade on them, especially given that these traders are often quite sophisticated, and quite on guard against getting screwed.

So don’t be afraid of the dark.  Be especially skeptical about stories detailing the horrors allegedly stemming from the activities of entities that are gaining market share.  And always remember that incumbents are past masters at inducing regulators to crack down on inconvenient competitors.  Be afraid of what regulators do in the light, not what goes on in the dark.

A recurring pattern since Putin’s reelection has been for him to issue some ukase, which results in . . . nothing happening.  Then he vents, and rants and raves, sometimes in public, and . . . nothing happens.

Today’s example, his command to Russian state companies to increase dividends:

Most of Russia’s state-controlled companies have refused President Vladimir Putin’s appeal to raise dividends, providing a fresh reason for investors to avoid the cheapest emerging-market stocks.

Russian stocks’ discount to the MSCI Emerging Markets gauge grew to 2.1 times net assets in May, the highest in four years, as 11 of 17 Kremlin-backed companies included in the benchmark Micex Index (INDEXCF) ignored the government’s November rule mandating a payout equal to at least 25 percent of net income. The Micex is down 9 percent this year, the worst performance of the BRIC markets after Brazil’s Ibovespa. (IBOV) State-controlled OAO Rosneft and OAO Inter RAO UES both fell more than 20 percent.

“The unrealized dividend promises have a negative impact on the market, especially since this was one of the key growth triggers,” Victor Bark, who oversees about $2.8 billion as the head of asset management at Alfa Capital in Moscow, said by phone on May 27. “This is bad news in a situation when there are no sources for economic growth.”

Putin has targeted dividends in a drive to boost budget revenue and lure foreign and domestic investors wary of an economy that grew at the slowest pace since 2009 in the first quarter. Capital outflows amounted to as much as $4 billion in April, according to the Economy Ministry.

Putin wants more of the money from state companies to go into state coffers so he can meet the promises he’d made to increase state spending on everything from pensions to weapons.  The management of these companies, of course, would much rather tunnel out the money using lavish investment expenditures.  Or in Gazprom’s case, pipe out the money-with a good chunk of the money going into the pockets of Putin’s judo buddies, and pipe manufacturers, the Rotenbergs.  So Putin will command, and rant, but he shouldn’t wait by the mailbox for the dividend checks to start rolling in.

This quote from the article is priceless:

“The Russian corporate sector would do almost anything on earth to be seen as modern and transparent,” Eric Kraus, a managing director at Nikitsky Capital in Moscow, where he manages about $200 million in assets, said by e-mail on May 28. “Anything but pay fair dividends, respect minority interests in corporate transactions, or allow truly independent directors. There is a disconnect between the rhetoric and the reality.”

Couldn’t have said it better myself.

In other news of Russian state corporation hijinks, consider this Reuters item:

Banks that helped Russian oil company Rosneft finance its $55 billion buyout of rival TNK-BP have been left waiting for their payback – a share in $15 billion in asset sales expected to follow the deal, sources familiar with matter said.

State oil company Rosneft’s takeover of TNK-BP this year aimed to create a major oil group producing more oil than Exxon Mobil, but it also tightened the Russian government’s grip on the country’s energy sector.

The asset sales promised by Rosneft Chief Executive Igor Sechin would offload less-profitable businesses to turn the company into the major oil player the CEO has said he wants it to be. The delay shows Rosneft has a lot on its plate integrating TNK-BP and that the sales are on the back burner.

Rosneft had dangled the juicy divestment mandates at the banks in exchange for a $29.8 billion loan – the largest in Russia’s history – on good terms, three out of four sources with direct knowledge of the loan talks said.

“All the lending banks are waiting,” said one of the bankers who asked not to be named because the talks are private.

And they’ll probably be waiting a very long time.

I really don’t blame Sechin here.  He is just doing what he does.  But because he’s doing what he does, that should have been perfectly predictable, I do blame the banks for being so gullible-no, make that stupid-for falling for his bait-and-switch.  (And to reprise a theme from above, Sechin has little incentive to unload bad assets because even bad assets can create good tunneling opportunities.)

Perhaps you’ve been asking yourself: Who trusts a grown man with a mullet when billions of dollars are at stake?  (Seriously: have you checked out Sechin’s ‘do lately? Hockey Hair hardly does it justice.)

Well, now you know: executives from the world’s biggest banks.  They think that Sechin is thinking like a western CEO who at least faces some pressure to maximize shareholder value.  In reality, Sechin’s objective function is quite different.  Mirror imaging is a very bad idea when western managers and financiers deal with Russians.  The Russians are marching to a very different drummer.  But Sechin apparently realized that the banks were mirror imaging, and used that to get them to offer attractive financing terms in exchange for future business he had no intention of sending their way.

Of late the news has been full of stories of the stagnating Russian economy, faltering investment, and continued capital flight.  These two stories illustrate a big part of the reason for those headlines: a colossally corrupt and inefficient state corporate sector.

And again, the irony here is too rich.  I noted the other day that Putin’s rant against defense contractors was ironic because he created the behemoth state enterprises that he now rages against.  He has also been a proponent of the huge state enterprises that he now fulminates about because they won’t pay dividends.

There’s an old expression: be careful what you ask for, because you just might get it.  I’m sure Putin could relate to that right now, if he’s capable of honest self-appraisal.