Once upon a time, there was a hedge fund named Hermitage Capital. Its head was Bill Browder, and it had the clever idea, back during the Yeltsin Administration, of investing Western capital in Russia. It worked spectacularly well, until it didn’t:
Browder is a smart guy. He made a lot of money and managed to get his money and his life out of the country, which would be reason enough for me to refrain from paying for Youtube videos naming the Russian government agents who defrauded me.
The facts of the case are modestly complicated, but the summary is this: individuals within the Russian tax ministry raided Hermitage’s offices, seized a bunch of documents, used the documents to appoint themselves as the representatives of one of Hermitage’s portfolio companies, had their confederates bring claims against the portfolio company, and accepted liability on behalf of the portfolio company. They then went to Hermitage’s Western banks with a court order to turn over Hermitage’s assets. Hermitage had taken the precaution of moving its money out of Russia, foiling this gambit, so the agents (still acting in their guise as Hermitage representatives) filed a tax refund application citing the losses to the confederates, and received a couple hundred million dollars from the Russian state.
That’s the long version. The short version can be found here at 5:26:
When you chase return and put your money in a foreign country – Russia, China, Texas – you accept the fact that you have little control over whether you get it back. That’s fine if your investment returns price in currency risk, expropriation risk, and general looting; I’m sure there was plenty of leakage in the days of the Dutch East India Company, but with real returns on the order of 40% for decades on end (not compounded – there was nowhere to reinvest the cash flow), it was worth it. But plenty of investors seem to assume that just because an Indian company is able to produce three sheets that look Western, it behaves the way a Western company does and should be priced the same.
The stability we take for granted is what the highest brackets are paying for on tax day. Warren Buffett and Charles Koch will never consume enough government services to justify their tax load, except for the most valuable service the government can offer: it provided the foundation that allowed them to accumulate their wealth in the first place. The rich of Russia before Lenin or China before Mao, the maharajas of British India – these men never invested in a system that provided popular legitimacy. For years they survived by combination of force of arms, political intrigue, and sheer luck, but those are fickle mistresses.
Much of the protest over the bailouts and stimulus package is little more than petulant Republican protest. Graciousness is not big in the Palin posse. But that doesn’t mean it is all simple opposition to Obama. The bailout really did channel hundreds of billions of dollars of taxpayer money to financial institutions in contravention of the spirit, if not the letter, of the commercial code. If a powerful Citigroup can breach capital adequacy ratios and have the difference made up by the taxpayer, with all governance and upside retained by the previous owners, that’s a perversion of the bankruptcy process. Every day small retailers file and have at best a few days before the liquidators arrive; the unlucky owners discover that they have given personal guarantees and have all their assets at risk. The responsible among us do not advocate some sort of national jubilee, with widespread abrogation of debts, yet a hidden version of this is exactly what happened over the past year.
Goldman Sachs ran to the arms of a commercial banking charter and Fed protection – granted in record time to an institution that was, in that glorious time, undercapitalized – eliminated the month of December 2008 altogether from its financial statements, and went on behaving exactly as it had before. Its value at risk increased. And we wonder why the owner of a metal-bending job shop in Ohio who is petrified that the Obama EPA will shut him down for thirty years of soil contamination might think that the system is rigged against him?
Simon Johnson, in one of the best posts to come out of the entire meltdown, described the corrosive effect of tunneling in emerging markets:
Boris Fyodorov, the late Russian Minister of Finance who struggled for many years against corruption and the abuse of authority, could be blunt. Confusion helps the powerful, he argued. When there are complicated government bailout schemes, multiple exchange rates, or high inflation, it is very hard to keep track of market prices and to protect the value of firms. The result, if taken to an extreme, is looting: the collapse of banks, industrial firms, and other entities because the insiders take the money (or other valuables) and run.
Way back before the French Revolution, nobles were essentially exempt from direct taxation. It was perhaps the most hated part of the ancien regime. In the great axis of Asian nations that would have social revolutions of some sort or other in the past century – China, Cambodia, Vietnam, Indonesia, Philippines – the aristocracy was free to commit any number of violent crimes against the broader population. It was not the basis of a stable society.
There is obvious if bitter comedic value in the idea that thirty Republicans would prefer to side with Halliburton than a rape victim; if nothing else, it shows just how preposterous the Grassley argument that “bipartisanship” requires eighty votes actually is. The sad thing, though, is that it shows that the rot of corporate favoritism has reached yet another level.
Jamie Jones went to Iraq to serve with a KBR firefighting team. She was all of twenty years old. While in Iraq, she was drugged by members of the firefighting team, then:
she awoke the next morning still affected by the drug, she found her body naked and severely bruised, with lacerations to her vagina and anus, blood running down her leg, her breast implants ruptured and her pectoral muscles torn‚ which would later require reconstructive surgery. Upon walking to the rest room, she passed out again
Despite showing enough pain tolerance to merit a battlefield medal, Jamie’s reward was
the firm placed her under guard in a shipping container and she was released only after her father asked the US embassy to intervene
Iraq is a combat zone. There is danger in combat zones. If Jamie had been in a convoy that was ambushed and some local gunmen had assaulted her, perhaps Halliburton might have a point that it was not responsible, or that she had waived some rights to a safe working environment by going to Iraq. Maybe, although if Iraqis had raped her – or, to be brutal about this, had black Americans raped her – she probably could have counted on swift vengeance from Blackwater. As things happened, the company not only employed her attackers but proceeded to imprison her for having the temerity to report the crime she endured.
When Americans run off to Antigua to set up online gaming businesses in contravention of US law, the government hounds them and tries its best to cut them off from the country. I happen to believe online gaming should be legal, but I get the point: if you run, it’s for good. Well, Halliburton hasn’t even had to run. They sit in Houston milking US government contracts and then have the gall to assert that a US citizen does not have access to the US courts to seek redress against them. And thirty Senators thought this was a reasonable position.
Russia has fantastic natural resources. It has an educated if alcoholic population. It could be a great nation, not merely a scary nation. It has failed to thrive for centuries because it never developed a just state, and the endless cycles of looting created an amoral place incapable of productive investment. John Nash’s nightmare.
We have been blessed with a happier initial position, and despite some bitter tests – the opening chaotic decades, the Civil War, the Depression – we have managed to stick to some central tendency of decency. More than the oil of Spindletop or the soil of the Central Valley, more than the ideas of our immigrants and the toil of slaves, this has been our great asset. The good news is that this asset can be replenished; the bad news is that its continued existence requires constant effort. At any moment in time it is easier for the group in power to try to seize what it can. This behavior was the essence of Cheneyism (kissing cousins of Suhartoism), and Obama has not quite summoned the courage to stamp it out.