Saturday, April 19, 2014

Zbigniew Brzezinki's long game.

According to the Sunday Times, Barack Obama has had it with trying to build a partnership with Vladimir Putin. Like George W. Bush before him, Barack Obama has finally written off Vladimir Putin. There will be no reset of relations. Instead, his administration's focus will be "cutting off [Russia's] economic and political ties to the outside world, limiting its expansionist ambitions in its own neighborhood and effectively making it a pariah state."   

In the same story, Senator Bob Corker of Tennessee, the ranking Republican on the Foreign Relations Committee, expresses his disgust. “They’re playing us. We continue to watch what they’re doing and try to respond to that. But it seems that in doing so, we create a policy that’s always a day late and a dollar short.”

To a degree unmatched since the early days of the Global War on Terror, American pundits and politicians have been marching in lockstep in response to Vladimir Putin's seizure of Crimea and continuing threats to Ukraine. On April 8th, as the Ukraine story continued to unfold, New York Times columnist and foreign affairs maven Tom Friedman summed up the commonly accepted narrative of Russian aggression and American passivity in his op-ed Playing Hockey with Putin:

"Putin doesn’t strike me as a chess player, in geopolitical terms. He prefers hockey, without a referee, so elbowing, tripping and cross-checking are all permitted. Never go to a hockey game with Putin and expect to play by the rules of touch football. The struggle over Ukraine is a hockey game, with no referee. If we’re going to play — we, the Europeans and the pro-Western Ukrainians need to be serious. If we’re not, we need to tell the Ukrainians now: Cut the best deal with Putin that you can." 

Friedman's colleague at the Times, David Herszenhorn, mirrored the President's frustration as he punctuated an article this week about a posting by Russian Prime Minister Dmitri Medvedev on Facebook with an acrid derision that has become commonplace:

"And so began another day of bluster and hyperbole, of the misinformation, exaggerations, conspiracy theories, overheated rhetoric and, occasionally, outright lies about the political crisis in Ukraine that have emanated from the highest echelons of the Kremlin and reverberated on state-controlled Russian television, hour after hour, day after day, week after week."

Fifty years ago, at the height of the Cold War, American foreign policy icon George Kennan  described circumstances like these. He suggested how a democracy "becomes victim of its own propaganda. It then tends to attach to its own cause an absolute value which distorts its own vision … Its enemy becomes the embodiment of all evil. Its own side is the center of all virtue."

Kennan describes our susceptibility succinctly. Americans cling tightly to our image of ourselves as a beneficent, if flawed, people in a Manichean world of good guys and bad guys. We prefer not to know too much about the complexities and morally ambiguities of the world as it really is.

Lost in the 24-hour coverage of the Ukrainian crisis has been any attention to the historical context of these events. This should be the job of our leading newspapers, but even the headlines of these stories in the newspaper of record, Playing Hockey with Putin and Herzenhorn's Russia Is Quick to Bend Truth About Ukraine illustrate how shallow our reporting has become.

There is a backstory that suggests an alternative narrative. Indeed, it would be interesting to know what President Obama and his staff are really thinking as they assail Vladimir Putin for his barbaric behavior. Are they really appalled by Putin's conduct, as the reporting suggests, or do they understand it to be a predictable--and predicted--response to America's continuing strategy to undermine Russian power in the region? And is Bob Corker similarly flummoxed by Putin's strategic superiority, or does he share the sense of satisfaction that Zbigniew Brzezinski must feel as Putin flails away in frustration, as America's decades-long campaign to contain and undermine the Russian state continues to play out?

Zbigniew Brzezinski--who first appeared in the public eye as President Jimmy Carter's National Security Advisor--has in many respects been the inheritor of Henry Kissinger's mantle as the most influential member of the American foreign policy establishment. His life's work has been animated by his enduring hostility to the Russian state, and even as the pundits and politicians frame Ukraine as a failure of western diplomacy and strategy, one can see in it instead the success of the Brzezinski doctrine.

Brzezinski was one of the architects of the expansion of NATO in the wake of the end of the Cold War to include all of the former members of the Warsaw Pact. The expansion of NATO, with the ultimate goal of including Ukraine, was part of a strategy of exerting steadily increasing economic and political pressure on the Russian state. Brzezinski laid out his strategic perspective his 1998 book The Grand Chessboard: American Primacy and Its Geostrategic Imperatives, and his ambitions to contain and ultimately break up the Russian state are summed up in his article A Geostrategy for Eurasia.

At the time that the NATO was expanded to bring in the former Warsaw Pact states, George Kennan expressed his belief that the aggressive expansion of NATO and a hostile policy of encirclement would backfire, and ultimately lead us to the point at which we have now arrived.

''I think it is the beginning of a new cold war... I think the Russians will gradually react quite adversely and it will affect their policies. I think it is a tragic mistake. There was no reason for this whatsoever. No one was threatening anybody else. This expansion would make the Founding Fathers of this country turn over in their graves. We have signed up to protect a whole series of countries, even though we have neither the resources nor the intention to do so in any serious way. [NATO expansion] was simply a light-hearted action by a Senate that has no real interest in foreign affairs.''

But where Kennan saw increasing risks of confrontation, Brzezinski saw opportunity. Brzezinski's policy objective was the neutering of Russian ambitions and assuring American dominion in Eurasia. He did not give deference to Russia's historic paranoia as Kennan counseled, instead his strategy of continued pressure was designed to force Russian leaders to make choices between alternative courses of action, any of which would work to America's advantage.

The Soviet invasion of Afghanistan in 1979 provides an example of Brzezinski's strategic approach. Back in 1980, we all knew that the U.S. boycotted the 1980 Olympics to protest the Soviet invasion of Afghanistan. We knew this because Jimmy Carter told us so on national television, and his explanation went largely unchallenged in the media. And we all came to know that we began our support for the Islamist mujahedeen--who would ultimately defeat the Red Army--in response to the Soviet invasion. We know this because we saw Charlie Wilson’s War. And that rendering of history has largely gone unchallenged in the media.

Only years later did we learn that Jimmy Carter signed the covert action directive initiating support for the Afghan mujahedeen on July 3, 1979, six months before the Soviet invasion. When the Red Army invaded, the Soviet leadership claimed that they were entering Afghanistan to defend the existing Afghan government against a covert war initiated by the United States. The Carter administration adamantly denied the Soviet claims, and the Soviet complaints were ridiculed in the national media--like Medvedev's words this week--as nothing more than self-serving propaganda. Of course we had to respond to Soviet aggression, suggested Tim Russert on NBC's Meet the Press, "We had no choice."

Except, as it turns out, it would appear that the Soviet claims were true.

On the day that Carter approved the CIA intervention, National Security Advisor Brzezinski wrote to the President“This is our chance to give Russia its Vietnam.” Or, as he explained in a 1998 interview, U.S. action in Afghanistan was designed to lure the Red Army into a war that would bleed the Soviet Union. At worst, if the Soviets didn't take the bait, the strategy still offered the prospect of overthrowing the Afghan Communist regime:

"According to the official version of the story, the CIA began to assist mujahedeen in the year 1980, that is, after the invasion of the Soviet army against Afghanistan on December 24, 1979. But the truth that remained secret until today is quite different: it was on July 3, 1979 that President Carter signed his first order on the secret assistance to Kabul’s pro-Soviet regime opponents. That day I wrote a memorandum to the President in which I told him that that assistance would cause the Soviet intervention (...) [W]e did not force the Russian intervention, we just, conscientiously, increase the intervention possibilities."

In subsequent years, Jimmy Carter asserted that it was definitely "not his intention" to provoke the Soviet invasion, and perhaps one can take Jimmy Carter's impassioned outrage at the Soviet invasion at face value. But it is now a matter of historical record that his covert action directive in mid-1979 was undertaken--at least in the view of his National Security Advisor--with an eye toward provoking the Soviets to respond as they did.

The fingerprints of the Brzezinski approach are evident in Ukraine today. Since the fall of the Soviet Union--after that brief moment of white shoe naiveté when George H.W. Bush and James Baker gave Mikhail Gorbachev their word that America would not push NATO "one inch" closer to the Russian border--our policy of encirclement was ratcheted up. Over the course of the decade following the Bush/Baker "commitment" to Gorbachev, all of the Warsaw Pact countries were brought into NATO, and American military facilities were developed in Azerbaijan, Kyrgyzstan, Uzbekistan, and Kazakstan. By the time the dust settled, America had formed a ring of military facilities around the western and southern perimeter of the Russian landmass--from the Baltic Sea to the Chinese border, with the exception of Iran--abrogated the Anti-Ballistic Missile Treaty, and installed a forward deployed "missile defense" system.

The post-Cold War strategy of encirclement was more aggressive in design than simple containment. America's goal, in Brzezinski's words, was to "shape a political context that is congenial to Russia's assimilation into a larger framework of European cooperation." That is to say, Russia would be pushed toward the right choice--democratization and decentralization--and pay a price if it chose poorly. It mirrored Jimmy Carter's covert action in Afghanistan, in that it anticipated the different ways the Russians might respond. On the one hand, steadily tightening a military noose around Russia--ultimately to include Ukraine and Georgia--would constrain its imperial ambitions, the integration of democracies along the Russian periphery into the European community would push Russia toward political and economic reform. On the other hand, should Russia ultimately push back against the West's broken commitments and military encirclement--as George Kennan predicted--it would demonstrate to the world that Russia continued to harbor imperial ambitions and remained a threat to the rest of the world, justifying punitive measures to further isolate Russia economically and politically. It was a win-win strategy: Either outcome would serve America's interests in the region.

In 2008, Vladimir Putin finally pushed back. The Russia-Georgia War was the precursor to Putin’s actions in Ukraine, as it demonstrated that he was serious about opposing continued encroachment on Russia's "near-abroad." At that moment, even as Georgia's ambitions for closer ties with the West were thwarted, international opinion turned against Russia, just as Brzezinski envisioned. Whatever one might have thought of Putin before the Georgia war, through his actions, in the eyes of the West, he revealed his true colors. He was an unrepentant KGB-bred spook, an emerging despot, a Russian nationalist, and a threat.

Writing in support of Putin's actions in the Russia-Georgia War in 2008, Mikhail Gorbachev expressed his frustration with the manipulation of Russia by the United States and in his anger at American duplicity:

"Russia has long been told to simply accept the facts. Here’s the independence of Kosovo for you. Here’s the abrogation of the Antiballistic Missile Treaty, and the American decision to place missile defenses in neighboring countries. Here’s the unending expansion of NATO. All of these moves have been set against the backdrop of sweet talk about partnership. Why would anyone put up with such a charade?"

Russian President Dmitri Medvedev mirrored Gorbachev frustration in an interview in Der Spiegel the following year.

"After the disappearance of the Warsaw Pact, we were hoping for a higher degree of integration. But what have we received? None of the things that we were assured, namely that NATO would not expand endlessly eastwards and our interests would be continuously taken into consideration. NATO remains a military bloc whose missiles are pointed towards Russian territory."

This was the backstory to Ukraine today, but little of that history has been explored in the media as events in Ukraine have unfolded. In advancing the commonly accepted narrative, Tom Friedman, David Herzenhorn and their compatriots have ignored not only that history, but more specifically the long term American strategy, that has been at work. Putin might be playing hockey, as Friedman suggests, but Brzezinski owns the team.

To those who embrace Brzezinski's strategic perspective, Putin's aggressive actions will only undermine his and Russia's credibility in the world. The impact on the lives of Ukrainians in Kiev and Kharkov and Odessa is not the point, Brzezinski's strategic formulation is designed to enhance American power in the region in the long term, and whether Putin finds a way to pull back or chooses to invade is immaterial. Either choice Putin makes, in Brzezinski's long view, will ultimately serve America's interests, even if a Ukrainian civil war and an energy crisis in Europe have to be part of the price along the way.

My point here is not to assess America’s foreign policies in the world or to embrace Brzezinski's approach. One can believe Jimmy Carter’s intervention in Afghanistan was good or bad, that it was effective realism or unwarranted intervention. One can believe promoting Ukrainian democracy and undermining Russia’s security is a good policy or an unwarranted and dangerous one. But one cannot as Friedman suggests, and the media has trumpeted from the outset, simply raise one’s voice in outrage, and express shock at Russia’s "incredible acts of aggression."

Despite the talk of partnership, the fact is that the United States has consistently pursued aggressive and hostile policies designed to contain Russia, and--if Brzezinski has his way--ultimately see Russia broken up into a confederation of smaller states. Yet, by and large, the American media has bought into the dominant narrative, and ignored the deeper strategy at play. America's core strategy remains intact, and from the Brzezinski perspective everything is on track. Vladimir Putin has not been the master strategist of the media's imagination, the puppetmaster who has outfoxed American at every turn. Instead, he has long been caught in a trap, his actions manipulated in a game of power and strategy that goes back decades and in which he is playing a role, not writing the script.

Sunday, April 13, 2014

The courage of Charles Koch.

Two weeks ago, Charles Koch returned to the pages of the Wall Street Journal to defend himself. One has to wonder if the Journal was the best choice. After all, readers of the Wall Street Journal are probably not the one's attacking him. They are the choir, so to speak.

"I have devoted most of my life to understanding the principles that enable people to improve their lives." He began. "Unfortunately, the fundamental concepts of dignity, respect, equality before the law and personal freedom are under attack by the nation's own government. That's why, if we want to restore a free society and create greater well-being and opportunity for all Americans, we have no choice but to fight for those principles. I have been doing so for more than 50 years, primarily through educational efforts. It was only in the past decade that I realized the need to also engage in the political process."

Then, not to waste much time, he launched into his own ad hominem assault on those who disrespect him and attack is character on an (almost) daily basis. "A truly free society is based on a vision of respect for people and what they value.... The central belief and fatal conceit of the current administration is that you are incapable of running your own life, but those in power are capable of running it for you. This is the essence of big government and collectivism."

For my own part, I did not know I was a collectivist until Wayne Berman told me I was. After all, as a Wharton grad and somewhat of a free market economist. But as is so often the case these days, you are either with us, or you're against us. So I was just a bit taken aback as I was walked into Wayne's office--truly an inner sanctum of Republican power--and he introduced me to one of his business associates. "You should know David, he is a collectivist, like you."

A half century ago, every day on my way to school, we drove past the small, red brick building in Belmont, Massachusetts, that was the home of the John Birch Society. That was in the 1960s, and the John Birch Society did not have a big following in the area, but that was not necessarily the case in my own family. My maternal grandfather, Bob Byfield, was an acolyte of William F. Buckley, and as such was a fellow traveler of sorts with the Birchers.

Wayne's comment took me back. Collectivism, totalitarianism, and communism. These were the central enemies of America that my Grandfather wrote about. Now the enemy was inside the tent, and it was me. Collectivist is no insignificant label, it is a moral slur. You are morally bankrupt, and you are my sworn enemy. You are not just un-American, you are anti-American.

Thus, the irony of Koch's response. "Instead of encouraging free and open debate," he bemoans, "collectivists strive to discredit and intimidate opponents. They engage in character assassination." Take that, you totalitarian commie Nazi.

The fatal conceit of Charles Koch's defense of himself is that he uses the term fatal conceit at all. It is a phrase that reeks of philosophical, intellectual arrogance, that shuts off the free and open debate that Koch suggests he so admires. There has been no free and open debate in our politics since the advent of the Tea Party. I am not suggesting that Koch or the Tea Party ended free and open debate, but they most certainly have not espoused it as a value, as Koch suggests.

"Rather than try to understand my vision for a free society..." Koch goes on, "Our critics would have you believe we're "un-American" and trying to "rig the system." Rig the system, sure. Un-American? Not so much. Rigging the system is why we have lobbyists, it is why we have K Street. Our First Amendment right to petition Congress to redress grievances has morphed into the right to petition Congress to grant us special favors and smite down our enemies.

Koch's vision of a free society is clear. It is not that complicated. And I understand the perspective that the rules and practices of more regulated society undermine the values and freedom that he asserts as higher order values. In that world view, unemployment insurance, minimum wages and other income support programs undermine the survivalist imperative that keeps poor inner city families in Los Angeles from moving to the central valley to do the agricultural labor work now done by migrant laborers. I understand that he believes that the children of those families would have a stronger desire to get an education to improve their lot in life, restoring the work ethic that Koch sees having been lost.

I understand Friedman's principles of how market forces can winnow out failing banks, companies that make bad cars. All of that. And as Bob Byfield's grandson, I have read The Road to Serfdom. Really, back in the old country, my other grandfather's forebears were probably serfs.

Koch suggests at the outset he has devoted his life to understanding the principles that enable people to improve their lives, but along the way he has forgotten that these are just theories. I understand the philosophical roots and economic theories that underpin his world view, but I do not agree with them. That does not make me a collectivist, a totalitarian or a communist, just one citizen in a free democracy who disagrees with his perspective, and opposes his conclusions.

As much as Koch imagines himself a herald of liberty and a "free society," his politics have been just one more uninspiring assault on the poor and the middle class. And that is Koch's Achilles heal. Robert Welch, a founder of the John Birch Society along with Charles Koch's father Fred, is widely quoted as having said that "both the U.S. and Soviet governments are controlled by the same furtive conspiratorial cabal of internationalists, greedy bankers, and corrupt politicians." When Charles Koch describes his 50 years of advocacy work, his words suggest that he has continued down this path.

A furtive conspiratorial cabal of internationalists, greedy bankers, and corrupt politicians. Who better to have brought us NAFTA, bank bailouts and the massive corruption of political campaign finance?

Writing in the Wall Street Journal in early 2011, Charles Koch emphasized this theme.

"Government spending on business only aggravates the problem. Too many businesses have successfully lobbied for special favors and treatment by seeking mandates for their products, subsidies (in the form of cash payments from the government), and regulations or tariffs to keep more efficient competitors at bay. Crony capitalism is much easier than competing in an open market. But it erodes our overall standard of living and stifles entrepreneurs by rewarding the politically favored rather than those who provide what consumers want."

He reiterated this view in his recent piece.

"Far from trying to rig the system, I have spent decades opposing cronyism and all political favors, including mandates, subsidies and protective tariffs—even when we benefit from them. I believe that cronyism is nothing more than welfare for the rich and powerful, and should be abolished... If more businesses (and elected officials) were to embrace a vision of creating real value for people in a principled way, our nation would be far better off—not just today, but for generations to come. I'm dedicated to fighting for that vision. I'm convinced most Americans believe it's worth fighting for, too."

But Americans for Prosperity--the main Koch-funded political organization--has completely disdained these broader, unifying themes, and instead rushed to the vanguard to defend traditional Republican power in the Blue vs. Red political wars. The Kochs appear to be captive of their family history as titans of the far right wing, and seemed incapable of any effort to bring Americans together around real, common interests or values in post-economic collapse America. Early on, the Tea Party and Occupy movements shared common rhetoric around the conspiratorial cabal of internationalists, greedy bankers, and corrupt politicians, but principled hatred of the left made it impossible to seize the moment to create a movement that might bring the left and right together around real, common interests, to take on the entrenched power of the center.

And that is the shame of Charles Koch. He may believe his own words, but he has not acted on them. He claims in his writing to see two broad areas of abuses of government. One area includes those programs such as Medicare, Social Security, healthcare and public pensions that by and large support Americans who are far less well of than he and his family. The other area includes the corporate welfare and crony capitalism that he alludes to above. But his political agenda has been completely one sided. The full brunt of the Koch political enterprise has been focused on those things that benefit retirees, school teachers and the poor. There may be an occasional nod to too big to fail, but that side of the Koch agenda has been rhetoric alone, and barely that.

That is the true indictment of Charles Koch. Un-American is a slur slung from right at the left. If he feels stung by that label, he should take comfort that it is just someone trying to steal the rhetoric that Birchers and others have used to such effect, for so long. Charles Koch is most definitely American, but unfortunately he has not been as special an American as he imagines. He describes himself as a man standing on and fighting for principles, to be engaged in a great battle for the future of freedom, but in the end his has been a one-sided pursuit of a narrow, partisan agenda.

Charles Koch made a choice to focus his energy on the destruction of income support programs for the poor, the safety net for older Americans and the retirement security of school teachers. Somehow he wants to be applauded for that, even as he has left alone the entrenched infrastructure of crony capitalism and corporate welfare. How does that comport with his claim to stand up for moral principles? Where do the words of Isaiah, St. Augustine and Pope Francis stand relative to Hayak and Schopenhauer the pantheon of philosophers he likes to cite?

If Charles Koch does not like being called names, he should stop calling other people names. If he wants to be respected, he should try respecting others. And if he wants to be admired for seeking to lead America to a higher ground, to a better place, he should try to act on his own words, and not just focus his vaunted war chest on those Americans who are most vulnerable. If he doesn't wanted to be treated like a caricature of himself, he might start by not acting like one.

Alternatively, as a Republican insider who was bemused by Charles Koch's fit of pique reflected, "Anyone who really cares or worries about what others say about them should shut up and sit down. Otherwise fight the fight and deal with it." 

Saturday, April 12, 2014

Crimes and misdemeanors.

When a person or firm makes too much money for too long, it turns heads. And so it was with Steven A. Cohen. Year after year, Cohen's firm, SAC Capital, beat the Street. Big bets, the theory went. Others were not so sure. Big bets generally cut both ways, as many hedge fund managers learned over the years, and even the best in the world--John Paulson and Paul Tutor Jones come to mind--had their hard times. But such was not the case with Cohen. SAC Capital was the envy of the industry, posting 30% annual returns over an 18-year period.

A pattern has emerged. In the world of finance, there are two observable theories that relate to investment performance. The first is reversion to the mean, which simply suggests that market returns tend normalize over time. The second is that the half-life of proprietary trading strategies is short, which simply suggests that however smart a trader is, others will soon pick up on what they are doing and climb on board, suppressing returns over time. If a firm or individual posts market-beating returns year after year, there are generally three possibilities. One, they really are smarter. Two, they are cheating. Or three, they are lying. John Paulson or George Soros are examples of the first category. The Enron group was the second. Bernie Madoff was the third.

We have seen versions of each of these over the years, but in the moment it can be hard to tell which it is. And those involved may not either. Early on in Michael Milken's career, he was clearly one of the smartest guys in the room. He single handedly created the junk bond industry, and brought new sources of funding to industries that for years had been starved of capital. And he was paid well for his innovation. Only over time did his drive for money and power lead him to cross the line and run afoul of SEC rules.

Steve Cohen was different, apparently. According to a lawsuit filed by his first wife, Cohen funded the creation of SAC Capital from the profits of his first big insider trade, on RCA stock in 1985. When the suit was dismissed, an SAC spokesman suggested that the outcome vindicated Cohen. But a layman's read of the ruling suggests that his wife's claims were denied because the statute of limitations for litigating the purported activities had expired, and the judge never considered the merits of the insider trading claim.

This week, a "remorseful" SAC Capital urged a federal judge to approve a $1.8 billion settlement on charges of insider trading dating back to 1999. To date, Cohen himself has not been convicted of a crime, but he has agreed to close SAC Capital and limit its activities to managing his family's $10 billion investment portfolio.

If one were to believe his scorned first wife, her ex-husband's insider trading activities date back much longer than the period investigated by the SEC, and her claims lead one to wonder if paying a $1.8 billion fine while keeping $10 billion suggests that crime does seem to pay. Cohen, the former Mrs. Cohen would have us believe, might be a really smart guy, but his stellar performance was grounded in illegal activity from the get-go.

A friend in the industry pointed out the problem with the notion that insider trading was only part of Cohen's repertoire. "Once you make that first trade, and realize the outsized returns, it is hard to go back to day trading."

That is the problem as well with high frequency trading (HFT). Michael Lewis has once again explained the arcane to the rest of us in his new book, The Flash Boys, that illuminates the HFT phenomenon. HFT has grown as an industry--a strategy really--since its inception less than a decade ago to now account for more than half of the stock trades in the market. HFT is what it sounds like--lots of very fast trades, where stocks may be bought and then sold in a matter of milliseconds.

HFT has from its inception been the domain of mathematicians and physicists, which led observers to presume that they were in the first category: they were making money because they are that much smarter than the rest of us. But Lewis paints a very different picture: one of an industry corrupted by a pervasive greed that astonishes even the most cynical observer. As detailed by Lewis, the stock exchanges themselves sold--and continue to sell--access to information that allows HFT groups tiny timing advantages that essentially allow them to "front-run," or buy stocks in front of investors and sell them to those investors at a slight markup. In essence, it is a modern day version of the old horse racing wire con. They are invisible intermediaries skimming a tiny bit of money off of every trade. Therefore, Lewis' story leads one to conclude that the gross revenues of the HFT industry literally constitute little more than a tax on the portfolios of the rest of the investor universe.

Lewis points out that even the most sophisticated traders--the SAC Capitals of the world--had no idea that they were being skimmed. When Lewis' book first came out, a hew and cry welled up in the financial media in defense of HFT, the normal instinct of industry participants to protect their industry from the attacks of the liberal media and others. But after a week or so, those protests gave way to industry participants who realized the enormous damage that HFT has done to the integrity of the industry.

The profit opportunity in what has come to be viewed as computerized front-running essentially undermined any broader market benefits that HFT might theoretically have provided. Defenders of HFT argued it brought "liquidity" to the markets. Liquidity--assuring that there will be buyers ready to make a bid whenever a seller wants to get out--is a critical element of effective securities markets. But as quickly became apparent, HFT traders are not providers of liquidity. Rather, their core strategy is built upon getting in the middle of trades that are fairly sure to happen and taking a tiny piece for themselves. If they are providing liquidity, it is only inadvertently, such as when another trader successfully games their system. The other trader might convince the HFT computer that a trade is coming, inducing it to accumulate shares, and then leave the HFT group holding the stock rather than able to turn around and sell it a millisecond later at a profit as intended.

Market observer Jeff Macke emphasized the market manipulation inherent in high frequency trading. "The trading desks of four different major financial institutions posted gains every single day during the first quarter of 2010. The trading desks of JP Morgan, Bank of America, Citigroup and Goldman Sachs combined posted 244 winning trading days against zero losses. Were the playing field truly level, the odds of a firm making profits or losses on any given day would be roughly 50%. The chances of going 61-0 on such a trading field of dreams would be 2.31 quintillion to 1."

The incomparable Tyler Durden of provided this chart encapsulating the problem with HFT. This chart may be Greek to some, but it simply suggests that HFT trading firms are incentivized to migrate from less profitable trading activities that offer some social utility toward more profitable activities that offer little or no social utility. We have seen others go down that road before--Milken, Enron and mortgage derivatives are prime examples--and we know exactly where it ends.  But as we have seen time and time again, in the moment it is difficult, if not impossible, for market participants to heed those lessons, to voluntarily pull back before things come to a bad end.

As Steve Cohen retires from public view and leaves open questions once again about whether justice has been served, the long-term implications of the emerging story of high frequency trading are yet to be seen. While this may not seem to many to be as significant a moment as the meltdown of complex derivatives five years ago, it certain respects it is a more troubling scandal. By all appearances, actors across the industry--major banks, the stock exchanges and regulators--willfully conspired to skim money from individual and institutional investors alike, and few, apparently, were able to step back and see the larger picture of corruption suggested by their collective actions, and the manifest disregard for the public whose interests each are there to serve. 

Monday, April 07, 2014

The dreams of Hyman Roth.

As Francis Ford Coppola told the story, casino investor Hyman Roth was celebrating his birthday in Havana with his partners in crime when he regaled a skeptical Michael Corleone with his vision of the future that was at hand. "Here we are, protected, free to make our profits without Kefauver, the goddamn Justice Department and the F.B.I. ninety miles away, in partnership with a friendly government. Ninety miles! It's nothing! Just one small step, looking for a man who wants to be President of the United States, and having the cash to make it possible. Michael, we're bigger than U.S. Steel."

How times change.

This week, billionaire casino investor Sheldon Adelson is living the dream. Gone is the era when a Senator Estes Kefauver investigated the corrupting commingling of casino money and politics. Gone is the era when one had to, as in Coppola's story, blackmail a member of Congress to secure their support. Instead, politicians eagerly solicit Adelson's patronage and he can openly use the political clout he has acquired in Congress to advance his global gambling interests.

Adelson emerged in the public eye as a force in Republican politics when he contributed over $20 million to Newt Gingrich's campaign for President early in the 2012 campaign season. By the end of that year, Adelson's contributions in the Presidential election cycle race reached $100 million. As he looks forward to 2016, Adelson's unabashed ambition is--in Roth's words--to find a man who wants to be President and use his cash to make it possible. In Presidential politics today, Adelson is bigger than U.S. Steel. Or Goldman Sachs. Or Koch Industries.

Adelson's clout was on display last weekend at the Republican Jewish Coalition gathering just as the Supreme Court issued its ruling in McCutcheon v. FEC. In its 5-4 ruling, the Court took one more step to strip away limitations on political campaign contributions, as it removed limits on aggregate individual contributions to federal campaigns. The ruling in McCutcheon will not likely change much in terms of the flow of money into political races. According to the Center for Responsive Politics, whose database tracks political contributions, in the 2012 campaign cycle, only 646 people actually hit the aggregate contribution limits that were struck down by McCutcheon. Sheldon Adelson's tens of millions certainly were not affected by the federal limits. Nor were the super PACS or the "dark money" 501(c)4 non-profit groups that can now accept unlimited contributions without disclosing their source.

But in his majority opinion, Chief Justice John Roberts once again derided the legal or public policy basis for campaign spending limits, as he not only affirmed the overriding importance of the First Amendment guarantee of freedom of speech, but was dismissive of the corrupting influence of political money. "Government regulation may not target the general gratitude a candidate may feel toward those who support him or his allies, or the political access such support may afford...Any regulation must instead target what we have called 'quid pro quo' corruption or its appearance." 

Roberts would appear to be either gallingly dishonest or shockingly disingenuous--your choice probably betrays your political leanings--given the juxtaposition of the Court ruling with the sight of Republican Presidential candidates falling all over themselves to garner Mr. Adelman's support and catering their every word to align with his views, and the descriptions of Senator Lindsay Graham and others introducing legislation drafted by Adelman's lobbyists to support Adelman's business interests.

Roberts may be right, and the Adelman situation may not reflect quid pro quo political corruption as the Chief Justice defines it. It may well be that those fawning Presidential aspirants are largely aligned with Adelman's interests, and that as a general matter large contributions to Democrats and Republicans alike follow the commitments of those politicians rather than drive them. I may not see the world that way, but the case can be made--and surely Roberts insists on making it. From Roberts vantage point, Lindsay Graham is more than happy to lead the charge to illegalize online gambling as his expression of gratitude for the support that Adelson has shown him.

Roberts' standard that only a quid pro quo provides evidence of corruption essentially obviates the potential or need for campaign finance reform. After all, a quid pro quo is just another term for a bribe, and, as Roberts has observed, bribery is already illegal. Absent a provable quid pro quo, all of those industry lobbyists with wads of bundled political contributions do not drive public policy, they are simply evidence of a cycle of gratitude that--in Roberts vision of the world--is the mother's milk of politic.

The passing of Charles Keating this week is a reminder of another vision of our world. Keating was a leading man in the savings and loan crisis a quarter of a century ago, when he was the CEO of Lincoln Savings & Loan. Keating's famously contributed $1.3 million to the political campaigns of five members of Congress who in a show of gratitude sought to intervene on his behalf with federal bank regulators. In subsequent testimony before the House Banking Committee, Keating was asked by then Banking Committee Chairman Henry Gonzalez if he had expected something from those members of Congress in return for his $1.3 million. Only in our nation's capital would Keating's response "I would hope so, Congressman" have stunned the audience.

If the average American watching the Keating Five hearings on CNN was stunned, it was only by the honesty and forthrightness of Keating's statement. Of course Charles Keating wanted something for his $1.3 million. Of course the actions by the five members of Congress to support Keating's business were in exchange for his financial support. In what rational universe would it be otherwise, and would Keating be a competent CEO if he did not expect a return on his investment?  This is not a complicated notion. It is the denial of the obvious that strains the imagination.

Gratitude is not the mother's milk of politics. It is money. For Hyman Roth, for Sheldon Adelson, and for the pantheon of players that circulate in our nation's capital, large political contributions are an essential part of transactional relationships that are expected to serve the interests of each party. If that cycle of interests does not constitute corruption in Roberts eyes, if the cycle of contributions and favors is too complex to meet his quid pro quo test, then perhaps there is a need to redefine the term. Any given check written to a political campaign account may not be able to be linked to a specific political action, but that does not mean that the relationship is not corrupt, or more specifically that then entire system has not been corrupted. The public understands this, and the 5-4 ruling in each of these Court decisions only further undermines faith in the integrity of the institution.

Chief Justice John Roberts persists in denying what to the broad swath of the American public is self-evident: Money is corrupting our politics and undermining public confidence in our political institutions. If it is a problem of the definition of corruption, then perhaps he should consider the assessment of Supreme Court Justice Potter Steward when the Court struggled with the definition of pornography. You may not be able to define it, but you know it when you see it.

Friday, April 04, 2014

Confessions on a three dollar donor.

While waiting to get my mind around Vladimir Putin, Bitcoin and High Frequency Trading, I thought I should pass along this contribution from my friend Jay Duret.

Among the categories of wasted cyber ink that I am getting too frequently – really, one would be one too many – are the posts I get from the political people looking for money. I made the mistake – I made the same mistake many times – of donating money to one candidate or another. I am a lawyer; I worked in Government; some friends have run for office; there really was no avoiding it, but in this world no mitzvah goes unpunished.

In fact this punishment is endless, a daily dose of emails that implore and entreat me to fight back and join in and stand firm and show what I stand for (presumably as I am standing firm). I am urged to help take back the House or hold on to the Senate. I am begged to have the back of the President. Barack needs me. And while I might find that hard to accept – I am a helpful person, yes, but he has done pretty well on his own steam - it is harder to discount completely when the message is reinforced by an email from Barack himself! And not one! Many! He sends them all the time. Barack loves to email me, it seems.

There is something frankly weird about getting emails from Barack. I like the man. I voted for him two times. Enthusiastically. I have defended his administration endless times at cocktail parties and dinner table talk-a-thons. But I don’t actually know him. And he couldn’t pick me out from a carload of circus clowns. He certainly has not sought my advice in some of the areas where he could have profited from it. I don’t even have one of those grip and grin photos with him that you can get for the maximum individual donation.

I am not angry about any of that; I don’t see any reason why Barack should be reading my blog (though really, it would be good for him). But then why is he emailing me all the time? It is unsettling. Disconcerting. To see that an email from Barack has arrived. I have no friends named Barack and so I don’t dismiss it on the thought that it is about carpool logistics or a squash match; no, when I get a message from Barack I feel as if I should drop everything: the President is reaching out to me! I am being called on.

But it’s a let down. Every time. He is only asking me to stand firm or take a stand or double down. He asks me to give whatever I can. He asks me to chip in $3, $2 whatever.

I mean, really? The President is asking me to give him three bucks?

I am from the generation, and I have the mindset, that if the President were to ask me to quit my job, move to DC and sleep on a bare mattress for a year to work on a matter of import and do it all for no pay, do it as a volunteer! do it pro bono! – I would be on a flight the next day. What choice would I have? My President has asked me to serve! But an email asking me to “chip in” three bucks? Hmmn, I don’t think so.

Thinking about Barack, I decide to look back and see how frequently he has actually reached out to me. Google of course makes these types of explorations easy and in no time at all I have discovered that Barack has emailed me 22 times since June of 2012. (That isn’t the day that he started to correspond with me; it is roughly when I last had the hard drive on my laptop wiped by some genius at the Apple Store.) If I were to go back further, I am sure that I would have a lot more email from the most powerful man in the world. I can remember specifically that I got an email from Barack the night before his speech in Chicago after he was elected. That was electric. Such a shame that electricity has come to begging for bucks at $3 a pop.

As I look at my Obama emails I discover that Barack appears to have shared my email address with a few of his friends and colleagues. I have emails from Abby Witt, Greg Berlin, Grant Campbell, Brandon English, Devin Driscoll, Michael Bennet, Erin Hannigan, Emmy Ruiz. Jeremy Bird, Ivan Frishberg (really? there is a guy actually called Ivan Frishberg?), Kathy Gasperine, Kaili Lambe, Julianna Smoot, Jordan Kaplan, Jon Carson, Jim Messing, Nico Probst, Neeti Kaur, Mu’Min Najah, Liz Lowery, Lindsay Siler, Sara El-Amine, Sami Rahanim, Rufus Gifford, and Robby Mook. All 25 of those folks sending me the same type of message that Barack has been sending me; all of them asking me to “stand firm” and “chip in” and “do my part”.

I suspect that these are fictitious names, but when I start Googling, they are all out there – all linked in to Linked In, all wikipedia’d up, all on Facebook and Twitter, all apparently actual people, and indeed all pretty damn impressively resumed. Ivan Frishberg is a climate change guy, Sara El-Amine is the National Organizing Director for Organizing for America. The list goes on and on.

I go back to my treasure trove of Obama emails and find it isn’t just Barack and his entourage, There are even more from Barack’s organizations. Organizing for America. Obama for America. Something called the Obama Store. I also find, somewhat to my surprise – that Joe Biden, Michelle Obama and Nancy Pelosi are also counting on me. I know them even less than I know Barack, but like Barack, they are also on a first name basis with me, though each of them refer to me by my formal first name rather than the name (Jay) that people who actually know me tend to use.

If you count all the emails – from Barack, the entourage, the OFA, the other organizations, and the political celebrities – I have gotten an awful lot of emails in the last two years asking me to chip in.  Rather overwhelming that my small dollar contributions to the President have generated this much attention.  Maybe I ought to feel guilty. Maybe I should be chipping in more. But the truth is I don’t feel guilty at all. I feel annoyed. I feel as if there is some fundamental lack of grace in these solicitations. A donation, modest as it may be, ought to buy one some zone of immunity. Maybe not forever. But at least for a while.

I wonder if it is possible to unsubscribe from these emails. At first I didn’t think it was but then I learned the trick. You have to scroll WAY DOWN to the bottom of the email – the key lines are spaced below the bottom of the screen on an iPhone. But if you persist and then look down to the smallest possible typeface, you indeed will find a button that says “click here to unsubscribe”. But this is not like Amazon one-click. Rather clicking unsubscribe takes you to a new page where a video of Michelle Obama starts playing right away, reminding you of the great work done last year, a narrative that doesn’t exactly try to talk you out of unsubscribing, but certainly makes you feel that unsubscribing would be churlish.

The text on the side of the unsubscribe page is more direct. The words read:

"I support the President — I just get too many emails."
That’s what a lot of folks who end up on this page say. 

Having acknowledged your pain, the page goes on and urges you to suck it up – there is an agenda to pursue and if you want the good folks on the Obama team to keep fighting you should stay looped in, but failing that, you should select an option to receive fewer emails, about one a week.  Wow, that puts it into perspective. I think I would be fine with one email a year; limiting it to one a week doesn’t seem like much of a limitation.

I go back to my email history and find that yesterday, March 31, 2014, I received four emails – two from OFA and one each from Obama entourage members Kathy Gasperine and Jon Carson. The day before I had three and the day before two. Wow. That’s a lot of love for three days. I read the eight love letters and found that seven of them asked me to “chip in”. God, they love that line. The only thing new in this batch was that the emails were now asking me for $5, a $2 dollar upsell from the $3 I remembered.

I hovered there on the unsubscribe button. Should I do it? I love Barack. He is my guy. I feel as if my whole identity as a good government, reform, citizen-activist will be somehow destroyed if I click the button. But I did. I unsubscribed. Sorry Barack. I am happy to help, but I just can’t stand this begging.

As soon as I click the button, a new page comes up that confirms that I have been unsubscribed and will be removed from all future mailings. I am about to move on to other business when I notice that there is a big bright red box on the Unsubscribe Confirmation page. And within that box there is a word in all caps:


I puzzle over it for a minute.

I should have been puzzling over the question of why the web designers thought that one who has been driven to such distraction by the emails that they would navigate themselves to the unsubscribe button would at the same time care to make a parting donation. I mean, seriously, what are they thinking?

But frankly, that thought hardly crossed my mind. What really baffled me was why it said DONATE. Didn’t the designers realize what they wanted to say:


How could they be so tone deaf?

                                                    -- Jay Duret