Streetwise Professor

July 6, 2019

Underwater Russian Roulette

Filed under: Military,Russia — cpirrong @ 7:18 pm

When my grandfather was barely 17, his mother signed a paper saying he was 18 (he was a hillbilly with no birth certificate, which gives rise to another story I may tell sometime), and he left Burr Oak, Ohio to join the Navy. He went to electrician’s school, and was assigned as an electrician’s mate on a submarine, the USS K-2 (submarine #33 in the US Navy), on which he served in 1921-22. (The K-2 was laid-up the next year.)

As you can see, she was a tiny thing, displacing 400 tons on the surface, and a little over 500 tons submerged.* My grandfather’s stories of his service on her were pretty harrowing. 1920s submarines were not for the faint of heart.

Even so, if given the choice, I would serve on the K-2 circa 1920 than on a modern Russian sub. Since Soviet days, the Soviet/Russian sub force has experienced a litany of accidents, many of them fatal: here is a list of those since 2000. The most notable of these incidents, and the one with the highest death toll, was of course the Kursk, about which Putin famously and laconically said: “It sank.”

Well, this week Putin didn’t have to say exactly those words about another sub, but there was a fatal incident aboard a Russian boat, reported to be the Losharik, reputedly a super-deep diving research and intelligence vessel.

Given the very secretive nature of the sub’s purposes and missions, and the inherent secretiveness of the Russian state, we know very little beyond a few details. These include that there was a fire that killed 17 aboard. (The standard crew of this class is estimated at 25, so arguably the fire killed 2/3s of those on board.) That the surviving crew was able to seal off the affected compartments, and eventually extinguish the blaze. And that’s about it.

It’s one thing for a dry dock carrying a decrepit hulk like the Kuznetsov to sink. It’s another for one of the most elite units in the Russian Navy to suffer such a catastrophic event. It does not speak well of the condition and readiness of the Russian Navy generally.

There are also some curious details. Reportedly 7 of the 17 killed were captains “of the first rank” (the equivalent of an O-6 in the US Navy). I know the Russian Navy (especially the nuclear sub force) is officer-heavy (and indeed, the entire complement of the boat is apparently officers), but that’s an insanely high number. Most US major combatants (including SSNs, SSBNs, and DDGs) are commanded by commanders (O-5), and others have a single captain, who is CO. What were 7 (or more) captains, plus two Heroes of Russia, doing on board? Was it holding some sort of ceremony? Or was it engaged in activities that were of intense interest to the higher ups?

Another possibility is enlisted ratings, and even junior and mid-grade officers, are not deemed sufficiently qualified and trustworthy to crew such an important vessel. But if they are not given substantial responsibility as lieutenants, how can one be confident in the captains? Is the Russian Navy so paranoid about security that they don’t trust anyone but the very senior, to serve on top-secret ships?

Also, are senior officers the best suited to handle the vital, but more narrow tasks that western navies entrust to well-trained, specialized ratings? If not, depending on the very senior to perform these tasks may increase the risk of things like fatal fires.

I doubt we’ll learn much more about the Losharik. But what we do know, especially in light of the record of Russia’s silent service, reinforces the very real perception that anyone in that service plays a submerged version of Russian Roulette every time his boat casts off.

*My grandfather took dozens of photos in his time on the K-2. I am going to digitize them and will post them when I do.

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June 24, 2019

Vova Phones It In

Filed under: Economics,Energy,Politics,Russia — cpirrong @ 3:13 pm

Vladimir Putin held his annual marathon phone-in session last week. Although Vova was taking the calls, he was the one who was clearly phoning it in. By all accounts his performance was bored and listless, and largely unresponsive to the economic and environmental (as in garbage disposal) concerns expressed by many callers.

Putin’s answers to questions regarding declining living standards bordered on the pathetic, and definitely revealed he has no answers and can offer no serious succor. The best he could do is to tell Russians that things aren’t as bad today as they were in the 90s.

If the key to success is setting low expectations, Putin certainly succeeded! Perhaps the only current world leader who is doing worse than Russia’s in the 90s is Maduro.

As for explanations, the best Putin could offer was sanctions, and low oil prices. The sanctions excuse is somewhat amusing, given that Putin had previously claimed that sanctions not only wouldn’t hurt/weren’t hurting Russia, they would actually rejuvenate the Russian economy by encouraging the development of import-substituting industries. Insofar as oil prices are concerned, Putin’s answer only underlines the failure of Russia under his watch to develop outside the resource extraction sectors.

None of this should be surprising, and I have predicted such a trajectory. Maximum Leaders get old. They get tired. They get bored. They run out of new ideas and don’t have the energy or inclination to generate them. They begin to prefer a quiet life and to abhor change and innovation. Even they get captured by vested interests who strongly favor maintaining the status quo. Moreover, authoritarian leaders like Putin inevitably become progressively more isolated and out-of-touch because they are surrounded by sycophants, and deprived of feedback from elections, a free press, and open debate.

We are witnessing the senescence of Putin, and Putinism. The most grave concern–for Russians mainly, but for the rest of the world too–is that another inherent feature of authoritarian systems like the one in Russia is that the current leader has no interest in creating a system of succession: indeed, he has an interest in NOT creating one. As he continues to age, or if he dies suddenly, the battle to succeed him will intensify, and inevitably destabilize Russia (with spillover effects around the world).

This brings to mind two closing thoughts.

First, if you think Putin is bad, you should shudder at the type who will prevail in the struggle to succeed him. (Such person will almost certainly emerge from the shadows of the security services or their allies, and you will likely not have heard of him.)

Second, for years Putin’s political hole card has been “I have given you stability.” But ironically, his creation of an increasingly ossified system creates the conditions for a resurgence of instability–perhaps as bad as the 90s–upon his demise, or even his enfeeblement.

So it is more accurate to say that Putin has perhaps delayed instability, and guaranteed that the instability will be all the more intense when it inevitably reappears.

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June 15, 2019

If They Didn’t Have Double Standards, They’d Have No Standards At All

Filed under: Politics,Russia — cpirrong @ 6:09 pm

Just when I think politics could not get any more retarded, I’m proven wrong. The latest example being the meltdown freakout over Trump’s statement that he would listen to “dirt” on an opposing candidate passed on by a foreign source.

The mind boggles. Those melting down and freaking out are Democrats to the last he, she, and xe of them. (Mitt Romney et al are basically eunuchs who follow the lead of the Democrats who unmanned them, and whose approval they crave.) They are all die hard Hillary supporters.

This would be the Democratic Party that actively solicited compromising information on Trump and Trump campaign figures from the Ukrainian government. Last time I checked, Ukraine was not the 51st state. Or even the 58th.

This would be the Hillary Clinton whose campaign hired a foreigner to solicit foreigners–Russians, no less, rather than the benign Norwegians whom Trump referred to in his answer–to collect dirt on Trump.

And alleged information passed on by Alexander Downer (who speaks with a funny accent and so I’m pretty sure he’s a furriner) was apparently totally copacetic.

A consistent application of the standards implicit in the meltdown freakout would require those melting down and freaking out to demand the banning of the Democratic Party and Hillary’s incarceration.

Consistent application. Sometimes I crack myself up. If these people didn’t have double standards, they’d have no standards at all.

A few other observations. Does truth matter? That is, should the information provided be ignored and even criminalized merely because it is from a foreign source, even if it is true?

Hypothetical. A source within the FSB provides documentation showing that while honeymooning in the USSR a certain candidate for president agreed to become a source for the KGB, and had in fact regularly provided information to the KGB and then the FSB in the past 30+ years. Is that information to be suppressed, merely because of the source? Isn’t it meddling in an election to keep this information secret? (Any reasonable definition of the word “meddling” would involve an action that affects the outcome of an election, and keeping information secret can impact the outcome just as much as its revelation. Which is precisely why candidates want to suppress compromising information.)

Indeed, some information can only come from foreign sources. So it’s better to accept an increased risk of electing someone who canoodled with foreigners, than to accept information that would disclose such canoodling, because the information came from the foreigners that s/he canoodled with?

The controversy over the DNC emails suggests that truth is not a relevant consideration. The veracity of those emails, and the damaging information in them, were never disputed. Yet their release was supposedly scandalous, and sufficient in the minds of many to rule them out of bounds for discussion.

Moving on. Isn’t the obsession with the foreign-ness of the source of the dirt, oh, I dunno, kinda nationalist? Isn’t it passing strange that people who are willing to accept the illegal immigration of every last Guatemalan to the US (transportation courtesy of a Mexican drug cartel) believe that it is utterly unacceptable for a campaign to accept information provided by a Norwegian or whoever who may never set foot on the fruited plain nor see the amber waves of grain? So citizenship should be totally irrelevant for residency and employment and receiving government benefits, but it is determinative when it comes to who can provide information on political candidates to rival political candidates?

That makes sense how, exactly?

Isn’t it also implicit in the obsessive focus on the citizenship of the provider of information that it’s totally OK for Americans to meddle in elections by passing on damaging information to opposing campaigns?

I could go on, but contemplating the outpouring of sanctimonious hypocrisy for too long makes my head hurt. Suffice it to say, the louder the scream, the more execrable the screamer.

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May 25, 2019

Why the Squealing In DC?: The Deep State is in Deep Sh*t

Filed under: Military,Politics,Russia — cpirrong @ 11:01 am

That loud squealing you hear coming from points east is not the sound of 1000s of hogs being scalded: it is the collective scream of the governing class panicked at the Barr investigation, and in particular, at Trump’s instruction to the intelligence agencies that they declassify large amounts of material relating to the origins of the Russia investigation. Not surprisingly, among those protesting most strenuously, like the slimy, sanctimonious James Comey and the Neanderthal-browed (hell, Neanderthal period) John Brennan, are those in the gravest legal jeopardy.

In other words, the Deep State is in Deep Shit, and lashing out in response.

One of the attacks leveled at Trump and Barr is that this investigation will reveal the identity of a super-secret CIA source close to Putin.

Is that the best you all can do? Really?

First, color me skeptical that any such source exists.

Second, even assuming that he did exist . . . he has long since been compromised. Obviously.

Christopher Steele spread around the dossier in mid-2016 like a crack whore spreads around the clap (apologies to crack whores, and to the clap). Russian intelligence therefore would have known about it long before it made it onto Buzzfeed–or into the set-up “briefing” Comey gave Trump in January, 2017. Generously assuming the whole thing was (a) not a Russian disinformation operation in the first place, and (b) not a figment of Steele’s imagination, the dossier’s disclosure that an individual or individuals present at or better yet a participant in conversations with Putin and other high-level Russians (e.g., Sechin) was blabbing to western spooks (ex- or active) would have unleashed the leak investigation from hell, without the legal niceties that protect leakers in the US.

Any source would have been identified, and dealt with. Not necessarily with extreme prejudice: indeed that is an unlikely outcome. It would have been far more useful to turn said source to get information on the CIA and to spread disinformation.

Indeed, the CIA (were it even marginally competent) would have realized that the dossier had burned the source and made him not just useless, but dangerous to the CIA.

So spare me the wailing laments about outing a CIA mole in the Kremlin. If (and that’s a big if) the mole existed, he is no longer a useful intelligence asset to the US, nor can he be any more endangered than was 3 years ago.

Further, the whole “we’d love to tell you but then we have to kill you” pose is rather convenient, no? After all, if there was a super secret CIA squirrel in the Kremlin who could prove that Trump conspired with the Russians, wouldn’t The Resistance just be dying for that information to come out, and to be validated? After all, it would seal their case against their arch-enemy.

How stupid do they think we are, that we would believe that the identity of an already-burned source is so sacrosanct that they would sacrifice their vendetta against Trump (whom they claim is a mortal danger to national security) rather than reveal it?

Please. The strident protests actually undermine the veracity of collusion claims.

I have always been deeply ambivalent about the CIA. I recognize the need for an intelligence apparatus. I further recognize the need for secrecy for it to operate effectively. But I also recognize that this secrecy provides a cover for it to engage in nefarious actions intended to implement its own agendas, which are often malign. Secrecy also makes it almost impossible to hold it accountable for its litany of failures.

There is a colorable case that the Neanderthal and his minions engaged in numerous nefarious acts in 2016 and 2017. Getting to the bottom of that, and holding those responsible for any such acts accountable is far more important to the health of the Republic than protecting some putative source in Putin’s inner circle (who, if he existed, was hopelessly compromised years ago).

Let the investigation continue, the documents be declassified, and the chips fall where they may. The prospect of which is exactly why the hogs are squealing.

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May 15, 2019

Round Up the Usual Suspects, Druzhba Pipeline Contamination Edition

Filed under: Energy,Russia — cpirrong @ 1:36 pm

Russia roiled European oil markets by shipping millions of tons (perhaps upward of 5 million, or about 35 million barrels) of crude oil contaminated with organic chlorine over the Druzhba (“Friendship”) pipeline. The contaminants have the nasty habit of turning into hydrochloric acid in refineries–not good!

About 2 weeks after the first news of the contamination, the Russians claimed they had cracked the case. They arrested four executives of an obscure oil company in Samara, and sought two more, claiming that the company had pumped the oil to conceal a million ruble fraud. One million rubles, as in about $15 grand.

Now, I can see how some Fargo-esque Russian crooks could wreak such havoc to cover up a petty crime, but I’m also very skeptical of the official story.

To start with, amazing, ain’t it, that crack Russian investigators who let many major crimes go unsolved for, like forever can solve this one in mere days? The fact that some of the alleged perps have Chechen names also suggests that this was a “round up the usual suspects” bust that would make Claude Rains/Captain Renault proud.

Also, the quantities don’t make sense. The contamination is serious, and even 10 million rubles of oil would represent only a couple of thousand barrels: could that create the kind of contamination that has forced the shutdown of a pipeline that can carry 1.2-1.4 million barrels per day?

No, pinning this on some obscure suspects seems just too pat, and calculated to let major players (such as the pipeline monopoly Transneft, and major producers, such as Rosneft) off the hook.

Even if crooks in Samara succeeded in introducing into Druzhba contaminated oil in quantities sufficient to make millions of tons unusable, this just raises other questions. Like, who was monitoring what was going into the pipeline? How were the crooks able to get this much bad oil into Druzhba? How is Transneft’s failure to detect this not negligent–or perhaps itself criminal (e.g., involving bribing Transneft employees to overlook the introduction of the tainted oil into the pipeline).

However you look at it, this validates many stereotypes about Russia. Rife criminality, or corruption, or incompetence–or all of the above!

Update. Some back-of-the-envelope calculations. The contaminated oil had 150-330 ppm of the organic chlorides. The acceptable level is 10 ppm. Assume that prior to the contamination, the oil had the maximum allowable amount, 10 ppm. If the contaminated oil had 100 times the allowable amount (1000 ppm) over 14 percent of the oil in the pipe had to be contaminated to that level just to get it to 150 ppm. To get it to 330 ppm, almost a third would have to be contaminated. At 1mm bpd of throughput, that’s 140k-330k bpd. That’s a lot of oil, and certainly more than the piddly companies blamed for this contamination can produce. Even if you increase the contamination by an order of magnitude, you are still talking 1 to 3 percent of the oil in the pipeline.

But if you crank up the contamination rate to cut down the volumes, that just raises the question: WTF was Transneft doing to allow oil with 100 to 1000 times the allowable limit getting into the pipeline.

Pick your poison, Transneft.

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April 20, 2019

Evidence of Absence Is Incompatible With Obstruction

Filed under: Politics,Russia — cpirrong @ 10:56 pm

The Mueller Report was released (with redactions) on Thursday. Although the “collusion” portion of the report is framed, as is the case with most decisions not to prosecute, in terms of absence of evidence to meet a burden of proof, the thoroughness of the investigation and the findings come as close to providing evidence of absence as one is ever likely to find. Most telling was the conclusion that although the Russians made numerous attempts at gaining access to Trump and Trump personnel, these attempts were uniformly rebuffed.

Yet like the dog returning to its vomit–again and again and again–the media cannot resist parts of the Mueller report that keep the collusion dream alive. Like this piece in Bloomberg (which has been particularly insane in its post-Mueller coverage). They fail to realize that this story (and others like it) completely demolishes the entire idea of pre-election collusion. If Putin was in cahoots with Trump or his minions before 8 November, he would have had no need to use oligarchs–or anybody else–to try to establish connections with Trump’s people after 8 November. Yet people who were (are!) willing to believe baroque and convoluted theories like the one in which Trump was communicating with the Russians via an Alfa Bank server (to name just one) don’t see how ludicrous these theories are in light of Putin’s obviously desperate attempts to make contact after Trump’s surprising election. So surprising that Putin was clearly caught off-guard and unprepared and completely without connections with the incoming administration.

It is particularly delicious that the Russian billionaire featured prominently in the report (and the Bloomberg article)–Petr Aven–controlled Alfa Bank. So Alfa Bank was supposedly the portal between Putin and Trump which they used to coordinate their dastardly deeds but months later Putin sent the man in charge of Alfa Bank to open communications with Trump–and he fails!

Yeah. Makes total sense!

One wonders when Mueller realized that there was no there there. None whatsoever. I suspect he realized it very early on, but was loath to admit it. If this is so, his extension of the investigation to this late date–and well past the midterm elections–inflicted grave injury on the country, and makes Mueller a figure of infamy deserving severe obloquy.

It is against background that one must evaluate the second portion of Mueller’s report, relating to obstruction. Put aside the Constitutional issues raised by the fact that several of the theories of obstruction involve Trump’s exercise of his presidential powers (firing Comey, requesting that Sessions unrecuse himself, discussing using the pardon power), and others involve the ability of the president to fire an inferior official (which just points out the Constitutional anomalies of special counsels): firing Mueller would have been a blunder, rather than a crime, and Trump was indeed fortunate that he was talked out of it.

No, think of how you would have reacted if you had been subjected to a Kafkaesque investigation into something that you knew was complete and utter bullshit–and bullshit that had been concocted by your political enemies who were dead set on rationalizing–and avenging–their loss to you. I think you would be outraged, and feel completely justified in fighting back by whatever means necessary. I think any normal person would be. And heaven knows, Donald Trump is not normal. If he were, he wouldn’t be president. So of course he said intemperate things and contemplated intemperate actions and no doubt felt perfectly justified in his intemperateness–yet in the end did not take these actions.

Anybody who harrumphs at this–and yeah, I’m looking at you, Mitt–is irredeemably partisan, or not a serious person, or is completely incapable of realistically appraising how he or she would react if in another’s shoes. There are those who attempt to obstruct investigations because they know they are guilty, and there are those who fight investigations that they believe to be unjust. Mueller strained every nerve, tried out every possible legal theory, and left no stone unturned in his attempt to demonstrate illicit dealings, and admitted abject failure. This failure validates Trumps belief that the investigation was a travesty that never should have taken place, and puts his reaction in the second category rather than the first. The excesses are typically Trumpian ones.

That is, the evidence of absence of collusion completely undermines assertions of obstruction, given that obstruction requires mens rea. F. Scott Fitzgerald wrote “The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.” Finding Trump innocent (not just not guilty, but innocent) of collusion or conspiracy yet believing that he might have obstructed justice makes Mueller a genius, by the Fitzgerald standard. These are utterly opposed ideas.

Such geniuses the Republic can live without.

I would like to say that Mueller did Trump–and the country–a favor by proving him innocent of illicit dealings with Russia far more convincingly than Trump ever could have himself. To be found not culpable by people who are almost certainly your enemies and who desperately want to hang something on you is as close to vindication as you can get.

But facts don’t matter. Russia was just a pretext, a dog to tree Trump with. If that dog won’t hunt, his enemies will find another. And another. And another.

This is a power struggle, pure and simple. Meaning that Trump has to take that fight to his enemies. And the best way to do that is to attack legally the apparatchiks–the Brennans and Comeys and Clappers and those still in the bureaucracy–who unleashed the Russia collusion hound. And after that, to go after their political masters.

This is war to the knife. Trump has warded off the attacks so far, and almost miraculously survived. He can’t count on such luck continuing, especially since defeat will only spur his enemies to greater efforts. He has to be the attacker now.

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April 13, 2019

The Russians Aren’t There to Spread Disorder; They are There to Maintain Disorder

Filed under: China,Commodities,Economics,Energy,Politics,Russia — cpirrong @ 4:41 pm

This headline in Bloomberg made me chuckle and think of a famous malapropism from Mayor Daley I: “The policeman isn’t there to create disorder; the policeman is there to preserve disorder.”

The Russians (and the Chinese) are not in Venezuela to create (or spread) disorder, the Russians are in Venezuela to preserve disorder. Quite literally. Because they are there to preserve Maduro, and Maduro has created such chaos and misery that “disorder” seems far too mild a word to describe it. So adapting Mayor Daley’s words to the Russians in Venezuela, it wouldn’t be a malapropism–it would be descriptively accurate. An understatement, even.

Yes, I understand that permitting foreign interference in the Western Hemisphere violates just short of 200 years of American policy, and this is not a precedent we want to set. But in comparison to say the French in Mexico in the 1860s, this is truly small beer.

And consider the fate of Maximillian et al. Not a precedent that the Russians or Chinese should want to emulate.

Venezuela is a disaster–the world’s largest tar baby (literally, in some respects, given the physical characteristics of Venezuelan crude oil). The Russians and Chinese are actually fools if they think that propping up this disastrous regime–which is on the verge of overseeing a record setting decline in economic output–will increase their odds of getting paid back the billions they lent. Every day that Maduro continues in power, and the catastrophe metastasizes, makes the prospects of recovering even a few kopecs all the more remote.

If recouping some of their debt is an objective, the Russians and Chinese would actually be far better off killing Maduro, overthrowing his thugs, and making a deal with the opposition. But Putin and Xi are doubling down on a regime that makes the phrase “failed state” seem like a compliment.

Putin also views an outpost in Venezuela as a military provocation to the US. Whatever. At over 5400 miles from Russia (and over 9000 miles from Shanghai), that outpost would be utterly unsustainable if push came to shove with the US. Russia has no ability to sustain it logistically over that distance–nor does China, really, even though its navy and sealift are not as decrepit as Russia’s.

Fools put bases in places they can’t support. Complete fools put bases in places that they can’t support AND which are located in places that are descending into a state that the creators of Mad Max would have found fantastical.

So let Putin add Venezuela to his collection of failed state allies. It will be an ulcer, not an asset.

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April 8, 2019

CDS: A Parable About How Smart Contracts Can Be Pretty Dumb

Filed under: Blockchain,Derivatives,Economics,Exchanges,Regulation,Russia — cpirrong @ 7:04 pm

In my derivatives classes, here and abroad, I always start out by saying that another phrase for “derivative” is contingent claim. Derivatives have payoffs that are contingent on something. For most contracts–a garden variety futures or option, for example–the contingency is a price. The payoff on WTI futures is contingent on the price of WTI at contract expiration. Other contracts have contingencies related to events. A weather derivative, for instance, which pays off based on heating or cooling degree days, or snowfall, or some other weather variable. Or a contract that has a payoff contingent on an official government statistic, like natural gas or crude inventories.

Credit default swaps–CDS–are a hybrid. They have payoffs that are contingent on both an event (e.g., bankruptcy) and a price (the price of defaulted debt). Both contingencies have proved very problematic in practice, which is one reason why CDS have long been in such disrepute.

The price contingency has proved problematic in part for the same reason that CDS exist. If there were liquid, transparent markets for corporate debt, who would need CDS?: just short the debt if you want to short the credit (and hedge out the non-credit related interest rate risk). CDS were a way to trade credit without trading the (illiquid) underlying debt. But that means that determining the price of defaulted debt, and hence the payoff to a CDS, is not trivial.

To determine a price, market participants resorted to auctions. But the auctions were potentially prone to manipulation, a problem exacerbated by the illiquidity of bonds and the fact that many of them were locked up in portfolios: deliverable supply is therefore likely to be limited, exacerbating the manipulation problem.

ISDA, the industry organization that largely governs OTC derivatives, introduced some reforms to the auction process to mitigate these problems. But I emphasize “mitigate” is not the same as “solve.”

The event issue has been a bane of the CDS markets since their birth. For instance, the collapse of Russian bond prices and the devaluation of the Ruble in 1998 didn’t trigger CDS payments, because the technical default terms weren’t met. More recently, the big issue has been engineering technical defaults (e.g., “failure to pay events”) to trigger payoffs on CDS, even though the name is not in financial distress and is able to service its debt.

ISDA has again stepped in, and implemented some changes:

Specifically, International Swaps and Derivatives Association is proposing that failing to make a bond payment wouldn’t trigger a CDS payout if the reason for default wasn’t tied to some kind of financial stress. The plan earned initial backing from titans including Goldman Sachs Group Inc.JPMorgan Chase & Co.Apollo Global Management and Ares Management Corp.

“There must be a causal link between the non-payment and the deterioration in the creditworthiness or financial condition of the reference entity,” ISDA said in its document.

Well that sure clears things up, doesn’t it?

ISDA has been criticized because it has addressed just one problem, and left other potential ways of manipulating events unaddressed. But this just points out an inherent challenge in CDS. In the case Cargill v. Hardin, the 7th Circuit stated that “the techniques of manipulation are limited only by the ingenuity of man.” And that goes triple for CDS. Ingenious traders with ingenious lawyers will find new techniques to manipulate CDS, because of the inherently imprecise and varied nature of “credit events.”

CDS should be a cautionary tale for something else that has been the subject of much fascination–so called “smart contracts.” The CDS experience shows that many contracts are inherently incomplete. That is, it is impossible in advance to specify all the relevant contingencies, or do so with sufficient specificity and precision to make the contracts self-executing and free from ambiguity and interpretation.

Take the “must be a causal link between the non-payment and the deterioration in the creditworthiness or financial condition of the reference entity” language. Every one of those words is subject to interpretation, and most of the interpretations will be highly contingent on the specific factual circumstances, which are likely unique to every reference entity and every potential default.

This is not a process that can be automated, on a blockchain, or anywhere else. Such contracts require a governance structure and governance mechanisms that can interpret the contractual terms in light of the factual circumstances. Sometimes those can be provided by private parties, such as ISDA. But as ISDA shows with CDS, and as financial exchanges (e.g., the Chicago Board of Trade) have shown over the years in simpler contracts such as futures, those private governance systems can be fragile, and themselves subject to manipulation, pressure, and rent seeking. (Re exchanges, see my 1994 JLE paper on exchange self-regulation of manipulation, and my 1993 JLS paper on the successes and failures of commodity exchanges.)

Sometimes the courts govern how contracts are interpreted and implemented. But that’s an expensive process, and itself subject to Type I and Type II errors.

Meaning that it can be desirable to create contracts that have payoffs that are contingent on rather complex events–as a way of allocating the risk of such events more efficiently–but such contracts inherently involve higher transactions costs.

This is not to say that this is a justification for banning them, or sharply circumscribing their use. The parties to the contracts internalize many of the transactions costs (though arguably not all, given that there are collective action issues that I discussed 10 years ago). To the extent that they internalize the costs, the higher costs limit utility and constrain adoption.

But the basic point remains. Specifying precisely and interpreting accurately the contingencies in some contingent claims contracts is more expensive than in others. There are many types of contracts that offer potential benefits in terms of improved allocation of risk, but which cannot be automated. Trying to make such contracts smart is actually pretty dumb.


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March 26, 2019

The NYT Figures Out That Putin Is Not An Omnipotent Dr. Evil. Well, I Guess 12 Years Late Is Better Than Never.

Filed under: Economics,History,Politics,Russia — cpirrong @ 6:35 pm

The image of Vladimir Putin as an all-powerful mastermind was central to the Russia Collusion Hoax. In this telling, the omnipotent and omnipresent Vova, secure in his lair in Moscow, could manipulate at will the electoral process in the most powerful country in history. His power, devious intelligence, and malign purpose made it especially reprehensible and dangerous for Trump to collude with him, and the image of the Putin evil mastermind made collusion with him a grave threat to the republic, in a way totally different from, say, assorted Chinese boodlers boosting Bill Clinton.

The entire Russian Collusion Hoax was farcical to me from the beginning, and this grotesque exaggeration of Putin’s power and influence was the most farcical part of the charade. It was particularly annoying to hear about it from idiots who hadn’t paid the slightest bit of attention to Russia since, well, ever, and who when they did weigh in on Russia it was to slam Mitt Romney for calling it a threat, and to chortle at Obama’s snarky response to Romney’s alarums.

Put simply, most of these people who have been running around with their hair on fire about Russia since, come to think of it, the minute that Hillary conceded defeat and needed an excuse, couldn’t find the place on a map, despite the fact it is the biggest country on earth. But all of a sudden they were experts on all things Putin and all things Russia.

Perhaps in a signal to the hysterics that they should back off, the NYT ran an oped titled “How Powerful is Putin Really?” The answer: pretty much the same one I gave 12 plus years ago, and repeatedly–not very. Because Russia is not that powerful, and because Putin’s main role is to be an intermediary in wars between completing clans in the security forces and business, rather than to be a grandmaster moving inanimate chess pieces around the board.

This is comic gold:

The gulf between what Mr. Putin says and what happens in Russia raises a fundamental question about the nature of his rule after more than 18 years at the pinnacle of an authoritarian system: Is Mr. Putin really the omnipotent leader whom his critics attack and his own propagandists promote? Or does he sit atop a state that is, in fact, shockingly ramshackle, a system driven more by the capricious and often venal calculations of competing bureaucracies and interest groups than by Kremlin diktats?

I won’t keep you in suspense as to the answer. Hell, if you have been reading here anytime since around 2007, you know the answer. But then again, if you read me you probably haven’t been drinking the NYT Kool-aid, and won’t need them to tell you the answer 12 years too late.

If you read the rest of the article, you will see a description that echoes exactly the one I first applied to Russia in April, 2007: “a natural state.” As I quoted North, Weingast, and Wallis:

natural state is a specific way of structuring political and economic systems so that the economic rents created by limited entry are available to secure credible commitments among politically powerful groups. Potential rivals in a natural state stop fighting (or fight less when the economic rents they enjoy depend on continued existence of the sate and of social order. Natural states limit economic entry to create rents and then use those rents to credibly commit powerful groups to support the state. In other words, natural states use the economic system as a tool to solidify the stability of the ruling coalition.

I also quoted Celeste Wallander:

Patrimonial authoritarianism is a political system based on holding power in order to create, access, and distribute rents. It is well known that Russia is deeply corrupt, but corruption in the Russian system of patrimonial authoritarianism is not merely a feature of the system; it is essential to the very functioning of political power. The political system is based on the political control of economic resources in order to enrich those within patron-client clans. The patron remains in power by rewarding clients, and the clients are rewarded by supporting their patron. The patron requires support from his clients, and he must access and distribute rents for that support. Without the creation and control of rents, political power disappears. At the top of the political system, Putin manages relations among competing patron-client clans headed by top government and business figures, such as Development and Trade Minister German Gref, Deputy Prime Minister and Gazprom chairman Dmitry Medvedev, Gazprom president Alexei Miller, and Igor Sechin, deputy head of the presidential administration and chairman of Rosneft. Each of these individuals in turn has his own set of clients, who are in turn patrons of their own clans, and so on, creating a complex web of relationships that sustain political power and distribute patronage rents.

The basic point of the analysis was that of course someone like Putin is powerful within such a system, but he is not all powerful. Further, his power derives from his ability to intermediate between independent sources of power within Russia. The main purpose of the state in Russia is to organize theft, and divide the spoils. The main purpose of Putin is to keep that process from devolving into violent chaos.

Put differently, I’ve often emphasized the deinstitutionalized, highly personalized nature of the Russian state. The personalism is a bug, not a feature, and inherently limits the power of the person at the top. It is a great mistake to confuse the prominence of the public face of a shambolic state with actual power. Institutions are necessary to generate national power, either domestically or abroad. The power of deinstitutionalized state is inherently constrained.

But especially post-8 November, 2016, the left and the media and Hillary needed a figure to personify evil, and to tie him to Trump, so the reality of Russia and Putin and Putinism–which is pretty plain to see if you actually look–was deliberately ignored, and in its place our “elite” became fixated on a cartoonish Dr. Evil figure in a way that would make the most crazed 1950s Bircher blush.

These are people who fell for the scary wizard and his pyrotechnics, and paid no attention to the little man behind the curtain. Some because they were fools. Some–the worst of them, and the most powerful–because it advanced their political agenda.

So I say to the NYT: Bravo! Better 12 years late then never! But this should be a lesson: don’t pay the slightest bit of attention to those Bozos, because their news and editorial “judgments” are driven by a political and ideological bias that is impervious to readily observable realities.

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March 24, 2019

I Love the Smell of Napalm . . . Anytime–But the War Is Not Over, By A Long Shot

Filed under: Politics,Russia — cpirrong @ 5:33 pm

Watching the wailing, moaning, shrieking, rending of garments and gnashing of teeth emanating from people I despise following the release of AG Barr’s summary of the Mueller report brings to mind this epic scene:

I realize that the metaphor extends. Yes, Charlie got smoked here, but this is just one battle. He will be back. He will shift the fight to Congress in particular, and the media will continue its assault. But here I think Trump actually has some advantages. This will be a political battle, with partisans on both sides: it is no longer possible for the left/media/Democrats to hide behind the alleged impartiality of Mueller. (Indeed, I think this is another reason that Mueller’s report is a huge benefit to Trump: given the partisan makeup of his team, if even he can’t find collusion or obstruction of justice, it’s not there to be found.) In fact, this may redound to Trump’s benefit because even on his most unhinged day he will seem normal compared to Schiff, or Swalwell, or AOC, or “impeach the motherfucker” Tlaib, or Maxine Waters, or and on and on and on. He will have a surfeit of fools providing a surfeit of foils.

The left/media/Democrats are also holding out hope that some other authority–the US attorneys in the Southern District of New York (do they know it reports to Trump, which is the whole purpose of special counsels?), the New York AG, or maybe Officer Mcgillicuddy from Queens who saw Donald jaywalking as a youth–will take up the cudgels and find something to indict Trump for. But it won’t be collusion. Because get real, if after all this Mueller can’t find any evidence, the evidence ain’t there to be found:

When I witness these desperate, pathetic clowns pinning all their hopes on somebody, anybody, else in authority, this comes to mind:

I also find it infinitely amusing that they are channeling their inner Donald Rumsfeld, and flogging variants of “absence of evidence is not evidence of absence” for all it’s worth. The irony! Which is fitting, because the Russia conspiracy hoax will go down in infamy alongside WMD.

And there must be a reckoning. An incomplete list, but a necessary start:

  • The “leadership” of the FBI that started the whole counterintelligence operation against the Trump campaign, and once it was elected, continued it against the Trump administration, starting with James Comey. These were the people who were interfering with US elections.
  • Key figures in the Obama administration, notably Brennan, Clapper, and Rice . . . and then following wherever that leads.
  • The Hillary Clinton, and the Hillary Clinton campaign and its beard, the DNC, which concocted the Russia conspiracy hoax first as a campaign dirty trick, then continued it as an excuse for its loss and as a means of crippling the administration of the man who had the temerity to derail her coronation.
  • Hillary’s henchmen, especially the loathsome, beyond execrable Glenn Simpson and his tool, Christopher Steele. (One thing I would really like to know is what the Mueller report says about the farcical dossier.)
  • Last, but surely not least, the entire media establishment, not just in the US (the usual suspects, CNN, MSNBC, NYT, WaPo and on and on) but their foreign fellow travelers (esp. the FT, the BBC, and other supposedly reputable UK outlets).

There are many institutions in government and the media that deserve to be pulled out, root and branch. But of course they will fight, tooth and nail, hammer and tong.

Meaning that the smell of napalm might be sweet today, but many more strikes will be necessary before the war is over.

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