A game theoretic approach to solving Afghanistan

All the recent Afghanistan-centric talk has gotten me thinking: why haven't we won this war yet?  Seriously - the fact that its been nearly a decade and we still haven't managed to install a credible, self supporting government is almost as embarrassing a loss for America as Team USA's underwhelming performance against Ghana in their first and only game in the knockout round.  Like all tragedies, this one in the middle east begs the question: why?  What can we do to fix it?  

The current insurgency need only do the same thing every other insurgency facing a first world enemy fighting in the traditional post modern manner - hold out, and try to debase public opinion of the current government.  As long as the Taliban can remain a bigger force in the minds of the Afghani people when compared to any other alternative - like the puppet government the US is propping up - they will have won.  To put it in perspective, imagine that war is a business - insurgencies are like startups, while the US Military is a like much much bigger, fatter, slower, more bloated company - I'm thinking something like Ford or BP here.  Moreover, the scrappy guys aren't just competing for a chance at some IPO payday money shot - they're literally fighting for their continued political survival, and this amplifies the incentives to stay alive by orders of magnitudes.  Basically, our enemies want the W more than we do right now, and they're going to be working damn hard and doing some very innovative things to get it. 

Now, the crux of the problem seems to be the lack of credibility of the puppet government the US is installing.  Its not even about a complete inability of Karzai to gain credibility - its more about the greatly lopsided difficulties that Karzai experiences as compared to the Taliban in terms of gaining credibility.  From a dynamic systems perspective, it's as though the system currently has only one fixed point or outcome, namely the US withdrawing and essentially conceding defeat to the Taliban.  From a human perspective, this only makes sense: as previously argued, the Taliban's incentive to win is their very survival, while for the US "winning" means spending disproportionate lives, money, and time on a hot, sandy, opium and terrorist filled quagmire with little hope of ever recouping the investment in the form of political capital with the rest of the Middle East.  Especially given the Summer Recessioganza, its clear the US wants to start cutting costs, so how soon until we cut the obvious trillion dollar cost that's really (supposedly) sapping our economy?  Any Afghani citizen can see the complete lack of American salience here when compared with the Taliban, and as any game theorist will tell you, salience is a dominant variable when determining the outcome of such political negotiations.  Given the massive inequality in salience for the two competing sides, it's clear who won't win this game in Afghanistan: the US. 

So, counter insurgence is borked just from a basic incentive perspective - it stands absolutely no hope of succeeding.  But now, before we get all doom and gloom here by giving up on Afghanistan completely (and thus dooming to the country and its people to an even more fucked up future than we found it), let's think for a second.  How can we change the incentive structures here so that a pro-American Afghani government gains sustainable authority over the country?  Essentially, we're trying to engineer a plan that will produce an incentive scheme that ensures our desired outcome is the only fixed point; or, if that's not possible, ensures that it's at least the most likely fixed point.  Fortunately, we're playing the role of the US government, which allows us to simplify a lot of the complicated engineering maths - essentially, we the US can do whatever the fuck we want in Afghanistan except force the people to support us.  This gives us quite a bit of leeway in our politictioneering, aka the art of engineering political incentive structures to produce desired social and political effects. 

As a slight interjection, I'd like to point out that we Americans have a wonderful history of incredible politictioneering, namely the US Constitution.  I find it utterly amazing how one single document managed to create, from nearly nothing, a set of political rules and incentive structures (aka a government) that would be able to grow seamlessly along with its nation all the way from backwater third world country to world geo-political and economic leader over the course of nearly three centuries.  Whereas most young democracies fuck up their constitutions or their implementations and leave themselves susceptible to overthrow by various petty dictators within a few decades, America actually managed to produce a system of checks and balances that kept the country alive and dictator free for over 200 years.  Go US. 

So what to do in Afghanistan?  My answer is simple: let the Afghani people fight the Taliban itself.  Don't coddle the Afghani police or military forces, either - offer them good wages, train them with the best the US Military can provide, equip them with the most modern counter-insurgency hardware like UAVs.  Do similar things for the political side of the sphere - make the best political consultants available to the Afghani parties so they can learn how to operate in the context of a modern democracy, but let the Afghanis elect the consultants: all the US has to do is foot the bill.  The US can offer the equipment, training, consulting as part of a lend-lease program - perhaps one where the amount lent is (at first) proportional to the reduction in insurgent activity and other measurements of desirable progress in Afghanistan.  By holding the purse strings, the US can maintain its dominant negotiating position and continue to call the shots and determine the overarching goals; however, by allowing the Afghani people to decide how the funds, equipment, and training get allocated to achieve those goals, all sorts of good things happen psychologically that would incentivize realistic, achievement-oriented parties to emerge from the political chaos that is Afghanistan.  But from a purely incentive based perspective, by offering the power to control the distribution of funds and other war and country building materiel to the Afghani elite in exchange for goal achievement, we incentivize them to start swinging their sizeable political clout around the country in our favor - a vital component of any successful rebuilding of Afghanistan. 

However, without even checking, I have a feeling that what I described above sounds an awful lot like McChrystal's counter insurgency surge whatever - help build the country and victory will follow, or some bullshit.  I want to point out though that there's a key difference in my plan that's necessary to make it work: its presentation and delivery.  Essentially, the Afghani people can't see the US funding as a control mechanism used to achieve US ends.  Instead, we must offer these as a gift to the Afghani people.  It is our forgiveness gift, or perhaps more appropriately our fine, for invading, royally fucking up their country and then having the gall to insult them with a weak puppet government.  However we spin it, we must get the Afghani people to see the incentive-based reality of it: that ultimately its cheaper for us to trust the Afghani people to know best how to rebuild their own country, and moreover we're so sure of it we're willing to provide them the resources to do it.

McChrystal Clear

I have taken a long break from the Snake Pit due to the World Cup and its consuming power.  However, I also think I was taking a break from the political world because I am, by now, simply bored of the only thing that is on the news: the oil spill armageddon.  I will post something about that, as I have many comments, but God, no, I need to think about something else that isn't BP, nor oil, nor the gulf, nor the unfortunate state of Louisiana.  Today, instead, I will discuss something far more entertaining: White House gossip. 

warning: I will not post about the World Cup, but you will have to bear with me because sadly I am seeing everything in football terms these days and analogies or parallels may slip into my writing.

Last week, after suffering an embarrassing loss to what seemed as an inferior Mexican team, France seemed to plunge itself into a little football soap opera when coach Domenech sent top player Anelka back home after the latter had a moment of insubordination.  Much like Anelka, General McChrystal was caught in a moment of grandeur (as perhaps being in charge of Afghanistan might lead one to do?) and decided he would be superior to his superiors.  Ah, but coach Obama is no angry Frenchman, and while I believe he should be firing the General right about now, I agree with his current response of "let's hear him out".  At this moment, CNN is confirming that the General is traveling to the White House tomorrow with his resignation in hand.  That is perhaps his best move thus far!  In the case of the French football team, the quarrel between team leader and coach went beyond themselves, it was an example of serious problems in the French team.  Sadly, I can't say this isn't the case for team Obama's war in Afghanistan.  Let's face it, team Obama is not playing a good game.

A year ago, the president performed two contradictory tasks: announcing a withdrawal date for Afghanistan and hiring McChrystal.  Back in college, two years ago, in a class called History of Terrorism my professor gave us his little speech about how he was an advisor to the Obama campaign.  This announcement mattered because he wanted to make a point about Afghanistan.  In class, he taught us the differences between the new school of counter insurgency and the then positional warfare strategy that Bush was employing. The counter insurgency method was one that involved not just bombing enemies, but also reconstructing the country.  The theory is that insurgencies live as they have popular support, so according to this method: to kill the insurgency, you have to kill the popular support.  In other words, you win by winning the hearts and minds of the people by providing good governance, goods, services, and most of all: security.  This meant that the military would have to take tasks that they wouldn't ordinarily do: building a government, building schools, or just pretty much rebuilding the country.  This is not something that can be achieved in six months, one year, or two.  This is quite a long term effort.  So when Obama announced that he would be withdrawing troops in 2011, I was perplexed!  This is not in congruence with the assumed new strategy.  So, one would think that Obama was resuming the war in Afghanistan, but then, he hires McChrystal, who according to the damming Rolling Stone article is himself a convert of counter insurgence.  What? this makes no sense! What makes perfect sense is why McChrystal would talk some smack about Joe Biden, because Biden is part of the liberal faction that wants us out of Afghanistan ASAP.

What seems obvious is that the objectives and goals of the Obama team in Afghanistan are not clear.  This is pretty bad.  I suspect part of what is causing the friction between the administration and McChrystal is precisely this perceived indecision on what direction Afghanistan should go.  Such indecision does not rest only with Obama, this is a problem of Democrats - one that started at they transitioned to power.  The question of what to do with Afghanistan divided the party.  The more moderate side wanted to stay committed to try this new counter insurgency plan, while the more liberal side wanted to get out and turn isolationist (the usual Democratic doctrine).  What I don't like about the administration is that it did not make a choice.  Instead, they have tried to maneuver themselves somewhere in the middle, setting a date of withdrawal to pacify one side and committing to the counter insurgency to pacify another.

Unfortunately, this is not the environment for the administration to be placing itself in the middle because this is a war and at the end of the day they will get no results.  Having people like McChrystal in charge is only going to delay the withdrawal that the liberal fringe wants and withdrawing sooner is only going to kill the counter insurgency efforts that the moderate side wants.  Meanwhile, nothing changes in Afghanistan.  Either you leave the country or you stay and try to fix it, but playing both games is only wasting American lives and squandering taxpayer dollars.

After the French coach sent Anelka home, the team revolted and boycotted practice.  The coach punished them by removing their team captain from today's game against South Africa - a game they went on to loose embarrassingly.  The standoff between player and coach opened a can of worms and France got themselves eliminated, after they had finished second in the last World Cup four years ago.  One can hope that Obama's team does not fall apart too, but a lot will depend on the solidity of their game plan.  Can Obama appoint someone that he can trust? can they get more clarity in their policy?

more importantly and plainly: will they get their act together?

BP Spill: an update

The only thing more fun for me than making predictions is going back and actually checking how I did with them.  Today, I want to go back to a post I wrote a week ago about BP's potential liability from all this hullabaloo and look at how the predictions I made back then have stood up to the developments of the past 7 days.

In my post, I assumed that 60,000* barrels of oil a day were spilling when the official figures were less than a third of that - since then, the current government numbers have twice been revised upwards to their current levels of 45-60,000 barrels a day, exactly my estimate a week ago.

In my post, I predicted a final net liability that was most likely to be somewhere in the range of $10-25 billion.  Since then, after meeting personally with Obama, BP has agreed to put $20 billion into escrow to fund the recovery.  Although this isn't necessarily a final number in either direction, it does indicate that the two biggest players in this negotiation - BP and the U.S. Government - are acting as though my prediction is the most likely reality. 

Further, by virtue of the fact that its an escrow account, it is in fact quite likely that the $20B figure is an upper bound to the likely costs of the relief effort.  Consider it this way - if the government expected the recovery to take at least $20B, they would have likely demanded something more like $30-40B in escrow just to make sure the funds are there.  The amount put in escrow is most likely a standard deviation or two above the expected cost of the relief effort, just from the perspective of prudent budgeting.  However, note that this is also consistent with my predictions that the recovery would likely cost between $10-25 billion - I used a log normal distribution which has a mean of about $16 billion here, and a $20 billion escrow account seems to be a healthy amount above that number such that I'd say its probably also BP and the Government's expected amount.  Going forward, although I'll certainly keep my $66B worst-worst case estimate in mind, I'm going to start assuming a $16B price tag for BP as the most likely course of events.

* In my post I assumed 1.8 million gallons, which is 60,000 barrels in barrel-speak

Vast majority of Goldman clients staying with firm

As a followup to my previous post analyzing the fraud allegations against Goldman Sachs, I want to share a Times article that highlights a most curious phenomena: the vast majority of Goldman's clients are staying put.  Considering that these are precisely the people who are most at risk of being exploited and defrauded by the predatory lending practices of GS, its interesting that they aren't leaving.  Its almost as though the people who are most familiar with the financial services sector understand that Goldman really didn't do anything wrong, let alone criminal, and are in fact willing to put their money where their mouths are (quite literally!) and remain with the firm.  As General Electric chief executive Jeffrey Immelt said about Goldman, "We trust them... People need to tone down the rhetoric around financial services and stop the populism and be adults.”  I couldn't have said it better myself.

Goldman Sucks 3: Wall Street fraud or European stupidity?

To take a break from BP, I want to follow up on my response to Anonymous's critique of Goldmach Sachs.  Specifically, I realize that in my previous post I never addressed the main charge that has been leveled against the company, both by Anonymous and the SEC - that of fraud.  Specifically the SEC is charging Goldman with fraud in structuring and marketing CDOs.

To quote the SEC's press release on April 16th:

"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement. "Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.

Continuing:

According to the SEC's complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio.

Wow, well when you put it like that, I can totally see what people like Anonymous are getting all up in a huff about!  That sounds pretty damn shitty!  But like all things, there are two sides to every coin - what possible defense could Goldman have against such charges?  Well, so far they haven't said much (must be playing their cards close to their chest until a possible trial or settlement), but you can get an idea of what they'll likely say by looking at Goldman's Well's Notice response.  Mark J. Astarita over at the SECLaw.com blog has a great summary of what that shit is if you're curious - as he says, its not their response to the complaint, but it does offer insight into their defense.  To quote the submission:

There was nothing unusual or remarkable about the transaction or the portfolio of assets it referenced. Like countless similar transactions during that period, the synthetic portfolio consisted of dozens of Baa2-rated subprime residential mortgage-backed securities (“RMBS”) issued in 2006 and early 2007 that were identified in the offering materials (the “Reference Portfolio”). As in other synthetic CDO transactions, by definition someone had to assume the opposite side of the portfolio risk, and the offering documents made clear that Goldman Sachs, which took on that risk in the first instance, might transfer some or all of it through a hedging and trading strategies using derivatives. Like other transactions of this type, all participants were highly sophisticated institutions that were knowledgeable about subprime securitization products and had both the resources and the expertise to perform due diligence, demand any information that was important to them, analyze the portfolio, form their own market views and negotiate forcefully at arm's length.

Further:

All participants in the transaction understood that someone had to take the other side of the portfolio risk, and the offering documents clearly stated that Goldman Sachs might lay off some or all of the short exposure to the portfolio that it had taken on. A disclosure that the relatively unknown Paulson was the entity to which Goldman Sachs transferred that risk would have been immaterial to investors in April 2007.

Basically, Goldman is supporting what I've said all along - that the Abacus investors had a full idea about the underlying portfolio they were investing, and that they further understood that some other party was taking the opposite side of the portfolio; "betting against"  them, so to speak.  Moreover, Goldman alleges that all involved parties had access to all the relevant information - Goldman and Paulson did not in fact stack the deck without letting investors see what was inside as those like Anonymous have accused; instead, every party had access to the specific securities that made up the CDO.  Moreover, IKB (one of European banks claiming fraud) actually claims in their investment prospectuses that the CDO pools they invest in are "are examined with a drill down to underlying assets and stress testing of the underlying asset pools" - see page 27 if you don't believe me!  From the looks of it, if IKB and ABN Amro are claiming now that they weren't informed off all the risks, then they must have been lying back in 2007 when they spent 70 pages touting their expertise in CDOs - given how these investments tanked within a year after being sold, its highly likely that they were lying about their expertise.  But if they were able to fool everyone including themselves about their expertise, how can we possibly hold Goldman accountable?

Of course, the issue is less about IKB and ABN Amro's technical abilities or investing knowledge, and more about whether or not Goldman misrepresented who was choosing the securities in the Abacus portfolio.  The central aspect of the SEC's charges of fraud hinges around the accusation that Goldman Sachs misleadingly marketed the portfolio to investors as having been selected by ACA Management, a prestigious investment firm that was brought in for their name brand experience with this type of investment.  Specifically, the investment materials Goldman released seemed to indicate that only ACA Management had picked the portfolio, with no mention of Paulson - this is supposedly a key difference, as ACA was entering into a long position on the deal (they'd lose money if it failed) whereas Paulson was shorting it and stood to make a fortune if it failed.

Now, the way that the European banks, the SEC, and the media tell it, Goldman let Paulson pick the entire portfolio and then pretended like ASA had picked the stocks - clearly this would be an egregious act of fraud if there ever were one.  However, I simply refuse to believe that Goldman Sachs would do such a thing - its not that I believe them to all be good people who would never do such a thing; far from it, I actually believe they're a bunch of shitty, selfish bankers who act only in their self interest with flagrant disregard for anyone perceived as competition or "prey".  However, its precisely this dismal view of Goldman that makes me question whether they would have committed such blatant fraud - after all, they're already an insanely profitable institution, and doing something so obviously illegal just to make a couple million dollars does not seem like the type of risk proposition Goldman would go for.  So the question remains, how the hell did Goldman claim with a straight face that ACA picked the portfolio itself?

Finding out exactly how the CDO portfolio for the Abacus deals was constructed wasn't easy.  However, this extremely well written essay about why the SEC has a strong case against Goldman does actually go into a bit of detail about what went down, summarizing and explaining what Gregory Palm, Goldman's chief counsel, said during their Q1 earnings conference call when asked about it.  Apparently, the portfolio was selected in what appears to be a series of back and forth rounds between Paulson and ACA, where each round one party suggested a set of securities and the other would respond with the subset they found acceptable; this continued until all 90 securities comprising the deal in question were selected.  Now, the SEC complaint includes the allegation that Paulson reserved the right to "delete safer securities" from the pool, though given the game-like nature of this exchange, I wouldn't be surprised if both parties actually had such veto power.

While its technically true in the English language that "Paulson picked the portfolio" in the sense that they selected or approved every security in it, it would thus also be true that ACA management picked the portfolio, too.  And honestly, this makes sense; moreover, it puts Gregory Palm's cryptic comments about longs and shorts in much better perspective:

In this market there has to be a long and a short. That is perfectly clear. Other point I would really emphasize is in order to have a transaction in this market you have to have some reference portfolio of securities which is satisfactory to both the longs who are looking at the portfolio; they are not really looking at really anything else and the short who are looking at the same portfolio and deciding that. As you know, whether the shorts are us or anyone else.

Keep in mind that this is a conference call transcript, hence the slightly confusing nature of this quote.  But basically from what I can tell, Palm is referring to the standard industry practice of building a reference portfolio of securities (e.g. the Abacus deal) that is acceptable to both the longs and the shorts who will be entering into the deal.  Because of this fact, I can hardly see how Paulson's involvement in the selection process would be considered fraudulent.

Ah, but its not about IKB or ABN Amro's technical (in)ability to assess credit risk (which, may I remind you, is a banks entire business).  Nor is about Paulson being involved in the selection process!  Nor is it the fact that ACA Management picked the portfolio - which they did.  No, like all good legal battles, this one comes down to semantics: did Goldman Sachs mislead investors about who picked the portfolio?  After all, this would be a bit like me baking a cake for you with my good friend, giving it to you, and then telling you that I had made you a cake - its certainly not a false statement, but it certainly is more likely to make you think that I baked the cake by myself.  After all, if I tell you I made you a cake, you aren't going to immediately ask me who I baked it with.

But did Goldman bake a cake and then grossly misrepresent its authorship?  After all, if I go to Build-A-Bear, pick a model and outfit and then let their employees actually stuff, dress, and box my bear, I still reserve the right to give it to you and say I made it; it would be silly to the point of obtrusiveness in to tell you that Build-A-Bear built you a bear according to my directions.  To bring it back to cakes, I can say I baked you one without having to grow the strawberries and mill the flour myself .  So where along this spectrum of implied linguistic intuitions about authorship does Goldman's case fall?  Well, the distinction between what's disingenuous and what isn't seems to rely in all of these situations on the other person's reasonable expectations.  After all, absolutely no one makes their own flour this day and age, so "baking a cake" won't imply having spent hard time at a stone mill, at least not to a reasonable person.  Similarly, many people are more than capable of baking a cake by themselves, so without offering any extra information to resolve the ambiguity, "I baked you a cake" implies a solitary experience.

So the question seems to be, what were the reasonable expectations for the involved parties back in 2007 when the deals were made?  This is a very vague question with even vaguer answers, and moreover considering that we're asking about a point in time over three years ago, its doubtful we'll be getting any black and white answers here.  Still, I think its worthwhile to think about.  Since our goal is determining whether Goldman's statement that "ACA picked the portfolio" was misleading, we should ask what the reasonable default assumptions for portfolio picking were?

On one hand as already described, for these types of deals to even go through, the portfolio had to be acceptable to both the longs and the shorts who were investing.  Moreover, the existence of a short position is a necessary, so it would seem that reasonable assumptions for involved parties would include knowing that there was a person shorting the deal to whom the portfolio was acceptable.  Basically, going into the deal, IKB and ABN Amro had to know that someone was betting against them.  But when Goldman omitted to mention Paulson's involvement in the portfolio selection process, was this the type of thing that IKB and ABN Amro could have reasonably understood was going on?  Goldman's argument that they could have asked unfortunately holds no water here?  Remember, when I tell you I made you a cake you shouldn't have to ask me who helped - nor should you accuse me of fraud if I bought the flour instead of making it myself. 

Now, the interesting fact of the matter is that when it came to building CDOs, Goldman wasn't alone in how they built them - lots of banks were structuring CDOs in the exact same way.  Apparently letting the counter-signor help pick the portfolio was fairly common in the industry, an idea first pioneered back in 2005 by a hedge fund called Magnetar Capital.  Apparently they were named after a type of neutron star that crushes anything nearby - how appropriate!  Considering that such deal structuring had been happening for over two years by the time Abacus were sold, and moreover considering that IKB did things exactly the same way as Goldman for the CDOs they sold (and here's even more zany shit they did!), at this point I think its fairly safe to say that Goldman's statements were far from fraudulent - both IKB and ABN Amro clearly had a very good idea of exactly what type of deal they were getting into, along with exactly how such deals were conventionally done; if they didn't, they were the ones responsible for egregious professional misconduct.  And finally, even if IKB didn't have access to every detail of how the portfolio was created (what time did you start it?  what were drinking?  was it sunny outside?), they did have raw access to the final portfolio itself, so if it had truly been created in a manner that stacked the decks so decisively against them, their stress tests, "security level drill downs" and other advertised investment acumen should have caught it, correct?  Oh, but that would require assuming that IKB was competent - a fact that apparently Goldman should have known not to assume back in 2007.

I just want to point out that in every story I read about Goldman supposedly defrauding an investor, the common theme I see is that in every case, some European bank bought an obviously horrible financial product without even pretending to research its viability.  They had likely been doing such things for awhile, and only had it catch up with them when the market finally crashed.  Said bank loses billions and then claims they've been the victims of fraud - after all, admitting that you're simply unable to properly assess a basic credit deal would be tantamount to corporate suicide for these banks, and although they apparently aren't able to do basic bank work, they're too big to fail so no one will let them admit it.  Instead, the Eurozone melts down and Goldman - being one of the only banks that actually still has money left - becomes the only viable target for litigation.  Meanwhile, I can't help but wonder - why is an American firm left with the blame for what appears to be an obvious European failure?  I find it no coincidence after all that Europe was apparently filled to the brim with banks that eagerly jumped on deals their peers across the pond had determined were complete shit more than 2 years prior.  Even if Goldman Sachs was potentially misleading, the biggest cause of IKB, ABN Amro and every other bank that is bitching's massive losses wasn't fraud, but rather their own simple stupidity.

Estimating BP's Total Possible Liability - $66 billion dollars?!?

I've been curious about just how much BP will have to end up paying for the Deepwater Horizon Oil Spill.  Let's come up with a ball park guess: worst case estimates by a Purdue engineering team put the spill at 1.8 million gallons of oil per day.  At 50 days, that's 90 million gallons of oil spilled.  For comparison, according to the Wikipedia article, the Exxon Valdez 10.8 million gallons and they ended up paying $3,000 million total in cleanup and settlement of various fines and charges.  At a strict cost-per-gallon rate, that's $3,600 per gallon.  Factoring in a total inflation rate of 70% since 1990, that would mean BP could be on the hook for upward of $43 billion.  Note that I really didn't do anything fancy here beyond some back of the envelope calculations, and note just how close I am to Credit Suisse's estimate of $37 billion on June 2nd.  Perhaps they used the same methods I did?  In fact, when you take into account the fact that I did my computations 8 days later, our numbers are almost eerily similar.  Maybe being a high paid analyst isn't as hard as they make it seem?

However, I should point out that my estimates are fairly conservative, and further only take into account oil spilled up until now.  However, my estimates are also fairly dismal in the sense that the cost per gallon most likely does not scale linearly - I hate to say it, but there are almost large fixed costs in an oil spill, and certain economies of scale become possible.  Further, Exxon had a drunk driving their tanker; right now as far as we know, Hyundai (the people who made the oil rig that exploded after less than a decade in service) are actually the ones responsible.  Finally, nothing says that the spill rates aren't actually lower - CNN was reporting tonight that the Government's current best estimates are 10-19 thousand barrels per day, or roughly 0.6 million gallons.  As you can see, using that non-worst-case estimate cuts our estimate by nearly a third.  Of course, the spill may very well go on for another 2 months - say if the first relief oil well fails and we have to wait for the second - which would double my estimates.  As with all back of the envelope calculations, this one is a rough stab at orders of magnitude; unknown unknown random factors are just as likely to cut it in half as they are to double it.  Still, given my hope that Credit Suisse arrived at a number through more rigorous means (otherwise what are they getting paid for, anyway?) the fact that my alternative guesstimate confirms theirs is reassuring - chances are after all the unknown stochastic elements play out, this is probably an order of magnitude upper bound for the amount that BP will ultimately have to pay.

Another guesstimate at an upper bound would go like this: so far BP at day 50 has had to pay $1,250 million, and assuming that it takes another 2 months or 60 to contain the spill and that costs scale linearly with time, we'd be looking at $2,750 million spent to contain the spill.  Meanwhile, to get an estimate of the cleanup costs, this 1997 paper Estimating Cleanup Costs For Oil Spills says that the cost per tonne spilled in the U.S. is $73,156. Using a conversion of 7.14 barrels of oil per metric ton and 42 gallons in a barrel gives us a cost of $244 in cleanup costs per gallon spilled.  At 100 days and 1.8 million gallons per day, that's $44 billion dollars in estimated cleanup costs.  Holy frack!  Yet again, that's nearly the same amount I estimated earlier.  Of course, keep in mind that this number doesn't include civil and criminal liability costs like the previous estimate did.  In the Exxon Valdez case, Exxon had to pay roughly half of their cleanup costs to settle the issue in court, so using that rough metric would say that BP's legal liability could be another $22 billion, for a grand total cost to BP of $66 billion.  Sounds rather ominous, doesn't it?

We've tried going higher - what's a rough lower bound?  I remember reading somewhere that BP put its estimates of the total cost at $4 billion - chances are fairly good this is the lowest "reasonable" estimate we're going to find.  Meanwhile, most analysts seem to be guessing somewhere between $10-25 billion, which seems like a good middle of the road worst-case scenario cost - its satisfyingly right in the middle of our lower and upper bounds (at least logarithmically, which is how you should compare orders of magnitude).  Still, notice that I said "worst-case scenario" - no where in here have I taken the numbers into account in BP's favor, and in fact I have been quite conservative against them.  Its my sincerest hope that the reality will actually favor BP in this situation, because anything that lowers their costs here would be coming directly from a lessened environmental impact of the spill itself.

So there we have it - a worst case lower bound of about $4 billion, an upper bound of $44-66 billion, and a most likely worst case scenario cost of about $10-25 billion which we get by logarithmically scaling between the two.  Maybe I'll whip out some log normal distribution to try to justify this further, but for now my intuition satisfies me.

Steven Chu is not considering a bomb

I was reading the Wikipedia article about the Deepwater Horizon Oil Spill, specifically the section about the efforts to stem the flow of oil.  Under the section that explains the possible use of explosive devices, I was rather surprised to find out from the article that "Federal officials also confirmed neither Energy Secretary Steven Chu nor anyone else ever considered using a nuclear device."  Wait, what?  I hadn't heard or read anything about the use of nukes in this situation, so reading this quote was a bit like having someone confirm to me that doctors had "never considered the use of a shotgun in treating my condition" - although at face value its good to know, its not exactly the most reassuring.  But sure enough, I checked out the source to find a Times piece: Nuclear Option on Oil Spill?  No way, U.S says - apparently the Feds really did feel the need to confirm the fact that they hadn't ever considered the nuclear option here... Good to know, I guess.

Still, I can't help but feel that the picture of Energy Secretary Steven Chu with the caption "Energy Secretary Steven chu is not considering a bomb" is somehow an internet meme waiting to happen.

Immigrants as a lucrative national investment - a response to Garter Snake's dissenting opinion to a previous post of mine

I was originally going to post this response as a comment, but Blogger kept giving me errors whenever I'd try to post - perhaps my response was too long?  Either way, Garter Snake, an intelligent commentator with a penchant for colorful theme-appropriate names had some interesting things to say in response to my post Social Welfare without Liberal Immigration Policy: an unstable proposal.  Allow me to quote her/him here:

I understand that it is not economically viable to offer all potential immigrants full citizenship immediately.

The solution you propose, however, sounds simply like offering a green card to everyone who asks for one. This only makes sense if we assume that everyone who comes in will actually be a productive member of society (with a job or a business) until such time that they become a citizen and can partake of all the lovely health care, employment benefits, and such. If I wanted to immigrate to the United States and knew that I were guaranteed citizenship in a couple of years, I would gladly come to the US to sit on my butt for a few years and mooch off of members of my ethnic community until I could start collecting the welfare I would soon be guaranteed.

I suppose we could put a system of accountability in place such that if a new immigrant were not productive, he or she could be asked to leave. But this sytem of "produce or gtfo" seems a bit too draconian and un-American to me. It's one thing to deny an unproductive person admittance in the first place, but quite another to let them in, monitor them, judge them, and then kick them out (probably disrupting communities and families). So that wouldn't work.

Interesting idea, but I can't get behind it.

Thank you Garter Snake! I have to say, these are some very good points you make in response to things I didn't fully explain in my initial post.  Basically, my main thinking is that new citizens, especially immigrants, represent an investment that our nation makes. Like all investments, immigrants pay out to the state if they're successful - specifically in the form of the lifetime taxes they and their future American descendants will pay into the system. Assume that after a certain "adjustment period" an immigrant can earn about $40,000 a year - taxes on that represent a significant income for the state. Even better, their kids will get an education and go on to earn even more, so over 50 years or so each immigrant may actually represent millions of dollars in potential tax income for the state - even better, this income adjusts for inflation! Now yes, also like all investments there are risks associated with immigrants like the ones Garter Snake points out. However, we must ask ourselves how often an immigrant comes here and ends up in jail, or goes on Welfare, or otherwise loafs around and underproduces - my sense is that since coming to a new country is difficult, such things do occur, but far less often than someone who makes points like those of Garter Snake may fear. If I had to take a guess, I'd say there's about 5% failure rate overall across immigrants - I get that by just taking historically average mortgage default rates in America and doubling them; not an exact method, but I bet order of magnitude its correct. Thus, even if everything Garter Snake says above is true, it may still be profitable to invest liberally in immigrants.

Personally, I think the ideal solution would be to have the government take a more analytic, investment-oriented approach to immigration, much the same way that banks have historically taken analytical approaches to managing their debts and other risks. Just like its profitable for a bank to lend to many homeowners and businesses despite the non-zero risk that each one represents, so too is it profitable for a government to invest in immigrants despite the risks they may represent. Of course, banks (typically) do due diligence on the customers they lend to, and just like your local bank won't loan money to your grandfather's stupid idea for a shell fish bar that targets young children, neither should this government-backed "immigration bank" loan citizenship to potential citizens who clearly won't be able to pay it back.  All this suggests that, similar to how a central bank sets interest rates that ultimately effects the cost of obtaining loans from local banks, there would some sort of central immigration agency (INS?) that would set a base "immigration rate" that would ultimately effect how profitable a potential immigrants future should be before they should be lent citizenship.

Finally, I just want to point out that Garter Snake's primary objection to my point was based on what's most likely a low frequency event - namely "free loafing" and underproduction on the part of immigrants.  Although easy to imagine, such behavior is far from what I've observed in practice, and honestly to assume its common is to take a rather prejudiced and biased view against the actually very hard working nature of most immigrants.  Personally, I can't help but wonder if Garter Snake's clearly exaggerated personal assessment of the "cost" of immigrants is actually a perfect example of the point I was making in my post: namely that as the cost of supporting new citizens rises, existing citizens will resist new immigrants simply due to economical animal spirits - of course, the justifications we come up with to support these essentially emotional reactions are often distortions of the truth based on personal prejudices, much as Garter Snake's assessment that most immigrants are likely to simply mooch off of their communities rather than produce.  What she/he seems to be forgetting is that if such an immigrant could come to the country and mooch, someone else has to be producing enough to support them: economically from Garter Snake's perspective this is the same as though that person were producing for themselves, so why is Garter Snake judging such an immigration policy based on the choices of others that have absolutely no effect on her/him?

Goldman Sucks II: Return of the Extreme Liberal Bias!

Thanks to Anonymous for their insightful, well written critique of my previous post Goldman Sucks, Financial Reform, and the Obaminator.  Their comments are on the mark and deserving of response in so many ways that I feel obligated and honored to promote the discussion to a full blown blog post.

Jesus, where to begin? First, let’s quickly tick off the first handful of arguments, which you eventually acknowledge are made in feigned ignorance of the real issue:

1) Anybody could see the housing collapse coming, and none of the big players on Wall Street suffer from bubble amnesia. This ignores the incentives created by transaction fees levied irrespective of performance -- a primary, if not the main avenue through which most street-level traders make their money. That strongly encourages amnesia.

2) The banks that survived did so because of their wise investments, not because they were and are propped up by government intervention. Those in the know seem pretty confident the Fed’s balance sheets tell a different story.

3) Others did worse things than Goldman and have been punished, therefore Goldman should face no repercussions for its actions. In a functionally unregulated market, Goldman does the least damage of any major player. This is not actually a defense.

4) This is just innuendo on the level of celebrity gossip, planted because Goldman is doing so well and people like scandal among the rich and famous. This argument might hold more water if every other TARP institution wasn’t refusing to acknowledge a single day of losses this year.

5) Bank of America’s debt-forgiveness program is proof that the industry is trying to help lift all boats! Believe me, the banks are spending much more time and money lobbying against cramdown or compulsions to lend.

6) Goldman didn’t need to be bailed out, they just went along with a conspiracy to force them to take the money, for … public confidence reasons, I guess? Goldman made more money by successfully lobbying for full payouts to AIG counterparties than they received in direct TARP loans. Like the other TARP banks, they are also still deep in hock to the Fed, in the sense that they are playing with a ton of Fed money at zero percent interest. The TARP-money show was all about executive compensation, as Blankfein will gladly tell you.

Although basically irrelevant, these arguments are surprisingly ingenuous. You seem to be thinking critically about the statements and motivations of every voice in this story EXCEPT Goldman, the party with the most at stake.

That brings us to the actual question the Times story explores: Not whether, as you suggest, Goldman simply hedged its clients’ risks given the complexity of the financial products they were selling, but whether Goldman specifically created financial products they knew were garbage, pitched and sold them to clients who couldn’t see what was in them, and then turned around and bet against them, knowing they would fail because, well, they designed them that way. That is not a simple case of caveat emptor; that is fraud.

You do see how that’s different from a poker tournament, right? It’s not like Goldman’s clients simply gambled on pocket kings and lost due to the random chance that the guy next to them had pocket aces; they paid their stake to the house unaware that the house had ensured beforehand that they, the client, would always be dealt the only two and seven the house hadn’t pulled out of the deck.

This particular article lays out the case against Goldman’s standing counterargument: If we rigged the system, how did we lose money? The answer, as the leaked Goldman e-mails suggest, is stupidity, along with a healthy dose of hubris and contempt for the clients whom Goldman was so vehemently protesting are its top priority, as contractually obligated.

I’ve just stumbled upon your blog, but hopefully the imminent passage of an anemic financial reform package after the deployment of 2,000 finance lobbyists to Capitol Hill has soothed your fears that the poor banks are being pushed around by the mean old government and their feckless journalist cronies. More recent revelations, on the other hand, have not weakened the Times story’s case that Goldman was actively involved in a huge -- and criminal -- bait-and-switch. 

Anonymous is clearly a professional wordsmith, and as he certainly doesn't use his skills lightly.  However, I would like to point out just how Anonymous's response in fact highlights and supports the main point I was making in my original post: that by being successful in spite of the economic crisis that's destroy so much of America and the world, Goldman Sachs has become public enemy #1, guilty until proven innocent, despite the incredulous and completely unrealistic nature of the claims leveled against them.  How can I say such a thing?  Read on.

The Abacus deals Goldman Sachs sold were a far cry from the "stacked decks" purposefully constructed by the house to swindle innocent players money, no matter people like Anonymous may have you believe.  Instead, they were actually a financial instrument called a synthetic collateralized debt obligation, or synthetic CDO.  I first read about such things in the 2008 book 'Traders Guns & Money' by Satyajit Das, which I came across on the Econophysics blog after trying to figure out what the heck was happening financially two years ago.

Essentially, investing in a tranched CDO is a bit like buying an apartment building someplace that stands a small but significant chance of flooding, sometimes catastrophically - say a 1-2% chance of a flood in any given year.  Now, if there's only a small flood, the perhaps only the lowest floor will be effected.  However, in the case of a 45 foot flood, an entire three story building could be submerged completely underwater.  Of course, a 45 foot flood is a completely catastrophically rare event, at least when you consider just how often they happen as compared to just how often your basement floods.  Because of this statistical nature of floods, you can easily imagine that the apartments on higher floors (or tranches) would be more expensive than those on the lower, more likely to flood floors.  Typically in a CDO apartment building, there were three floors: the equity or first floor, the mezzanine or second floor, and the senior or third floor, though some CDO apartment buildings got crazy in their design.  Now because of how debt is structured, the more senior tranches (higher floors that are less likely to flood) floors didn't "cost more" so much as they paid less every month - they were more secure investments that were less likely to be "flooded" or ruined, so they paid a smaller amount; conversely, investments in the first floor equity tranche were the most likely to be flooded first, so thus they earned a higher return for every dollar invested when compared to higher floors.

So how exactly were Goldman Sachs and every other bank on Wall Street building these collateralized debt obligation apartment buildings on such unstable flood lands?  Its actually a neat statistical trick: essentially, a bank would take a collection of about 100 different smaller fixed income assets and pool them together (in banking parlance, fixed income is anything where the bank receives a predictable, regular payment each month - mortgage payments by home-owners being the culturally and topically salient example).  The different tranches or floors were built as follows: investors on the first floor would receive high rates of return from the instrument, but only as long as no more than say 5 out of the 100 fixed income assets remain out of default.  Meanwhile, investors in the second floor (aka mezzanine) would get a slightly lower rate of return, but would get it until say 10 out of the 100 constituent instruments defaulted, which is obviously less likely and at the very least would take longer to wipe out than the lower equity level.  Finally, the senior tranche would be safe until perhaps 20 out of the 100 defaulted - the supposedly safest tranche of them all.  Investments in these most senior tranches were the ones labeled AAA by S&P, Moody's, and every other rating institution that handles this type of thing.  If you're curious to read more about how these things were built and work, check out the Wikipedia article on CDOs - pay particular attention to the section on how they're structured, especially what "synthetic" means in this context.

So whereas Anonymous's metaphor of a rigged poker game is certainly an easily understandable and emotionally inflammatory one, its definitely far from correct - investing in these things was really a lot more like buying a condo in an apartment built on what everyone knows to be unstable, flood prone land.  Make no mistake about it - the exact terms and conditions of these deals were known or easily understandable to everyone who dealt with these sorts of things.  I don't even work in debt or financing, and even I came across the easily understandable and highly predictive 2006 book "Traders Guns & Money" by Satyajit Das that explained precisely how synthetic CDOs were built, as well as exactly how they were actually much much more risky than the AAA labels given to them.  This wasn't some big banker schenanigans where the wool was pulled over unsuspecting poor investors eyes - no, this was just some basic common sense that was available in a $25.00 book on Amazon or a bit of thinking about what the CDO debt structure implies.  And remember: Das published his book that explained all this in 2006 - so to assume that this wasn't common knowledge to professionals in the industry years before would be sheer tom foolery.

So why are CDOs so risky?  There's nothing inherent to their structure that would lead them to be a priori a bad investment - they can be appropriately and fairly priced.  The unfortunate thing was that they simply weren't priced correctly by the market.  See, because of mathematical convenience and a general desire among Wall Street investors not to really have to think too hard about anything, everyone just assumes that credit risk follows independent, identically distributed distributions (i.i.d. in statistical parlance), and moreover the street models these distributions as normal or gaussian - e.g. completely statistically describable via a mean rate of default and an expected variance about this mean.  Now basically, what this assumption says is that if you're given the average or expected default rate of each instrument in the pool, you can model the overall failure rate of the pool by flipping 100 biased coins who's probability of coming up "defaulted" is equal to the expected rate of default.  Statistical independence is achieved since the results of one coin have no influence on the results of any other coin.  Of course, we all know this isn't true - as the hundreds of other economic cycles over the course of human history have taught us, economic defaults and failures tend to cluster significantly - when one company fails, several more failures are likely to follow.  However, because all the models used by banks, investors, and rating agencies to assess the risk of these instruments stalwartly followed the identically and normally distributed assumption that had worked for so many years, almost everyone completely ignored this simple and obvious business reality in favor of personal profit - the bankers for their fees, the investors for their higher returns that still had an AAA rating, and the rating agencies because they had absolutely no incentive to challenge the status quo when neither of the parties they were supposed to advise wanted to.  Note that I say almost everyone - a few of the more common-sense driven out there definitely saw these obvious realities from a mile away.  Hell, Warren Buffet is in fact on record as early as 2003 as calling CDOs "financial weapons of mass destruction" - haven't people learned to start listening to that man yet?  At this point, can anyone really say that the buyers of synthetic CDO obligations were getting into a game they couldn't understand with an appropriate amount of due diligence, something as easy as reading a book.

To continue the flood-like metaphor for modeling CDOs, its interesting that in his book "The Black Swan", Nassim Taleb actually uses flood prediction in the Nile as one of the first great examples of the failure of normal distribution statistics to adequately model important and naturally occurring events - and this research was done by the British back in the 19th century.  As an investment banker himself, Taleb is yet another great example of someone who say the game on Wall Street for what it was.  I imagine that if Taleb were to liken CDOs to any sort of casino game, it would be a slot machine - after all, its a well known fact that long run every dollar put into a slot machine is a losing investment, but that doesn't stop people from riding "hot streaks" and feeling "lucky" because of temporarily high returns.

Finally, as to the accusation that  Goldman Sachs "bet against" these investments - again, I find this to be a very biased presentation and choice of words, because unfortunately its literally the truth.  As responsible financial institutions, when banks sell instruments to clients, they need to take a correspondingly opposite position to the one they sold in order to maintain a "risk neutral profile".  This type of financial behavior is called hedging and it is a perfectly normal, healthy, and expected thing for a bank to be doing in the course of its day to day affairs, the same way that it is expected behavior for air lines, industrial manufacturers, farmers, and nearly every other corporate entity.  To fault Goldman Sachs for "betting against" the instruments they sold to clients would be to fault every other bank on and off Wall Street, as well as nearly every corporation, for engaging in what is well known, financially responsible behavior.  It is here that I say Anonymous is judging Goldman guilty until proven innocent: she/he is much more willing to call day to day, responsible behavior on their part fraud than what it is much more likely to be: day to day, responsible behavior.  At that point, the onus of proof is on the accuser, and beyond a few misleading metaphors and emotionally charged statements, Anonymous has provided little to support his criminal claims; similarly, as far as I can tell nothing has come out of any of the criminal investigations into Goldman Sach's behavior - if what they were doing was so obviously criminal, why would this be the case?  If you're going to reference vague claims to "recent revelations" that supposedly support your liberal biased, narrow minded "big-bank-bad" attitude, Anonymous, please at least mention what these revelations are so that we can all discuss them fairly - otherwise you're no better than Fox news.

But what of the claims by the purchasers of these CDOs that they were mislead and otherwise poorly informed of the risks?  Again, as Satyajit Das points out, investors who are taken for rides by economic bubbles always claim they were mislead about the risks - its much easier to make such claims after the fact and forget that the financial gambling agreements were signed before hand.  Of course, from a self-interested perspective this makes complete sense: those clients who made now obviously stupid decisions and investments have only one chance to redeem themselves and save their career - blame the bank who sold them these things no matter what legal documents they may have signed indicating they fully understood and accepted the terms of the agreement.  Again, from a simply reasonable, common sense perspective, why would the biggest, most successful bank on the street need to use fraud to make a profit?  Even assuming the most criminal and self serving motives on the part of Goldman Sachs and their employees, it just seems like too much risk for the institution to engage in on a systemic level compared to the expected increase to profits that would result.  While Anonymous rightfully points out my complete lack of questioning about Goldman's motives, I must conversely point out her/his complete inability to see any motives except criminal ones on Goldman's part.  I thus expect the reality to be somewhere in between our two views, and given the extreme claims that he/she makes compared to the cold hard reality of how banking works, I wouldn't be surprised if that reality ended up being closer to mine than Anonymous's.

Ultimately, I'll say this: as far as I can tell, its simply far more likely to me that Goldman Sachs was simply going about its business selling CDOs to consumers who demanded them and then hedging those positions in a responsible way.   Did the divisions in charge of risk loss probably have more adequate models that allowed them to understand the true risk of toxic assets like CDOs?  Almost certainly - such things are valuable trade secrets.  However, the thing that most people forget is that clients were the ones who were purchasing these instruments - most of the investors who bought these CDOs were institutional investors that couldn't invest in anything less than AAA rated debt by their institutional bylines and regulations.  As such, when they saw CDOs with extraordinary returns and the required AAA ratings, they bought into them heavily with little due diligence - after all, the bylines had shifted that onus onto the ratings agencies in the form of ratings.  These investors in these Abacus deals were not financially naive people who needed Goldman's brokers to help guide and protect their best interests - they were savvy, profit driven individuals who were driven by greed to buy these amazing CDO products without questioning their perfect story; if they weren't able to purchase them from Goldman, they would have simply gone a couple blocks in any direction down Wall Street to another, more than willing broker.

Ultimately, where does the blame lie?  On everyone who participated in this fucked up game of musical chairs - the basic story I see being told here over and over is not one of fraud, but one of lustful greed so taken up in its passion for profits that it simply refused to take into account some fairly obvious realities simply because it would have meant less profit.  However, such animal spirits have existed in humans since the dawn of time (remember the Dutch Tulip bubble of the 1630s?), and I doubt we will ever be able to eliminate them from our economic behavior.  Instead, we should remove the false signals of security and trustworthiness - namely, the ratings agencies.  The whole CDO song and dance could have never occurred if rating agencies had used more realistic models to assess debt.  However, as everyone is more than well aware, the agencies had absolutely no incentive from either the banks or the clients to point out the well known fact that these investments were actually terribly risky.  At this point, any agencies that didn't sing along were quickly forced out of business, so the rating agencies quickly because filled with a bunch of parrots who were more than happy to sing back whatever stories were told to them.  However, this isn't criminal - its simply human nature.  Typically, such inefficiencies in capitalistic systems are addressed through competition - if someone can come up with a better way to rate debt and no one in the existing power structure will listen, said individual always has the right to start their own rating agency and compete; if their method is truly better and everything is functioning correctly, they should eventually beat out their less effective competitors.  Unfortunately, rating agencies weren't paid in a way that depended on how accurate their ratings were - they were simply paid a transaction fee.  The fact that the incentives here are completely out of whack here is obvious, and anyone banker, client, or otherwise who believed otherwise is simply a fool.  Moreover, the inordinate amount of trust that everyone - Wall Street, Main Street and elsewhere - put in institutions like Moody's and S&P such that they allowed their ratings to effectively find their way into regulations and laws governing institution behavior shows just how messed up this system had become: individuals and entities were willing to put their personal best interest and long term financial solvency into the hands of rating institutions that had absolutely no incentive to challenge the status quo because to do so would mean losing business.  Who but a fool would trust the AAA ratings given by such agencies, especially when it was so obvious even at the time that the ratings were absolute bunk?

There's a general rule across all walks of life that there's no such thing as a free lunch.  In finance, this takes the form of the rule that there's no such thing as increased reward without increased risk.  Throughout the economic history of the United States, especially during heady bull periods of economic growth, investors are more than willing to temporarily suspend disbelief and believe in stories that fly completely in the face of this simple well-known fact.  Historically, they always cry foul and fraud afterward, regardless of who should actually be at fault - after all, it definitely shouldn't be the people who lost money, right?  Unfortunately, people like Anonymous are more than willing to champion this essentially Communist ideology, especially when it jives with their own personal socialist stories about big, evil banks making money while the poor proletariat suffer, which is terrible because it absolutely fails to recognize the real fucked up incentives that went into creating this situation - not fraud as Anonymous suggests, but stupidity, hubris, and contempt for financial common sense in favor of greed and personal profit on the parts of all involved parties.  If we're to do anything more than indulge knee jerk emotional reactions and actually fix this situation, we have to be willing to see reality for what it really is: not a few evil characters, but rather a bunch of generally animal spirits masquerading as rational, independent, reasonable bankers, traders, legislators, reporters, regulators, and whoever else we may pretend knows what they're doing when it comes to running our country.  I have just as much desire and incentive to blame and punish whatever individuals acted criminally in the course of the recent financial meltdown, same as I do at any other time.  However, I'm unwilling to ignore the obviously complicated reality in favor of an overly simplified story that may satisfy both the public's desire for blood as well as the news media and government's need to produce that blood, but willingly omits and often simply outright misrepresents the reality of what actually went down.  After all, that story would be both far more boring and far less easy to sell or politically spin - and then what would people like Anonymous write about?

Update on Murky Waters of Gaza

So... interestingly enough, this morning I was doing my daily reading of the NYtimes and I found an article that confirmed the suspicions I raised in the Murky Waters of Gaza post (see previous post).

see article: NYtimes: Turkish Funds Helped Group Test Blockade of Gaza

The article gives you a glimpse of the murkiness of the organizations, how some can be only humanitarian, and how others are much more politically oriented.  Guess which one turned out to be the militant one!?? you guessed it, the Turkish one.  More telling is the following quote from the article:

"The organization is funded entirely on donations, its members said, money that comes from Turkey’s religious merchant class, an affluent section of Turkish society that has brought the party of Prime Minister Recep Tayyip Erdogan to power"

Ouch... that's not something that Israel would want to hear.

In college, I spent two long semesters studying the abstract concept of Orientalism, one semester in Islam and Globalization, and another semester looking a the history of terrorism (in it a long section on Islamic terrorism).  These three topics overlap severely in the current issues we face.  In particular, I got two distinct views.  One one side, in my Islam and Globalization class, our professor wanted us to understand that charity organizations were really important and necessary in Muslim countries because they filled the void that inefficient governments left and it helped the poor.  On the other hand, in the terrorism class, I was given a different point of view, where the authors alleged that it was IN THESE charity organizations that militancy grows and that a lot of terrorism hides behind a banner of humanitarianism and charity.  Moreover, some of these charities, like the ones funded by Saudi Arabia, are ALREADY meant to provide aid but with a second helping of really conservative (Wahhabist) ideology.  Would we not expect that if people are receiving charity ALONG WITH conservative ideology, that our charity recipients would turn militant?? of course they would!  It is no coincidence that America began to target the charities (the Muslim Brotherhood as a prominent example) during the war on terror.  When I went back to my Islam and Globalization professor and asked him about the terrorism links in the charity organizations, he told me this was much more of a neo-con myth than anything really true.

So what is the truth?? are these organizations helping radical causes or not??  I believe the answer is much murkier than either side would like to believe.

Unfortunately, I somehow didn't keep any books from the globalization class (where there even any books? haha).  But I did keep the one that is linked to below.  If you're interested in reading about the history and origins or Islamic terrorism, this is a great book!! take it with a grain of salt of course, it is most helpful in providing the basic history.  It was written by the two guys that worked on counter-terrorism in the Clinton Administration who, essentially, lay out all their research here.  For me, this book changed my perception on Islamic terrorism and it also led me to a greater understanding of the conflict we face today.  I feel like so many people out there talk BS (ummm, fox news) without really having ANY clue how these radical groups formed and why.  America would be a much better place if people were more informed and read their damn facts on a subject that is SO important to our present.

And no... I did not side track! afterall, the murky waters of gaza, 9/11, and the subjects of this book, all sadly go back to one point of origin: the shit show.

Oh, the Murky Waters of Gaza

The most recent clash between Israeli forces and activists on the waters of the Mediterranean offers a curious window onto the complicated situation unfolding in the Israeli - Palestinian conflict.  A conflict that, for the purpose of this post, we can refer to in much more endearing terms as: the shit show.

This whole situation is crazy... let's summarize it!!  A set of boats take off from Turkey, headed for Gaza.  The "freedom flotilla", as they call themselves, confidently asserts that they will not follow Israeli commands of camping out at Ashdod to let the Israelis inspect their crap.  Israel then says "whatevs dude, we're still gonna intercept you and take you to Ashdod".  See, right there!! just in those two lines we can see that this is a conflict waiting to happen.  So they meet at sea and somehow (the details are murky... as they ALWAYS are in the shit show), a bunch of people wind up dead and none of them are from the Israeli side.  Israel doesn't fuck around, when they do something, they do it well! they pull out the big guns, literally.  And as usual... Israel claimed it was self defense - because absolutely everything that Israel ever does is in "self defense".  In this case... it was in self defense from slingshots! and metal bars!! and being thrown overboard!! Yeah, no, sorry Israel, you need to just admit that every time you react, it's almost always with disproportionate violence.  Even the Israeli press is asking its interior minister why they weren't able to seize a damn ship without someone getting killed.  But to be fair, Israel had already warned these people, the blockade has been in place for a while, these activists were honestly just asking for it.  Which leads one to seriously inquire as to the motives of these activists.  Personally, I believe it's clear that they were anticipating, maybe even hoping, for this clash.  If this allegation that I am making is true... damn, those are some really politicized activists acting under a banner of humanitarianism.  I mean, they knew they were not gonna make it to Gaza, at least not with a fight.  If you really want to deliver these supplies, why would you endanger the operation (whose aim is supposed to be SUCCESSFULLY delivering the supplies, no?) by opposing to procedure and having an all out confrontation with Israel?? Like seriously, no... these people wanted this attention.  They knew what was going to happen and I can't help but suspect that they wanted the confrontation to bring attention to their cause - in true political activist fashion.

This whole incident is very characteristic of the shit show, but one thing seem odd and also damaging to Israel: Turkey's involvement in the flotilla.  Not only did they help the activists, but they have also taken a lead role in supporting them post-clash.  Israel's gotta be thinking "wtf Turkey" because not long ago this was, along with Jordan, a country that tried to stay semi-neutral in shit show matters.  But as this flotilla incident shows, Turkey's politics have changed in the recent years and they have slowly shifted away from the center.  While this recent rise in conservatism is a general trend that comes as a consequence of Turkey's harsh secularism, this is still pretty alarming for Israel.  The washington post remarked that, as news of another ship allegedly heading to Gaza tomorrow:
"Gaza residents nevertheless dug trenches in the sea to facilitate the passage of the ships, and decorated their port with Turkish flags and a huge photograph of Turkish Prime Minister Recep Tayyip Erdogan"
Seriously, a huge photograph of Turkey's Prime Minister?? that's pretty crazy.  Additionally, this flotilla incident is already turning into yet another shit show styled controversy.  It will be interesting to see what happens next and whether this will disrupt the on-going peace process (as media outlets suggest/ask).

This incident shows the militancy of the Pro-Palestinian activists and the no-nonesense attitude of the Israeli government.  Sure enough, as highly polarized as the shit show is, both sides have expressed their harsh condemnations of the other.  Sadly, in recent years, the trend for both sides has been to become more militant and more conservative.  Flotilla clashes or not... with such extreme positions and demands on both sides, it is really unlikely that we can see a meaningful peaceful resolution to the shit show.

Here is a photo of the freedom cruise... sailing their way into a shit show!