29th February 2012: StratCap

Stratfor Logo

 

Strategic foresight practitioner Stephen McGrail pointed me to a Yes Men press release on Stratfor/Wikileaks, where I found this gem:

 

Among the millions of other leaked Stratfor emails are some that reveal dubious financial practices, including an apparent insider trading scheme with Goldman Sachs Managing Director Shea Morenz, who joined Stratfor’s board of directors and invested “substantially” more than $4 million in the scheme, called StratCap. “What StratCap will do is use our Stratfor’s intelligence and analysis to trade in a range of geopolitical instruments,” wrote Stratfor CEO George Friedman in September 2011. StratCap was designed through a complex offshore share structure to appear legally independent, but Friedman assured Stratfor staff otherwise: “Do not think of StratCap as an outside organisation. It will be integral… It will be useful to you… We are already working on mock portfolios and trades.” (StratCap has been due to launch in 2012, though that could now change.) [emphasis added]

 

I wrote about Stratfor/Wikileaks here. The StratCap documents are here. They reveal plans by Stratfor chief executive officer George Friedman and colleagues to establish an event arbitrage and global macro fund that would trade on the basis of Stratfor’s geopolitical and strategic intelligence. Friedman and colleagues envisioned a $US25 million fund with a 10% equity investment from Stratfor: small for global macro but possible for a boutique event arbitrage or special event fund. The emails deal with the fund’s offshore structure; the service agreement; the role and compensation of Shea Morenz; and Stratfor’s role to provide StratCap with actionable intelligence.

 

“From where I sit, this deal is dead,” Friedman wrote on 23rd July 2011. The deal show-stoppers included Friedman’s discontent with attorney Bruce Herzog‘s handling of the service agreement and anger over a $US200,000 fee (“for Bruce’s clumsy attempts to undermine the process”); an immediate tax liability that impacted on the initial investment capital; potentially adverse effects on Stratfor’s publishing business and working capital; and the potential for Shea and StratCap to bankrupt Stratfor through demanding potentially unlimited strategic intelligence. These show-stoppers made the deal non-viable: it exposed Stratfor to credit and transaction risks.

 

Friedman explained in his 23rd July 2011 email to Stratfor colleagues:

 

I can imagine easily a scenario in which StratCap’s demands outstrips Stratfor’s means to the point that StratCap would hold Stratfor in default and even push it into bankruptcy with StratCap the major creditor. Nothing in the course of the negotiations gives me the slightest hope that Bruce would not do this in a heart beat and that Shea wouldn’t let him. I regard the proposed service agreement as a threat to the survival of Stratfor as a company under Don and my control. [emphasis added]

 

Friedman notes: “I have no intention of being the Chairman of a failed investment fund . . . I will not be the public image of StratCap, ridiculed for the failure of an enterprise that was built to fail.” (A reference to Jim Collins and Jerry Porras’s influential management book Built to Last.)

 

StratCap may have run into other problems if the fund had launched. In 2002, Goldman Sachs paid a $US110 million fine to separate its sell-side research from Goldman’s trading activities. So did dotcom era analyst Henry Blodget. Morgan Stanley paid  $US125 million in fines though analyst Mary Meeker escaped prosecution. It’s possible that Friedman and Stratfor may have faced similar fines or regulatory threats if they had proceeded with the StratCap deal.

 

Want to start your own event arbitrage fund? You might start with Robert Webb’s Trading Catalysts (London: FT Books, 2006) and Andy Busch‘s World Event Trading (Hoboken, NJ: John Wiley & Sons, 2007) on event arbitrage and special event strategies. On hedge funds, read Sebastian Mallaby‘s excellent history More Money Than God (London: Penguin, 2011), and for the best academic research, Andrew Lo‘s Hedge Funds: An Analytic Perspective (Princeton: Princeton University Press, 2010).

28th February 2012: Wikileaks & Stratfor’s Emails

Stratfor in December 2011

 

Yesterday the activist site Wikileaks prepared to publish 5 million emails from the Austin-based private intelligence firm Stratfor. Anonymous hacked Stratfor on 24th December 2011 and gained access to client passwords, databases, and internal emails. Wikileaks claims the emails: “reveal the inner workings of a company that fronts as an intelligence publisher, but provides confidential intelligence services to large corporations, such as Bhopal’s Dow Chemical Co., Lockheed Martin, Northrop Grumman, Raytheon and government agencies, including the US Department of Homeland Security, the US Marines and the US Defence Intelligence Agency. The emails show Stratfor’s web of informers, pay-off structure, payment laundering techniques and psychological methods.”

 

The leak prompted some hilarious and insightful responses from political pundits. “That @Wikileaks thinks publishing @Stratfor emails matters is a big compliment for Stratfor, biggest sign yet that Wikileaks is clueless,” tweeted Dan Drezner, and then he wrote a Stratfor/Wikileaks critique. “Statfor is on the mild end of the scary shadow CIA/stodgy think tank spectrum,” observed Dan Murphy for The Christian Science Monitor. “A friend who works in intelligence once joked that Stratfor is just The Economist a week later and several hundred times more expensive,” noted The Atlantic‘s Max Fisher.

 

I briefly subscribed to Stratfor so am probably on the leaked email/credit card list. I found many of Stratfor’s weekly reports to inflate threats. I got Friedman’s first book America’s Secret War during the book buy-up for my PhD but found it to be sensationalistic. Several Stratfor analysts contacted me whilst I edited the alternative news site Disinformation and claimed to be ex-psychological operations people.

 

I seriously considered developing a private intelligence capability on two occasions.

 

The first time was at Disinformation in 2000, I pitched a subscriber service to publisher Gary Baddeley that would do for the nascent conspiracy industry what Nikki Finke’s Deadline Hollywood does for the United States entertainment industry. I also had in mind the subscriber services that do 5-8 page summaries of business books. Baddeley wasn’t interested and the nascent conspiracy industry evaporated after the September 11 attacks.

 

During my postgraduate studies I studied under David Wright-Neville, Andrew Newman and Philip Gregory, and wrote essays on Ulrich Beck‘s world risk society (PDF); Rupert Murdoch’s use of game theory (PDF); considered the developments circa 2002 for news publishers (PDF); explored the collapse of the hedge fund Long-Term Capital Management (PDF); outlined the post-September 11 changes to intelligence services (PDF); and evaluated DARPA’s Terrorism Information Awareness system (PDF).

 

The second time was at the Smart Internet Technology CRC (SITCRC): I scoped out a project for Canberra firm The Distillery and looked at the major international and Australian firms that provided market intelligence on information technology trends. I proposed a market intelligence capability for the Smart Services CRC successful bid that would use strategic foresight and strategic intelligence methods. However, this remained scoped out work only for the unfinished Disruptive Internet project, although I did trial the methods in a public blog for a month. I left the CRC in March 2007 due to infra-team conflict.

 

During preparation for my PhD studies I considered several topics. One was on design patterns and counter-terrorism. A second idea was ‘The Markets for Political Risk: An Analytic View’ modelled on the research of Deborah Avant (The Market For Force) and Andrew Lo (Hedge Funds: An Analytic Perspective). I outlined the historical precursors to Stratfor (RAND, Royal Dutch/Shell, and Kissinger & Associates); found six market segments; considered risk arbitrage, securitisation and trading applications; and began to develop contagion/rumour models. I noted that Friedman “may cultivate ’boutique mystique’ as reputational capital.” In 2009, I began reading the hedge fund and trading literature, and decided it was easier to develop a personal capability for market arbitrage and trading (reflected on during an October 2011 visit to Tokyo’s Stock Exchange). In March 2011, I began a part-time PhD on the strategic culture debate and counter-terrorism studies (2011 initial proposal PDF).

 

Stratfor’s chief executive officer George Friedman is scheduled to speak at SXSW Interactive 2012 in Austin. I’ll definitely be attending.

15th December 2010: Iran-Twitter Q&A

Over a year ago Ben Eltham and I did a conference paper on Twitter’s role in Iran’s 2009 election crisis. The paper proved too controversial for the conference’s refereed stream yet it has gone on to become our most widely read and cited paper.

Today, Paul Raymond posed some questions about Twitter and Wikileaks for a forthcoming article in Saudi Arabia’s magazine The Diplomat. Below are my email answers:

You express doubts that Twitter and other social network tools will “enable ordinary people to seize power from repressive regimes.” But what other political potentials do these networks have, in terms of broadening the public sphere for debate, mobilizing political networks, and helping to globalise civil society? What will be the results of these potentials for governments?

Twitter, Facebook, and other social networking tools certainly have the potential to broaden debate, mobilise political networks, and to globalise civil society. Perhaps they are today’s equivalent of the Cold War’s Radio Free Europe or Voice of America broadcasts. They are able to mobilise autonomous, self-regulative networks of people on a salient issue, and allow government agencies like the US State Department to reach a wider audience. However, these same qualities also mean that particularly for Twitter, social networks can be used to spread rumour and propaganda.US neoconservatives recognised these qualities in 2000 during their discussions on what a ‘next generation’ capability might resemble.Twitter’s interest in Iran gradually faded after the weeks of political uncertainty, as it became clear that Ahmadinejad’s regime would remain in power. Our conclusions echo the late sociologist and political scientist Charles Tilly’s work on political violence and repressive regimes.

The US State Department implicitly recognised Twitter’s importance when it asked Twitter to delay server upgrades – or at least, officials wanted to know what would happen next in the political cyber-laboratory of Iran. What would be a proper response by western governments to the results, including the “unintended uses” different actors gained from the network?

Firstly, to understand that Twitter, Facebook and other social networks will have their own dynamics similar to the CNN Effect of the 1990-91 Gulf War. Second, to counterbalance the ability to reach different audiences with the reality that people may only sustain their attention during a crisis. Third, that different actors will use ‘open network’ tools for their own ends and ethics, such as the Iranian Basij paramilitary using Twitter to arrest and kill protestors.

A ‘proper response’ may depend on the specific government agency. Whilst the US State Department was interested in public diplomacy, other agencies may have different agendas or uses for the same data. The US Department of Defense may be interested in the danger of social networking sites to be used for adversary propaganda and disinformation to international public audiences. A US intelligence agency may be interested in ‘contextual intelligence’ that may arise from diaspora networks, or alternatively, how many ‘tweets’ or messages can lead to ‘noise’. We tried to explore how the same data could be used in different ways depending on the aims and objectives of the specific end-user.

The State Department reacted very differently to the recent phenomenon of Wikileaks. What would be a proper governmental reponse to that kind of use of the internet?

The likely response of the US Government will probably be to charge Wikileaks publisher Julian Assange under the relevant espionage and national security legislation for releasing diplomatic information. In the short-term this will also mean increased security and restricted access in the US Government on a ‘need to know’ basis to diplomatic cables. In the long-term, the US Government could work with specific media and scholarly groups — the American Political Science Association, the Society for Historians of American Foreign Relations, The New York Times, The Washington Post, or George Washington University’s National Security Archive — to release declassified versions of the diplomatic cables in a more controlled and possibly ‘redacted’ manner. However, this might also require changes to US freedom of information laws and declassification schedules. Marc Trachtenberg at the University of California, Los Angeles, is an expert in these declassification issues for historians and political scientists.

What general rules would you suggest governments apply to make best use of the public diplomacy potential of social networking?

Use social networking tools to openly inform the public, such as Saudi Arabia’s initiatives on combatting terrorist financing and successful rehabilitation programs for ex-jihadists. Understand the limitations of social networking tools, such as their varied use by different groups, and how they can become disconnected in crisis situations from ‘on-the-ground’ events. Have mechanisms in place to identify, monitor and to counter disinformation and propaganda that may propagate on such social networks. Integrate social networking tools into a ‘hearts and minds’ strategy that uses a variety of media.

Can government’s efforts to crack down on freedom of information (such as the Chinese attacks on Google and the worldwide campaign against Wikileaks) work in the long run, or has the playing field been permanently leveled, giving civil society and opposition groups the ability to challenge governments’ influence over media agendas and foreign publics’ perceptions?

Constructivist scholars like Alexander Wendt, Peter Katzenstein and Martha Finnemore note the growing power of civil society groups to shape public perceptions and influence media agendas. Sophisticated governments may even work closely with aid organisations like the International Federation of Red Cross and Red Crescent Societies during a crisis. It depends on the context and the nature of the information being publicly released. Google’s problems with China were foreseeable since at least early 2006 because of how Google’s management handled earlier crises about the identities of Chinese human rights activists. The campaign against Wikileaks and its publisher Julian Assange appears in part because the information was released in an ‘unredacted’ form and not through an establishment source like Thomas Friedman or Bob Woodward. The realist scholar Stephen M. Walt and others have pointed out the hypocrisy of this: Assange and Wikileaks are being attacked whilst mainstream media institutions like The New York Times are not. Perhaps the challenge also is that the information Wikileaks has published is about recent and current events, and not the usual 20-30 year gap of normal declassification procedures. The public’s demand for ‘real-time’ information and more transparency is an opportunity for governments and public diplomats, should they decide to seize it.

29th November 2010: Cablegate

Germany’s Der Spiegel has launched a series on Wikileaks’ release of 250,000 US diplomatic cables, dubbled ‘cablegate’.

Wikileaks reveals a darkly realist view of the world, likened to a “foreign policy meltdown“.

The New York Times has articles on the ‘decision to publish’ and a selection of diplomatic documents as part of its State’s Secret series.

This will keep colleagues at the Society for Historians of American Foreign Relations busy for months.