Yves here. For the normally anodyne OilPrice to run an article, Obama Fiddles While Iraq Burns, that is openly frustrated with US conduct suggests that there is considerable consternation in the oil industry about the lack of a coherent policy in Iraq. One school of thought has been that the US wanted a breakup, but history like the dissolution of Yugoslavia shows that they are ugly, bloody affairs that hurt the population and infrastructure. Both are bad for business, such as drilling for and refining oil, which was apparent reason we occupied Iraq in the first place.
I’ve discussed with Lambert the difficult of coming up with a coherent rationale for the US stance towards Iraq. The only one I can come up with is that the neocons have convinced themselves that chaos in Iraq creates more options for the US, and as the world’s only superpower, we’ll find a way to take advantage of the situation. Readers of this blog will recognize this is troublingly similar to the way banks generate risk, because it’s profitable for them, even if they break the system.
As Andrew Haldane, executive director of financial stability for the Bank of England, said in a 2010 speech we’ve cite often, The $100 billion question:
Tail risk within some systems is determined by God – in economist-speak, it is exogenous. Natural disasters, like earthquakes and floods, are examples of such tail risk. Although exogenous, even these events have been shown to occur more frequently than a normal distribution would imply. God’s distribution has fat tails.
Tail risk within financial systems is not determined by God but by man; it is not exogenous but endogenous. This has important implications for regulatory control. Finance theory tells us that risk brings return. So there are natural incentives within the financial system to generate tail risk and to avoid regulatory control. In the run-up to this crisis, examples of such risk-hunting and regulatory arbitrage were legion. They included escalating leverage, increased trading portfolios and the design of tail-heavy financial instruments.
And from a later Haldane speech (emphasis ours):
In particular, we can draw on a framework developed a century after the introduction of limited liability – the contingent claims model of Nobel Laureate Robert Merton (1974). This tells us that the equity of a limited liability company can be valued as a call option on its assets, with a strike price equal to the value of its liabilities.
Figure 1 demonstrates this option-like payoff profile to holding a hypothetical bank’s equity. The beta of a firm is measure of how its value varies with the market as a whole. Arithmetically, the beta of a bank’s equity is the product of its leverage and the beta of its assets.11 So assuming an asset beta of 0.1 and a leverage ratio of 10, the bank’s equity beta will be equal to one. The returns on bank equity and the return on the market will then lie on a 45 degree line, provided returns are positive. When market returns are negative, however, returns on bank equity will not follow them south. Instead they will be capped by limited liability.
This asymmetric payoff schedule generates interesting incentives. The value of the equity option is enhanced by rises in the volatility of the bank’s assets. Why? Because volatility increases the upside return without affecting the downside risk. If banks seek to maximise shareholder value, they will seek bigger and riskier bets. Joint stock banking with limited liability puts ownership in the hands of a volatility junkie.
While this conceit may strike some readers as a stretch, the flip side is the neocons seem to be very fond of expressions like “rearranging the strategic game board” and are addicted to the muscular use of US power. This seems to put them in the same place as too big to fail banks, of seeing only advantage in risk’taking (which in its most extreme form in policy terms means fomenting war) and naively see the US as having no downside (the globe’s only hegemon is seen as too formidable to fail). The sad reality is that this assessment of risks and returns may be true for the neocons personally, as they are likely to score gains and incur little in the way of costs by breaking countries and creating failed states. But it isn’t true for the US as we become more and more resented and isolated.
By Claude Salhani, a journalist, author and political analyst based in Beirut, specializing in the Middle East, politicized Islam and terrorism He is the former editor of the Middle East Times and a long-time contributor to the Commentary pages of the Washington Times and Beirut’s Executive Magazine. He is the former International Editor with United Press International and also ran UPI’s Terrorism & Security Desks. Originally published at OilPrice
To compare U.S. President Barack Obama to a modern-day Nero may be somewhat harsh, but as the Middle East continues to disintegrate, falling into chaos and unprecedented violence, its oilfields and gas fields within grasping reach of well-organized terrorist groups, it’s hard not to when no clear U.S. foreign policy is in sight.
In 1990, President George H. W. Bush (the elder) went to war against the most powerful Arab army to force Iraqi President Saddam Hussein out of Kuwait, the tiny emirate he had invaded a few months earlier, claiming it as Iraq’s 19th province.
The only reason Bush Sr. went to war and succeeded in putting together a formidable coalition that included Arab countries was the need to safeguard Kuwait’s oil.
Today, two of the Middle East’s most key countries – Syria and Iraq — are quite literally on the verge of disintegration, threatened by terror groups the likes of which the world have rarely seen, with the potential to jeopardize the security of Western Europe and United States, and yet there is no visible U.S. involvement or articulated policy to manage the crisis.
What is even more alarming is that this latest crisis did not suddenly appear out nowhere, as the loudest media narrative has insisted. Alarm bells and red flags were consistently ignored by the Obama administration.
Members of the U.S. administration were warned, repeatedly, that ISIS, the Islamic State of Iraq and Syria, posed a real threat to the security of Iraq, and ultimately to the region, but chose to ignore the warnings.
As reported by the Daily Beast, “On November 1, 2013, Iraqi Prime Minister Nouri al-Maliki visited the White House, and made a rather stunning request.”
Maliki — who reportedly celebrated when the last U.S. troops left Iraq in 2011 — made a very discreet request of the White House to return some U.S. military units to Iraq so they could assist the country’s air force in planning target acquisition of ISIS positions.
Senior administration officials told the president that ISIS was producing upwards of 40 suicide bombers a month.
ISIS took advantage of the Iraqi government’s weakness and the Iraqi army’s unpreparedness. That, compiled with Sunni disenchantment with the government’s policies, provided fertile grounds for the Islamists to strike.
Yet the warnings were there, clear for anyone to see, if anybody really wanted to see. The problem was that nobody close to the American president seemed to give it much thought. All the intelligence services were telling anyone who was willing to listen that the news from Iraq was worrisome. No one at the White House seems to have been listening.?
Additionally, too much trust was placed in the restructured Iraqi Army. Despite major U.S. training and reforms, Iraq’s military suffered from poor operational tactics while legitimate and popular grievances were unheeded.?
Obama could have used political leverage to force al-Maliki to avoid sidelining the country’s Sunni population. The sale of advanced weapon systems for nearly $11 billion should have been the carrot.
And major notice should have been taken when Fallujah — a town made infamous during the U.S. occupation of Iraq when Sunni gunmen killed American contract workers, and where resistance to the U.S. presence became notorious — was the first major and strategically important city to fall to the Islamists.
When Fallujah fell, red flags should have gone up. But the only flag that went up was the black banner of the jihadists.
It was only after Iraq’s second-largest city, Mosul, fell to ISIS that the world began to take notice. But by then, ISIS had gained control of oil fields in Syria and some in Iraq, and had looted millions from banks in the cities they occupied.
Obama may be thinking that the fallout of this crisis will be mitigated if the U.S. continues to pursue improved relations with Iran. But again, he seems to ignore the fact that countries like Saudi Arabia and Turkey will never accept Iran playing the role of the regional policeman.
Like it or not, as the only remaining superpower, the job falls to the United States. It’s a dirty job, but somebody has to do it.