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 Zerohedge.com 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. 

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.

Confessions of 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:

DONATE. 

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:

CHIP IN 

How could they be so tone deaf?

                                                    -- Jay Duret

What would Dick Cheney do?

Why, exactly, are we surprised? Up until Russian President Vladimir Putin seized the Crimean peninsula, a large swath of the commentariat seemed to think that such an action in this day and age was unthinkable. Then, when President Obama warned Putin against military intervention, it seemed all but inevitable.

This was not cynicism or defeatism or a reflection on other red lines. Rather, it was the simple realization that there was little to be done to deter a Russian invasion of Ukraine, should Putin choose to do so. Russia has air and ground forces arrayed along the 1,500 mile northern and eastern borders of Ukraine--to say nothing of its Black Sea Fleet birthed at the Ukrainian port of Sebastopol. The question was only whether he would choose to do so.

As Americans, we tend to view world events through rose colored glasses, and so we did as the Ukraine crisis escalated. We cheer on the toppling of autocrats and the birth of nascent democracies, and we frame events through a Manichaean lens of good and evil, of 'good guys' and 'bad guys.'

Our good guy/bad guy rubric is not consistent, however. We support young democracies, until election results don't fit our preferred narrative. We decry brutal, autocratic regimes, but make exceptions for countries with important economic or historical ties. And former enemies can become friends--black hats exchanged for white--when the confluence of democratic change, political alignment and economic interests align.

But if there is has been one immutable adversary over the past century, it is Russia. The Berlin Wall may be no longer, the Soviet Union a relic of the past, but it has been a quarter century since the end of the Cold War and Russia has lost little of its 'evil empire' sheen. We still see ourselves as we did a half a century ago, Rocky and Bullwinkle, fighting for Truth, Justice and the American Way against Boris Badenov, Natasha and the one-eyed Fearless Leader. We are the good guys. They are not.

As the Soviet Union was collapsing, it seemed for a brief moment that a change in that paradigm might be possible. To assuage historical Russian fears of encirclement by the west, President George H. W. Bush promised Soviet leader Mikhail Gorbachev that the United States would not take advantage of the dismemberment of the Soviet Union to draw former Warsaw Pact nations into the NATO alliance.

Yet, within just a few short years every former Warsaw Pact nations joined NATO. And while that fact was not proof of American perfidy--after all, those countries had ample reason to seek refuge in the west and in NATO--the elder President Bush's assurances were never integrated into American policy. Before long, the policy of containment that George Kennan prescribed to control Soviet expansionism in the 1940s found new life. The encirclement of Russia--in particular the expansion of NATO membership to Ukraine and Georgia--became central tenets of post-Soviet American policy, and for the ascendent Neoconservatives the break-up of the Russian federation was the ultimate stated goal.

Even as American political groups backed reformist parties in Russian elections, Putin emerged as a powerful and popular President of Russia in large measure due to his steadfast opposition to the continuing humiliation of Russia at the hands of American and NATO policies. He worked steadfastly to solidify Russia's security perimeter and to return prestige to the Russian state. Putin's ambitions were not secret, and his hostility to U.S. and European designs on Ukraine was well established.

Events in Georgia in 2008 presaged what was to come in Ukraine. After Georgia elected a pro-western government, Russia intervened militarily--ostensibly to protect the ethnic Russian populations within the Georgian provinces of South Ossetia and Abkhazia. Vice President Dick Cheney decried Putin's action, declaring that "Russian aggression must not go unanswered, and that its continuation would have serious consequences for its relations with the United States, as well as the broader international community."

But Putin's actions in Georgia did go unanswered. Russian intervention in Georgia was quick, decisive and brief--and he got away with it. For all the bellicose inclinations of the second Bush administration and the Neocon embrace of Georgia President Mikheil Saakashvili, there was no U.S. or European response of any substance. The international community quickly turned its attention to other matters, and Russia continues to occupy Georgian sovereign soil to this day.

Writing in the Washington Post, Bush administration State Department official Elliot Cohen sums up the widespread critique--from the Republican right to the Washington Post editorial page--of President Obama's performance, "President Obama’s history of issuing warnings and, when they are ignored, moving on smartly to the next topic gave a kind of permission... Absent a severe penalty — one that inflicts pain where Putin can feel it, to include Russia’s economy and his personal wealth and control of that country — the lesson learned will be, “You can get away with it.”

Cohen concludes by demanding tough American, "The world is a darkening place, and the precedents being set are ones that will haunt us for decades to come unless the U.S. administration can act decisively and persistently against Russia." Cohen dismisses the importance of Putin's invasion of Georgia that occurred on his watch, labeling Georgia a country of no consequence that provoked--and therefore implicitly deserved--Russia's ire. The truth is just the opposite, however. Ukraine is of far greater import to Russia strategically, historically and politically. Georgia proved out for Putin the central premise that while U.S. and NATO policy has been and remains to tighten its strategic noose around the Russian heartland, limited actions to control its perimeter would not be met with a significant response.

No one has any illusions that Putin's actions to date in the Crimea can be rolled back by force, or expects to hear a version of President George H. W. Bush's words of warning to Saddam Hussain--"this will not stand, this aggression against Kuwait..."  When Florida Senator and Presidential Aspirant Marco Rubio weighed in the "8 Steps Obama Must Take to Punish Russia," the gap between rhetoric and the facts on the ground only widened. "This is a critical moment in world history," Rubio declared, mirroring Dick Cheney's tone years before. "The credibility of the alliances and security assurances that have preserved the international order is at stake. If Putin’s illegal actions are allowed to stand unpunished, it will usher in a dark and dangerous era in world affairs."

Yet, when faced with an issue of historic consequence, Rubio's eight steps lacked the urgency of his rhetoric: Stronger denunciations. Barring Russia from international organizations. Limiting Russian visas to the U.S. There is no call for the U.S. to match Russia's proposed $15 billion aid package to address Ukraine's massive economic problems--the best we have seen is John McCain's proposal to provide $1 billion in loan guarantees. There is no call to arms, no commitment to building a Ukrainian resistance. No threat of retaliation against the Russian homeland. The closest Rubio comes to urging a show of force was his call to admit Georgia into NATO. But Rubio knows well that admitting Georgia into NATO is infeasible because Russian troops already occupy Georgian soil, a fact that could immediately compel NATO action against Russia in Georgia's defense.

It is all just words. Only the inaction of the Bush administration in 2008 keeps one from wondering wistfully what would Dick Cheney do...

To date, the presumption has been that Putin's objectives will be satisfied with the annexation of the Crimea, and the swiftness of the Russian-Georgia war supports this thesis. But this is a unique moment for Russia to--in its mind--restore the integrity of its borders. One can imagine that Putin must have considered at least four different intervention possibilities. First, seizing Crimea and securing the Black Sea Fleet, as has been accomplished to date, followed by the restoration of the Crimea to Russian sovereignty. Second, moving beyond the Crimea to occupy a swath of eastern and southern Ukraine with majority ethnic Russian populations, under the pretext of providing a land corridor to the Crimean peninsula that the first scenario would lack. Third, seizing all of the majority Russian territory across eastern and southern Ukraine to the Moldovan boarder. And fourth, taking all of Ukraine, and thus fully securing the Russia-Ukraine border, as well as the Russian gas pipelines that traverse central Ukraine, passing through Kiev, to Europe.

Each of these possibilities would entail increasing levels of difficulty, occupying lands with increasingly hostile local populations, and incurring increasing levels of opprobrium from the west. With the first two or three scenarios, Putin can move forward with his proposed referendum to establish de jure support for the de facto partition of the country.

It may seem like we are embarking on a new dark and dangerous era, as Cohen and Rubio suggest. But apparently Dick Cheney saw the onset of that era years ago, under his watch. Perhaps George H. W. Bush had a more subtle grasp of the exigencies of dealing with Russia than Rubio or Dick Cheney. The elder Bush recognized the importance of acknowledging that Russia has its own strategic interests within its region, and that even with the collapse of the Communist regime, it would have the power to assert itself. Unlike Rubio and Cheney, Bush eschewed a Manichean world view, and could accept that other nations have interests and perspectives that are different than ours. Russia, Bush and the Paleoconservatives around him understood, would be less dangerous if it were not backed into a corner.

But that was not the path we chose. Instead, we chose to push Russia to the wall at every opportunity possible, and now we are surprised that it is pushing back. Putin is playing with a strong hand on his home turf. His ultimate intentions in the Ukraine in the current crisis are opaque. But his goals have been know for years.

Putin at the crossroads.

Vladimir Putin and I share a special bond. We both grew up believing that the Ukraine was part of Russia. My father's family was Russian, or so the story went. One parent was from the city of Uman, south of Kiev, and the other from the long-disappeared town of Ivangorod.

When I went to Kiev in 1989 as part of an international finance commission, there was no mention of the Ukraine as the nation-state it would become just two years later. It was still the Ukrainian Soviet Socialist Republic, just one of many teetering Soviet Republics being held together by Mikhail Gorbachev's vision of restructuring and openness that might forestall the urge to independence and democracy. But even then it was the Ukraine. Dating back a more than a thousand years to its inception as the Kievan Rus, it remained the integral southern realm of the Russian state.

When we met with an emissary of the Metropolitan (head prelate in charge) of the Ukrainian Orthodox Church--a man with the long black beard and colorful vestments of one's imagination--he said nothing of independence or statehood. Rather, he worked himself up into a full rage as he described the seizure of the land and murder of the clerics of his church by the Uniate Catholics in the western Ukraine. For centuries, the Ukraine was riven by the sectarian tensions between the Orthodox and Catholic branches of Christian faith, and the bordering nations--primarily Catholic Poland and Orthodox Russia--played a tug-of-war for control, as the borders shifted from one century to the next. Now, our host assured us, as Communist control was weakening, the war of ages was ramping back up, and the Orthodox Church was preparing for battle with its Roman antagonists.

Faced with this raging scarlet-faced prelate, I betrayed nothing of my own Russian roots. Even in the wake of the Orange Revolution that came a little more than a decade after our lunch with the Ukrainian Church emissary, both Putin and I remained unconvinced of the independent status of the Ukraine. For me, it remained a question of identity. Russia is a nation with a long history and deep cultural roots. The literature. The poetry. The massive scale of Siberia. The massive suffering of the Gulag. To acknowledge Ukraine as a nation meant that I must recast my own roots from Russian to Ukrainian. 

The challenge for Putin is tougher. He has made clear that his identity is not simply Russian, but Soviet. The collapse of the Soviet Union was, in his terms, the greatest catastrophe of the 20th century. And the center of the Soviet Union was Russia and the Ukraine. Subduing Ukraine's schismatic wars and crushing the aspirations of the Ukrainian peasant farmers (kulaks) was central to the formation of the Soviet empire under Joseph Stalin.

Not to belabor the details, but Simon Sebag Montefiore's biography of Stalin In the Court of the Red Tsar, describes Nikita Krushchev's rise from Ukrainian Communist Party leader to inside member of Stalin's court largely on the basis of his ability to outperform his quotas of Ukrainians killed month after month until the numbers totaled in the hundreds of thousands. This is the history whose loss Putin laments.

The Sochi Olympics that close this week were supposed to mark the culmination of Putin's career. Over the past few months alone, Putin was named the most powerful man in the world by Forbes magazine, he strategically out-maneuvered the Americans in Syria, exposed and thus undermined Saudi threats to fund attacks against the Olympics, and offered refuge to American public enemy number one, Edward Snowden. Last week, Putin stood at the opening ceremony in Sochi in his great coat like a commissar of old on the Kremlin wall. At the apex of his power, he broadcast images of himself as the post-modern Soviet man riding horseback bare chested across the Siberian taiga, dressed in camouflage after slaying a tiger in the wild, and in his martial arts attire after hand to hand combat.

Then it all fell apart. First, the Russian team was humiliated in Olympic Hockey. Then, just as Putin thought things could not get worse, the Ukrainian protests exploded into public view. With Putin's support, Ukrainian President Viktor Yanukovych plied the Syrian gambit. The regime labeled the protesters terrorists and unleashed the anti-terrorist units of the Ukrainian armed forces. But it was to no avail. The Syrian gambit, it now appears, demands a ruthless absolutism at the top and loyalty across the officer corps that Yanukovych did not possess. Within days, the protesters and the Parliament assumed control, the Orange Revolution constitution was reinstated, and Russia's southern flank lay exposed.

Control over Ukraine has been the cornerstone of Putin's goal of reestablishing the Soviet empire in fact if not in name. Ukraine's departure from the Russian orbit--if not undone by some act of force or diplomatic miracle--looms to undo all that he has accomplished in his decade and a half in power. The looming presence of the Russian military that keeps authoritarian regimes across Russia's near abroad in line will have been shown to be a chimera. Putin's arguments that the opposition in the Ukraine was primarily instigated by the Roman Catholic Church and the American CIA have been rendered quaint. Ukraine, even Putin must be coming to realize, is a real place.

What happens next is unclear. It is easier for me than for Putin. It seems my family was Ukrainian after all, and I will just have to deal with that. I will have to unfriend my former compatriots Anna Ahkmatova and Aleksandr Pushkin. I can continue to embrace Nikolai Gogol. I will remain skeptical of my Grandmother's claim that we were related to Leon Trotsky.

But for Putin, this is a tougher moment, and his options would appear to be limited. Unlike the Russia-Georgia war, there is no standing army against which to fight. Unlike his Chechen wars, Ukraine cannot be brutally subdued outside of public view. Certainly putsch's can still work--the Egyptian military has proven that recently--and a terror campaign against domestic opponents is not out of the question--as Putin has himself supported in Syria. But each of those both demand a ruthless Ukrainian leadership and a supportive Ukrainian military, they cannot simply be imposed from the outside. And then there is Khrushchev's approach, but for all of Putin's posturing, he does not have the will to power of a Stalin or a Khrushchev. 

Putin has the resources in place for a military response. His armies lie across Ukraine's northern border, and his Black Sea Fleet remains berthed in its Ukrainian home port of Sebastopol, on the southern tip of the Crimean peninsula. The annexation of all or part of the Crimea to preserve Russia's naval access to the Bosphorus is not out of the question. Unlike Kaliningrad Oblast, the Russian outpost on the Baltic Sea, separated from the Motherland by Lithuania and Belarus, the Crimea is adjacent to Russia across the Strait of Kerch. But a military assault from the north against the entire Ukraine in the absence of a complicit host government and military is inconceivable.

Putin could choose to adapt to a the reality. He could offer the new Ukrainian government the $15 billion aid offer that he put on the table early on in the crisis to forestall Ukraine's acceptance of the Association Agreement with Europe. This would demonstrate goodwill and further bind Ukraine's economic future to Russia's. 

But that would be a weak response. Losing Ukraine means losing his position as an historical Russian figure. Instead of comparisons to Peter the Great, who expanded the Russian empire into the Ukraine, Putin's place would be alongside Mikhail Gorbachev, an earlier handmaiden of Russian decline and humiliation. To Russian nationalists, it would bring cries of 'who lost Ukraine', and it would send the message across Russia's near abroad that Putin's plans for the reassertion of the Soviet sphere of influence have come crashing back to earth. It would compromise the leadership of authoritarian regimes in each of the lesser states that Putin has wrapped so tightly around Russia's perimeter. Even Russian democrats would be given succor. 

The Sochi Olympic Games were supposed to mark the pinnacle of Putin power and prestige, but instead it may mark the moment of his undoing. Ukraine's success would show Putin's to be a Potemkin regime, with little behind the facade of strategy and power but the machinations and ego of one man.

Putin must have another plan. He must have something more. He must have one more move to change the trajectory of the Ukrainian drama. Because if he doesn't, all that he tried to build will come crashing down, and that will be his legacy. Just one man riding across the taiga, a bare chested leader with no one following behind.

Rage of a privileged class.

Tom Perkins, co-founder of the iconic venture capital firm Kleiner Perkins Caufield & Byers, caused a stir recently with his Wall Street Journal letter "Progressive Kristallnacht Coming?" Perkins fears that recent protests over Google buses in San Francisco and growing resentments around income inequality could ultimately turn to violence against the wealthy.

As protests have grown against the white Google buses plying the streets of the Mission to bring young techies down to the Silicon Valley, it was the Counterforce anarchists breaking Google bus windows that for Perkins evoked images of Kristallnacht. One might have thought that as a long time resident of the area, Perkins would have a greater sense of perspective. Protest--whether about income inequality, bank lending practices, gentrification, LGBT rights, Black Power, immigrant rights, the wearing of animal fur, the list goes on--is deeply rooted in Bay area culture and history. And the periodic involvement of self-styled anarchist groups--be it the Counterforce, Anonymous or the Black Bloc--have periodically elevated the tenor of otherwise peaceful protests, increasing the potential for property damage along the way. Protest happens, and in the worst cases the police show up. Sometimes it leads to greater public attention on important issues. Sometimes it contributes to constructive civic debate.

Perkins was roundly vilified for his use of a Nazi metaphor. We have seen this story before, as when billionaire Steven Schwarzman compared an Obama administration proposal to require financiers like he and Perkins--along with Warren Buffett and Mitt Romney--to pay the same income tax rates as the rest of us to Hitler's invasion of Poland.

The thing about Nazi metaphors is that they end conversations rather than encourage them. Perkins actually had a real point to make. There is real and growing animosity in the Mission, and it should be a cause for concern. Not very long ago, the Google buses were a source of bemusement rather than resentment. They began as a symbol of hip, socially responsible capitalism--a sort of corporate carpooling that takes cars off the road and mitigates the adverse environmental impacts of rapid economic growth in the tech sector. Similarly, the burgeoning techie population in the Mission began as a benign phenomenon, just one more population migration into a city that has long attracted post-college kids, bringing new energy to the city, along with a plethora of new restaurants and cafes.

There is no small irony in the demographics of the street protests. The community of artists, progressives and bohemians who now find themselves being squeezed out by a new, wealthy hipster population themselves arrived in the Mission and the adjacent Noe Valley neighborhood a few decades ago, when they in turn displaced the working class, largely Latino, residents at that time. The gentrifiers are being gentrified.

But it was Perkins words as he walked back from his Nazi allusions that were most illuminating. He is, after all, not Steven Schwarzman. He is not a big Republican contributor. He is not even a billionaire. He is friends with and voted for Jerry Brown, and intends to again "even though he raised my taxes 30%." And he agrees that income inequality is "probably and possibly" the number one challenge facing the nation.

Yet even as he sought to put the controversy behind him, he remained--like Schwarzman--trapped within his own sense of entitlement, of being unfairly victimized by an unappreciative world. He was unable to look at the circumstances and seek to understand how others might experience it. "It’s absurd to demonize the rich for being rich and for doing what the rich do, which is get richer by creating opportunity for others.... Let the rich do what the rich do, which is get richer. But along the way, they bring everybody else with them when the system is working."

Is it really absurd? For many in the American middle class, letting the rich do what the rich do has not been an effective formulation for increasing either economic opportunity or outcomes. The three greatest forces that have undermined middle class incomes over the past several decades have been the advent of free trade, technological change, and financial deregulation. Each of these have created cohorts of winners and losers. Free trade was heavily supported by and benefitted corporate America, which saw increased profitability and capital mobility through outsourcing, and along the way it benefitted the American consumer and lifted millions around the world out of abject poverty. These are good things, but they did not come without a price, and that price was paid by the domestic manufacturing sector and the industrial middle class.

Similarly, technological change has dramatically increased domestic productivity--defined as economic output per hour of labor worked--which has driven corporate profitability to new heights. It has transformed society and created a new class of young, uber-wealthy entrepreneurs. But this increased profitably and labor productivity again did not translate into higher domestic wages, and along the way new technologies destroyed myriad occupations upon which millions derived their living, as technologist Jeron Lanier has observed.

And little needs to be said about the impacts of financial deregulation.

These changes have been largely enabled by federal legislation, supported, if not instigated, by the lobbying and political contributions of those who would benefit. The rich, to use Perkins' formulation. However, it should be noted, particularly in light of the current protests, that the wealth in the tech sector in particular has been the least directly enabled by federal legislation, though the entire online world comprises companies that are effectively free riders on years of federal investment. The core value of Google, Facebook and others lies in their use of user data and user generated content, control over which has been effectively ceded to them voluntarily by users. Thus, the artist in the Mission has been an unwitting co-conspirator in the accumulation of wealth in the tech sector. As Jaron Lanier has observed, this ceding of value is exchange for "free" services has neither a necessary nor preferable outcome for the mass of users of the Web, and it has been a further contributor to the issues of economic stratification underlying the protests in San Francisco.

In that light, is it not reasonable that artists or others living in the Mission might feel some resentment toward the rich? Could they not interpret the past several decades--years of flat real incomes for many cohorts of society--as ones in which the rich continually adjusted the rules to their own benefit, but largely failed, as Perkins suggested, to bring everybody else with them. For those who saw their livelihoods directly undermined by these changes, is resentment not a natural response? Is it reasonable, as Perkins would have it, that instead they reflect equanimously on the larger benefits to the world--and to the rich--of free trade and new technologies, and say to themselves, well, if my livelihood is the price of progress, that is fair enough... I will just have to start over.

Class resentments--I use the term class deliberately as it is the term that Perkins chose to describe the rich--are a problems common to many societies, exacerbated by images of elites using their political and economic power to solidify their advantages. The challenge for democratic societies has always been to build both economic structures that enable people to believe that they or their children will not be shut out of the opportunities that the future may bring, and political institutions that enable conflicts and differences to be addressed, if not resolved.

Increasingly, we are failing on both accounts. Perkins' plea to the artists and anarchists in the Mission that the rich be appreciated, respected and left alone to do their thing stands in stark contrast to a national political climate in which the defaming and demonizing of groups across society has been elevated to an art form. In recent years, teachers, public employees, retirees, union members, immigrants and others have been the target of withering political assault for partisan political purposes. The demonization of bankers and the rich is really just the most recent evolution in a toxic political climate where the notion of respecting and appreciating the diverse roles that different groups play in our national economy and civic life has been ground into the dust. If appreciation and respect is what Perkins wants, he should engage directly with the communities involved rather than complain about the lot of the rich on the pages of the Wall Street Journal. And perhaps he should consider that respect and appreciation are rarely given to those who do not show it to others.

Against that backdrop, the current protests have really been unremarkable. Hopefully, they will lead to real engagement and understanding across groups within the community. Reaching out, rather than lashing out. And Perkins should take comfort from the comment on one anarchist website. Things could be worse: "So, what, the Irish starved because Oliver Cromwell took their land, the Ethiopians are having their land taken away from them now, and all the bloody far left can do is to protest Google Buses."

90% of life is showing up.

As trumpeted across the media, the four day meeting of the Third Plenum of the 18th Central Committee of the Communist Party has ended, and China's leaders announced that among the decisions were an "easing of" its one-child family policy and the abolition of its "re-education through labor" camps. As much as these policy changes are being trumpeted as evidence of how far China has come, they really are a reminder of how far China and its leaders have to go.

In the wake of the shutdown of the federal government last month, Chinese President and Communist Party General Secretary Xi Jinping took the opportunity to remind the world of the failings of the American political system. Year after year, as China's foreign exchange reserves have piled up, the leaders of the regime have gone to great pains to critique America for its profligacy and political instability, among myriad other failings. China's much heralded rise, and its ambitions to supplant American leadership, reflect not just its growing economic and military power, but the values of frugality, stability and conservatism Chinese leaders eagerly contrast with the chaos and moral decay of the west.

Little is ever said amidst these frequent rebukes of the role that America has played in enabling the resuscitation of the Chinese people, to say nothing of the Chinese Communist Party itself, from the depths of economic calcification reached in the 1970s. Much is made of the success of the market reforms instituted under the leadership of Deng Xiaoping beginning in 1978, and indeed the growth trajectory of China's GDP has been extraordinary. But the success of China's economic transformation could not have happened absent the free trade policies of the United States, and to a lesser extent western Europe, that enabled that growth.

Under American global leadership since the end of World War II, international trade policies have uplifted the Asian continent out of severe poverty. Japan led the way, in the wake of the devastation of WWII, building a manufacturing juggernaut enabled by American business insight and market access. The Japanese model of export driven economic growth and development then became the model for the Asian tiger nations of Singapore, Taiwan, Hong Kong and South Korea, which like Japan have risen from abject poverty a half-century ago to among the highest levels of per capita income in the world.

That was the American half-century. As we opened our markets, our share of global GDP steadily declined. Our trade policies actively supported the rise of Asia out of poverty and the globalization of our leading corporations. That real middle class incomes stagnated at home should have come as no surprise. It was simple economics.

But the Asian Tigers, and even Japan, were relatively small countries, who as trading partners were able to build their domestic economies around export trade with America without destroying the host upon which they fed. Through that economic period, there were unintended consequences that exacerbated the challenges we now face. The combined reinvestment of Asian nation trade surpluses in US dollars--and the similar practice embraced by OPEC nations selling us oil--led to relative stability in the US dollar and enabled steady increases in US borrowing without the increases in US interest rates or declines the value of dollar assets that would otherwise have undermined Asian growth.

But it was trade in goods and services with China and India, respectively, that ultimately showed the limit of the export driven model, as the damage to the US economy and middle class has now become too extreme to ignore. The challenges we now face--underinvestment in infrastructure, chronic deficit spending, and socially debilitating inequality--have conspired to contribute to the fraught domestic politics that President Xi now trumpets as the rationale for the world to turn to China for future leadership. China's gleaming new cityscapes--and the Chinese dream of Xi's rhetoric--are being built not upon the ingenuity of the Chinese system, but instead upon the hollowing out of the American economy.

The policy changes Xi and his colleagues announced this week only draw attention to the depravity that remains central to the Chinese system. Even as there is a rising wealthy population within the Chinese elite and urban cores, economic growth within China remains dependent upon the Foxconn-style factory model that is one step short of a slave economy. The Communist Party social and economic policies continue to drive Chinese peasants from their land while securing billions of dollars in stolen wealth for Party members. Dissent and banned religious practice remains punishable by prison and the Orwellian "re-education" that is to be moderated, but not eliminated, under recently announced Party reforms.

The Party plans to modify the decades old one-child policy is perhaps the most shocking reminder of the starkly immoral nature of Communist Party control over the most intimate aspects of Chinese personal life. Unauthorized pregnancies continue to be aborted by force up until birth, and children found to have been born in violation of the law remain at risk of being "confiscated" by police. The proposed may relax the rules surrounding who is to be allowed more than one child, but does nothing to curtail this most fundamental power of State control over the population.

This week, the US aircraft carrier George Washington arrived in the Philippines from Hawaii. The stories were so familiar from other disasters in recent years. The helicopters arriving over the horizon, coming to the aid of the population devastated by Typhoon Haiyan needing not just food and water, but the most basic help from building and securing aid distribution capacity, to recovering, identifying and burying the dead. The carrier and accompanying ships brought aid, logistics and people trained and capable of responding to the need on the ground.

Nine years ago, in the days following the 2004 tsunami, it was the US carrier Abraham Lincoln and the Navy hospital ship Mercy that steamed from the Persian Gulf to Banda Aceh, that city on the northern tip of Sumatra that had born the brunt of the tsunami and seen tens of thousands of its residents die. Like Banda Aceh, the Philippines are located close to the Chinese mainland--just 700 miles from Hong Kong--yet once again it was an American flotilla that steamed over 5,000 miles to bring critical aid, while the Chinese sat on their hands.

Last month, President Xi trumpeted China's rising essential role in the region at the Asia-Pacific meetings that President Obama chose not to attend due to turmoil in Washington. Yet just a few weeks later, he was nowhere to be seen as the people of the Philippines faced their crisis. The Chinese government committed just $100,000 to the Philippines relief effort after the typhoon struck.

President Xi has a long way to go to build the credibility of China as a modern state to be looked to by the world for leadership. Just the name of its recent meeting, the Third Plenum of the 18th Central Committee of the Communist Party, is a reminder that while much in the world has changed over the past quarter century--from the fall of the Berlin wall to the Arab spring--China remains a throwback the Cold War era. As much as Xi would like to show the world the face of a man whose time in Iowa left him an admirer of American freedoms, the pronouncements from his first plenum are a stark reminder of the deep corruption and cruelty that lie at the heart of the Chinese system, and of the ghosts of Tiananmen that still haunt the Chinese leadership.

But it is the response to Typhoon Haiyan that has demonstrated how far China has to go before it will be embraced as a global leader. Leadership is not just about words at meetings of world leaders, or reserves held bank vaults, but about conduct in the world. It is not about what you do to build up your own country, but what you do to uplift others. President Xi and his colleagues disappeared this week when their neighbors across the water were crying in pain, and their inaction spoke volumes. Because, at the end of the day, leadership is not about ideology or rhetoric, it is about showing up.

Secrecy and intelligence in a free society.

Twenty years ago, an article entitled Secrecy and Intelligence in a Free Society was written by the Center for the Study of Intelligence that explored the challenges of intelligence and secrecy within a free society. The summation of the CIA document could have been penned this week:

"Free society needs intelligence. It needs secrecy. But there has been a loss of proportion, a loss of confidence and trust, and a lack of understanding on all sides. These must be overcome because the free society needs to make wise use of the capabilities at its command — and I include covert capabilities in this. It is high time that a mending took place."

The article was part of a self-study within the CIA which came twenty years after the Church Commission review of intelligence oversight which was formed in the wake of Watergate-era abuses, and twenty years before our current crisis of intelligence. The The recurring need to review the conduct of intelligence activities speaks to the continuing tension surrounding the role of intelligence and secrecy within our government and society.

Yet the fundamental expectations of Americans are that the nation's intelligence apparatus will continue to be employed effectively to keep Americans safe, whatever scorn and derision may be cast upon those agencies from time to time for whatever abuses of power may occur. This was demonstrated dramatically with the criticism directed toward intelligence services for failing to disrupt the plans of the Tsarnaev brothers whose bombs in Boston were constructed from cookware that can be purchased at Amazon.com and explosive material readily obtainable from fireworks stores and gun shops in many states. 

It has been remarkable to me in recent days to encounter three vastly different reactions to the events and testimony surrounding the National Security Agency disclosures of the range of its electronic eavesdropping activities.

For his part, NSA Director James Clapper has seen little if anything to apologize for in the conduct of the NSA surveillance programs. He has not been insensitive to criticism, but rather confronted clearly the notion that gathering intelligence is the central charge of the NSA and serves an essential purpose: "Leadership intentions is kind of a basic tenet of what we collect and analyze."

The dilemma of intelligence and the perspective of the intelligence operative was dramatically presented in the movie Three Days of the Condor, which presents the dilemma of intelligence gathering impinging on liberty in a free society. At the end of the movie, Robert Redford's character has taken the stance of Edward Snowden, and delivered information on CIA intelligence gathering methods to the New York Times, convinced of the outrage that will ensue. Redford's CIA counterpart challenges his idealistic belief that Americans would readily sacrifice their comfort for their idealism and principles.

"Ask them [the American People] when they're running out [of oil]. When it's cold at home and the engines stop and people who aren't used to hunger ... go hungry! They won't want us to ask [for their permission] ... They'll want us to get it for them."

In contrast to James Clapper's sanguine stance, the NSA's tapping of Angela Merkel's phone sparked the demand by Senate Intelligence Committee Chairwoman Diane Feinstein that the NSA cease the "collection of intelligence on leaders of US allies – including France, Spain, Mexico and Germany." Yet, rhetoric aside, Feinstein's stance, particularly as Senate Intelligence Committee Chair, is untenable. For example, Mexico is certainly an ally, but it is also a country rife with the corruption of public officials. It would be irresponsible for our intelligence services not to assess the extent to which the President of Mexico is being influenced by--to say nothing of personally corrupted by--the leaders of the drug cartels.

It is unarguable, along the same vein, that Saudi Arabia--widely proclaimed to be one of our strongest allies--is responsible for the funding of radical Islamic groups, including many no doubt who are at war with us. Certainly Senator Feinstein is not suggesting that the US intelligence services--particularly the least invasive electronic intelligence programs of the NSA--cease the use of all means available to us to understand the lay of the land in the volatile and evolving Middle East. Or perhaps her stance is that it is OK to surveil the leaders of Arab or Muslim states with whom we are allied, but not European states. And what about Israel, who has famously spied on us? Does our president not want the best possible intelligence to divine which of Benjamin Netanyahu's words are--like Feinstein's--rhetoric to appease a domestic audience and which mark true lines in the sand?

In contrast to Senator Feinstein, whose public comments certainly cannot reflect her stance in the closed confines of the Senate Intelligence Committee, I was surprised this week by the comments of a friend at Google. He suggested that people within Google are just beginning to recover from the realization that the federal government has been using its resources to monitor private Internet communications.

My friend explained the shock on the part of the tech community by suggesting that it would have taken a massive amount of computing power to hack into the encrypted communications backbone, unless it had a backdoor. He readily accepted the notion that the NSA had the computing muscle to do it, and reluctantly acknowledged that as an infrastructure funded early on with military research money, it was not inconceivable that there were backdoors into the system. Backdoors, as one hacker scolded another in the movie WarGames thirty years ago, are not secret.

My friend commented that the disdain within the tech community for government was validated by the HealthCare.gov fiasco, and no doubt that disdain contributed to the shock of learning that the same government that could not launch an effective e-commerce website after three years of planning had nonetheless successfully hacked into areas of the Internet infrastructure presumed to be unassailable. For my friend and his colleagues at Google, it has been a rude awakening. Like the early stages of grief, it is not apparent that people in the tech world have get fathomed the implications of their new understanding of the world around them.

The NSA issue revolves around the nature of secrets, and the security infrastructure that undergirds a free society. The NSA is charged with giving the President of the United States the best possible intelligence, and given that charge it is unlikely to foreswear an effective means of gathering intelligence, absent a clear and compelling--to say nothing of urgent--rationale.

The NSA surveillance activities constitute violations of privacy, not the murder or suborning of foreign leaders, after all. If it meant that the NSA was able to advice President Obama that it believed that Angela Merkel would ultimately support keeping Greece in the Euro, that was worthwhile intelligence that contributed to global economic stability at a fragile time. If it meant that the NSA has been able to suggest that Vladimir Putin would support a middle ground on Syria, or to suggest how far Ayatollah Ali Khamenei is inclined to support Iranian President Hassan Rouhani, so much the better. Perhaps it is even useful if those adversaries are not sure how much we know.

At the end of the day, NSA Director James Clapper's testimony rang true. He appeared to be neither lying nor disingenuous. And for my friend at Google, this has been an awakening. Alone among the three, Senator Feinstein's remarks evinced dissembling and calculating disingenuousness. The film analogy for her, of course, is Claude Raines, in Casablanca. Senator Feinstein, Chair of the United States Senate Intelligence Committee was shocked, shocked to hear what the National Security Agency was doing on behalf of the American people.

The Senator cannot have it both ways. If it is true that she is shocked, and that she believes that the NSA should not be gathering the best intelligence it can about the President of Mexico, then she should resign her position, because it suggests that she is not serious about defending the interests of the nation she is sworn to serve. If, on the other hand, she is not really shocked, but understands that there is a delicate balance--as the CIA study above noted--in managing the role of intelligence services in a free society, then she owes us not her feigned outrage, but her leadership in helping Americans understand that balance.

Through his revelations, Edward Snowden is forcing us to recognize what our intelligence services do on our behalf. This is not a movie with clearly defined good and evil characters, it is the real world and the answers are not simple. Perhaps it is time that we confront it honestly rather than just recoil in horror or feigned outrage. It is our government: We, the people. It is time we owned it and learned how to have a real discussion about the very real issues and choices surrounding secrecy and intelligence in a free society.

The anger of the Al Sa'ud.

There is something oddly satisfying about seeing the Al Sa'ud monarchy of Saudi Arabia throwing an international hissy fit. This story began last week when the Saudi government announced that it was rejecting the seat on the United Nations Security Council. In rejecting the seat—which it was awarded after concerted lobbying by the Saudi’s themselves—the Kingdom of Saudi Arabia lambasted the United Nations, and the Security Council in particular, for its failure to act against the Syrian regime of Bashir al Assad, as well as its failure to address the Israeli-Palestinian issue.

The rejection of the United Nations for failing to match the Kingdom’s longstanding "support of moderation and in support of resolving disputes by peaceful means" and intimations of dissatisfaction with the non-democratic structure of the Security Council was imperious and utterly without irony. The Saudis, after all, are one of the most repressive and feudal ruling elites in the world, who have a long history of covert funding of extremist Islamist terrorist groups across the globe. The rejection that began as a slap at the United Nations evolved in the ensuing days into a barely concealed assault on the foreign policy of the Obama administration. Not since 9/11 have Saudis grabbed the world stage to vent their anger at America with the full throated passion we have seen this week.

Prince Bandar bin Sultan—for many years a running buddy of the Bushes and the newly crowned head of Saudi intelligence—has seen the full betrayal of everything that matters to the Saudis, as the current American administration has repeatedly acted against Saudi wishes. The Saudis have watched as the Obama administration betrayed long-time American ally Hosni Mubarak in Egypt, and then turned its back on General Sisi after his coup against the Muslim Brotherhood. They have watched as Barack Obama vacillated  in his support of Sunni fighters in Syria and then walked away from a military attack on the Assad regime. They are now watching as Barack Obama pursues the possibilities for rapprochement with Iran, in the wake of the election of Hassan Rouhani, an action that would mark a complete and utter betrayal of everything for which the half-century old Saudi-American alliance has stood.

Of course, there never was an alliance between the United States and Saudi Arabia, at least not in the deeper sense of a coalition grounded in the pursuit of common interests. Ours has been a transactional political relationship that produced something that each side needed. We needed a stable and predictable supply of oil and a recycling of petrodollars. They needed the protection of U.S. military power to secure the interests of the Al Sa'ud regime against all enemies, foreign and domestic.

That was the relationship. Other issues—such as U.S. support of Israel and Saudi support of ultra-orthodox Islam—became points of tension along the way, but were never allowed to undermine the central rationale for the relationship.

Since the first oil embargo in 1973, the essential Saudi-American relationship has been predicated on 'you get our oil, we get your military,' as Jimmy Carter created the Rapid Deployment Force—the precursor to CENTCOM—to secure the Saudi oil fields and the Kingdom. Since that time, it has become standard fare to watch American presidents paying obeisance to one Saudi king or another.

It is oil—a geological coincidence—that had bought them everything. But somehow, Prince Bandar seems to have spent too many evenings watching Lawrence of Arabia, which celebrates the emergence of the Saudi nation, and not enough watching Syriana, which portends a post-apocolyptic vision, a world of declining oil reserves where growing rising popular anger turns Islamist terrorism against the Saudi homeland. The past weeks have been a rude introduction to a future of declining influence, where it is a race against time before the Al Sa'ud family century runs its course.

The endgame on Syria took the worst possible turn for the Saudis. The New York Times headline said it all. U.S. and Russia Reach Deal to Destroy Syria’s Chemical Arms. Syria was not at the table, to say nothing of the Saudis. Instead, the old Cold War adversaries sat down and worked things out. It was like the clock had been turned back a hundred years, to the early 20th century, with US Secretary of State John Kerry and Russian Foreign Minister Sergey Lavrov playing the roles of the British and French diplomats Sykes and George-Picot, who in 1916 secretly mapped out what would become the boundaries of the modern Middle East after the fall of the Ottoman Empire.

Oddly enough, when Vladimir Putin seized the moment to rebuild Russia's relevance in the world as he helped Barack Obama extract himself from a foreign policy mess of his own making, few back in the Washington, DC really had much to say about it. Unlike every other issue, where the pundits and politicians quickly go to the mattresses, criticism of the President was largely muted, even if it mean ceding some respectability to the ceaselessly self-promoting Russian. The relative quiet surrounding the Syria denouement did not reflect a return to the internationalist notion of decades past that partisan politics "ends at the water's edge," but rather sheer exhaustion and lack of any better ideas.

But it was Putin who really put Bandar in his place. Bandar had been lobbying the Russians for months to cut Assad loose. Last month, Bandar made his final play  as he brandished both the carrot and the stick to induce Putin to turn on Russia's long-time ally. First, as reported in Al-Safir, Bandar offered an alliance between the Saudis and the Russians (not members of OPEC) with the prospect of controlling the world oil markets. Then he offered a barely veiled threat to the security of Russia's 2014 Sochi Olympics. Give me Assad's head on a platter, Bandar proposed, and “I can give you a guarantee to protect the Winter Olympics next year. The Chechen groups that threaten the security of the games are controlled by us.”

For Bandar to sit across from Putin—whom he should have revered as a spymaster of the old school—and believe he could intimidate him was a dramatic misreading of Saudi power. Putin rejected Bandar's entreaties out of hand, and as to the Saudi's threats, Putin—whose career has been defined as much as anything by Russia's Chechen wars—responded, “We know that you have supported the Chechen terrorist groups for a decade. And that support, which you have frankly talked about just now, is completely incompatible with the common objectives of fighting global terrorism."

With a population that is one-sixth Muslim, and a country whose southern borders abut Muslim nations, the Russians are acutely aware of the threat posed to their nation from Muslim extremism. Mistaking a transactional relationship for an alliance, Bandar demonstrated that the Saudis have no common interests with the Russians, but instead confessed to what all presumed to be the case: As the paymasters of Islamic terror networks, the Saudis are the source of the very problems that are of the greatest concern to the Russian national security establishment. Putin's response mirrored the Bush Doctrine of a decade ago: "Any nation that supports terrorism we regard to be as a hostile regime." 

Then, as if the world were piling on just when the Saudis were down, came this week's headline, "U.S. surges past Saudis to become world's top oil supplier." The PIRA Energy Group report pointed to the resulting security of global oil supplies for years to come, a factor that can only undermine Saudi power and leverage.

Even if the Arab Spring has not yet arrived in the Gulf, it is becoming apparent that the Saudi's world is changing. The Saudis and the Gulf monarchies are under increasing pressure, both from increasingly restive populations as well as the consequences of over-leveraging that has left many of those states unable to support their current spending levels at the current market price of oil.

This week, the Al Sa'ud monarchy has seen its world begin to unravel. World leaders are no longer bending to their will. They have seen their long-held grip over American foreign policy in the region weaken. They made their play against the Russians, and Putin did not blink. The Saudis—who are used to dealing from a position of strength and leverage—are now being confronted with their own weakness. And weakness is the trait that the Al Sa'ud despise most of all.   

The long war.

A week after Government reopened, the focus of attention has turned to the war for control over the direction of the Republican Party. Earlier this year, Sarah Palin voiced her grievances with the subordination of true Republican principles by establishment Republicans, and, flashing her inimitable disdain toward the GOP establishment, she suggested it might be time for the Tea Party to split off from the GOP.

For as long as I can remember, the Republican Party has been riven between conservatives and moderates. Growing up in New England, the iconic profile of political courage was not that of the young JFK serving as commander of PT-109, but rather Joseph Nye Welsh standing up to Joe McCarthy during the Army-McCarthy hearings in 1954.

Welsh, a partner at a white shoe Boston law firm, was serving as counsel to the Army when he berated McCarthy for persisting in attacking an associate at his firm. His words--"You've done enough. Have you no sense of decency, sir?"--publicly embarrassed McCarthy, and marked the end of his crusade to expose Communist sympathizers within the State Department and the Army itself. It was not a Democrat who took on McCarthy, but rather a high brow Boston Republican. It was not a cabal of Democrats in the Senate that led the ensuing campaign to censure McCarthy, but rather a small group of Republican Senators, led by Maine's Margaret Chase Smith and Vermont's Ralph Flanders, that brought him down.

Today's simmering civil war within the Republican Party reflects sectarian animosities with deep roots. The image of Joe McCarthy, a Catholic farm boy from the upper mid-west, being humiliated by the Episcopalian, Phi Beta Kappa, Harvard lawyer is an enduring one that reflects the historic animosities between Main Street and Wall Street Republicanism. For many on the right in the GOP today, Welsh is no hero. It is McCarthy who is owed an apology, whose reputation in history has been been treated indecently. Evidence uncovered in the Kremlin archives, they argue, has proven the bulk of McCarthy's claims to be accurate. The State Department was in fact riddled with Soviet agents of influence. At best, in their view, McCarthy's tactics were ill-conceived. At worst, he was an American hero pilloried by the liberal left, but ultimately betrayed by moderates in his own party.

The demise of McCarthy at the hands of Republican moderates was just one moment in a recurring history of internecine warfare. Ten years after McCarthy's humiliation, the conservative wing of the party would find vindication with the victory of Arizona Senator Barry Goldwater over New York Governor Nelson Rockefeller. Notably, it was in response to Rockefeller's speech at the Republican National Convention accusing Goldwater of being an extremist--rather than against some Democrat attacks--that Goldwater uttered his famous words, "I would remind you that extremism in the defense of liberty is no vice. And let me remind you also that moderation in the pursuit of justice is no virtue."

Goldwater's words would become the defining defense of conservative Republicanism, just as the ensuing decades of success by conservatives in dominating the Republican Party politics and moving the GOP to the right ultimately began with the Goldwater campaign.

Growing up in famously Democratic Massachusetts, voters as often as not turned to Republicans for steady, mature leadership. John Volpe, Frank Sargent and Bill Weld--and later Mitt Romney--were moderate Republicans who became successful Governors of that deep blue state. Liberal Democratic Massachusetts--the world of academia and the professional classes--was a side show in Boston. Once you got past the liberal bastions of Cambridge, Newton and Brookline, the Democratic Party in Massachusetts was the captive domain of Billy Bulger--the powerful brother of recently convicted mobster Whitey Bulger--who as State Senate President dominated Massachusetts' well-honed patronage machine. It was the party of Billy Bulger and Joe Kennedy, the party of ethnic passions and Kennedy money. It was against that background that the Republican Party was rewarded for being the party of prudence and reason, and entrusted with the responsibilities of governing. "If you were not a Democrat in your 20's, you had no heart. If you were not a Republican in your 40's, you had no brain," the saying went. Republicans were supposed to be the grown-ups.

Sarah Palin--and her Tea Party compatriots--inherited a different Republican Party, one that was profoundly changed by Nixon's Southern Strategy that leveraged the passions of the Goldwater faction with the new realities on the ground that grew out of the Voting Rights Act of 1965. The modern GOP has been more overtly divided between the northeastern elites that date back to the founding of the GOP, and its increasingly southern and western base. No events up until the formation of the Tea Party highlighted the regional and class resentments within the GOP more than Patrick Buchanan's presidential campaigns of "peasants with pitchforks" challenging the incumbent George H.W. Bush in 1992 and Bob Dole four years later. As Buchanan said at the time, "If the country wants to go in a liberal direction... it doesn't bother me as long as I've made the best case I can. What I can't stand are the back-room deals. They're all in on it, the insider game, the establishment game--this is what we're running against."

Only time will tell if the events of the past week rise to the historic significance of the McCarthy-Welsh standoff or the 1964 convention. But the capitulation of Ted Cruz and House Republicans in the recent debt ceiling battle is already being viewed in the eyes of Cruz and his supporters less as a defeat at the hands of President Obama and Senate Democrats than a product of abject betrayal from within the Republican ranks.

And this is an honest portrayal. Ted Cruz and his followers in the House indeed had victory within their grasp--many of them salivated at the prospect of going over the cliff--before they prostrated themselves before Mitch McConnell and other Senate Republicans, who, in the name of bipartisanship, yielded to the unholy alliance of Wall Street elites and Republican elders. The humiliation was complete, as summed up in the New York Times headline: At 11th Hour, G.O.P. Blinks in Standoff.

The battle within Republican ranks will only intensify in the weeks and months ahead. While the conventional wisdom is that Ted Cruz is leading the GOP down a path toward electoral suicide, conservative loyalists within the party reject that formulation. They argue instead that theirs is the only strategy that offers the GOP a path to success. Bipartisanship--the mantra of party leaders who have been vocal in berating Cruz and his followers--is itself what must be resisted. Bipartisanship--as FreedomWorks co-founder and former Republican Majority Leader Dick Armey famously said--is another name for date rape.

Conservative Republicans--harkening back to the Goldwater campaign--make the simple argument that the most committed wins. Goldwater might have lost--and lost badly--but that loss laid the groundwork for the decades of success that followed. Grover Norquist, founder of Americans for Tax Reform, solidified the modern Republican Party electoral strategy around a coalition of single issue, litmus test voting groups--non-negotiable pro-gun, anti-tax, pro-life, home-schoolers, property tax rights and other principles--that produced conservative success for decades.

For moderate Republicans, the absolutism inherent in Norquist's formulation is anathema to the notion of politics as the art of the possible, the politics that have enabled Republicans to win and govern successfully in blue states from Massachusetts to California. But conservatives push back and argue instead that GOP success at the national level over the four decades since Lyndon Johnson's second term in office was built around the strength of those convictions. Other than the loss to Jimmy Carter in the wake of the Watergate scandal, they argue, the Republican Party did not lose a straight up election to the Democrats for forty years from 1968 to 2008. Conservatives attribute Bill Clinton's victory in 1992 to Ross Perot taking 19% of the vote--largely from the Republican column--as Clinton beat Bush 43-38%.

While Republican strategists looking at demographic changes argue that it is imperative to broaden the GOP coalition from its aging, white base, conservatives are loath to abandon the absolutism of the Norquist strategy that has served the GOP well. People of faith within the GOP coalition point to New Jersey Governor Chris Christie's overwhelming popularity as a pro-life Republican governor of a traditionally blue state as evidence that there is no need to give ground on their core values. Similarly, second amendment voters point to the rapid fading of the gun issue nationally, even in the wake of repeated tragic events. They argue not only that ceding the gun issue is not critical to electoral success at that national level, but that to do so would cost the GOP the proven passions of the pro-gun voters.

Establishment Republicans and traditional large contributors who are urging the GOP to turn back from the trail that Ted Cruz is blazing, will be hard pressed to counter the passion and energy that the debt ceiling battle has unleashed. The argument that moderation is important to winning back public support that has turned against the GOP will once again be countered by those on the right who will argue that on election day, it is passion and core principles that brings out voters. The animosities voiced by Ted Cruz and his followers toward establishment Republicans mirror similar grievances dating back decades. They believe that they have been wronged by the establishment urge to bipartisanship and they will be loath to let it happen again.

Faced with the logic of the world according to Ted Cruz, a friend who is a national GOP strategist suggested that it was the Democrats who would ultimately benefit in elections to come from the rise of Ted Cruz. "My humble opinion is that they over estimate the Tea Party / social conservative base. Watch the Texas Governor's race. The Dem's will win... So called moderates will vote the Dem's in... Cruz strategy hurts Republicans in the long term. Hope you are well."