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Watergate’s John Dean on the Chennault Affair

My Rolling Stone Q&A with Watergate figure John Dean got a lot of people talking. Dean told me that Nixon might have survived if he had Fox News. He also said that he doesn’t expect Trump to resign and a whole lot more.

One thing that we didn’t have room for was a question I asked John Dean about the Chennault Affair, another Nixon scandal that involved collusion with a foreign power to win an election and allegations of treason.

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The Scorpion and The Frog

41k6bh9dczl-_sx304_bo1204203200_I just finished reading The Scorpion and the Frog, the book by Felix Sater’s Wall Street pal, Salvatore Lauria.

It’s an interesting read about Sater’s time on Wall Street and his dealings with Mobsters.

Even more interesting are the details about his cooperation with the CIA in Russia against al Qaida that helped keep him out of prison for racketeering.

A lot of these details were new to me, so I thought I would post a little summary of what’s in the book.

Sater’s lawyer, Robert S. Wolf, has called some of the CIA-related portions of the book “fabricated.” However, The Scorpion and the Frog was the subject of a 2002 legal proceeding in federal court in Los Angeles. Lauria sought to stop publication of his own book. Not because it was fiction, but because it told the truth.

According to Lauria, he had agreed to write the book on the condition that his real name not be used. His publisher, however, went ahead and used his real name, and Lauria was worried that he could be physically harmed by the people named in the book. A bench trial was held and in the end a federal judge cleared the way for the book’s publication.

With that said, here’s my abridged version of what the book says:

Felix Sater walked away from his Mob-linked Wall Street business in 1996 and headed for Russia. He would spend the next two years there before returning to the United States to surrender to the FBI in 1998 and plead guilty to racketeering.

Sater had two jobs in Russia. The first was a deal to bring AT&T bulk long distance service and pre-paid phone charge cards to the country. The second was to find a deal that could get him out of jail. 

Sater began to develop contacts at secret Russian military installations known as closed cities, which held “some of the great secrets of the Soviet Union,” Lauria wrote.

The closed cities were opening up. Their representatives were contacting “various countries and rogue organizations interested in buying everything from missiles to assault rifles to millions of rounds of ammunition,” Lauria wrote. They also would make munitions and missiles “to order.”

“We ran into guys selling shiploads of arms to Arabs and other Muslims — Libya, Iraq — countries that were hostile to the United States,” Lauria wrote.

At some point, according to the book, Sater made an initial contact with “someone connected to the CIA.”  

Sater gave this version of events to New York magazine.

One night, Sater told me, he went to dinner with a contact that he assumes was affiliated with the GRU, the Russian military-intelligence agency, where he was introduced to another American doing business in Moscow, Milton Blane. “There’s like eight people there,” Sater said, “and he’s sizing me up all dinner long. As I went to take a piss, he followed me into the bathroom and said, ‘Can I have your phone number? I’d like to get together and talk to you.’ ” Blane, who died last year, was an arms dealer. According to a government disclosure made 13 years ago in response to a Freedom of Information Act query, Blane had a contract with the Defense Department to procure “foreign military material for U.S. intelligence purposes.” Sater says the U.S. wanted “a peek” at a high-tech Soviet radar system. “Blane sat down with me and said, ‘The country needs you,’ ” Sater said.

Back to the book. Sater’s unofficial contact in the CIA came to see him and told him the agency wanted a radar tracking system that the Russians had developed before the fall of the Soviet Union. The radar tracking system had never been deployed, and the CIA worried that the system could fall into the hands of our enemies. 

“We looked around through Lex’s contacts and found we could definitely get the radar system. For once, this was a deal we were doing with no interest in the money.  We were doing it to enhance our own position regarding the legal charges, and also as something that might benefit the country. Money or profit was not an issue. We just wanted the credit for doing it. With a direct line to the radar system, we contacted our lawyer in New York, who went to Washington DC to talk to the CIA”

The CIA was interested. The agency sent a man to Russia, and Sater located the radar tracking system. (In other parts of the book, Lauria calls it a “missile guidance system.”)

With that success,  Sater was approached about acquiring a dozen Stinger missiles. The Stinger was the portable, shoulder-fired missile that used a heat-seeking sensor to home in on an aircraft’s engine. They could be fired from as far away as 5 miles away and could easily bring down a passenger airliner.

The CIA was desperate to get hold of them.  Lauria states that at least 12 Stinger missiles were obtained by Osama bin Laden. 

As he had with the radar tracking/missile guidance system, Sater found that he could get the Stingers, albeit in a round-about way.

Sater could not buy the Stingers directly from al Qaida. “Instead, he used his contact with a KGB general who claimed he had strong ties with Ahmad Shah Massed, leader of the Northern Alliance,” Lauria wrote.  Sater alaso used “connections he thought he had with both sides in the Afghan War.” This is interesting. Was Sater dealing with the Taliban?

According to Lauria, Sater obtained photographs of the Stinger missiles as well as the the serial numbers of three of them to verify their authenticity. Sater also obtained what he thought was an active cell phone number for bin Laden. His attorney supplied it all to the CIA.

The CIA offered to pay Sater $300,000 per missile. Lauria insists there was no profit built into the deal. However, one of their partners, Gennady “Gene” Klotsman went behind their backs and demanded $3 million per Stinger. The CIA was furious and called off the deal.

A few days after the attacks of Sept. 11, 2001, Lauria got a phone call from Sater. The information they had provided about Osama bin Laden was now being actively pursued. 

“Our situation had improved,” Lauria wrote.

 

Anatomy of a Gas Price Spike – Why Are Gas Prices So High in California? Part II

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Rumors in the gas market sent gas prices soaring in the LA area in July 2015. (Courtesy: LA Times)

 

In July 2015, gas prices in LA shot up overnight. Some stations downtown posted prices as high as $4.99 a gallon.

“I’m mad as hell,” one driver fumed to a reporter for the Los Angeles Times as he pumped $4.65 gas into his car. “What can you do? It’s crazy, man. It is crazy.”

They had right to be angry. Gas should have been cheap. Oil prices tumbled 50 percent  over the previous 12 months and were down around $50 a barrel.

Nobody really seemed to have a clue what sent Los Angeles gas prices soaring 70 cents over that Fourth of July weekend. That’s just how things go in California, experts said.

The story of what happened in Los Angeles emerged at a hearing this month before the Petroleum Market Advisory Committee, which has been trying for two years to explain the nature of such price spikes.

The LA gas price spike offers a window into the hidden world of gasoline trading in California. The picture that emerges is of a thinly traded gasoline market that is not for the faint of heart. Rumors precede facts and whip up wild price swings that can turn a sure bet into a big money loser in an instant.

The LA gas spike is evidence that California’s gas market “is prime to being manipulated and is being manipulated,” said Bob Van Der Valk, senior editor of Baaken Oil Business Journal, who told the story to the Petroleum Market Advisory Committee.

The West Coast used to be one of the best markets in the world for gasoline importers. It was a huge market. It was the most populous state in the country after all. Almost everyone, especially in Southern California, got around by car.

But over the past 15 years, as California imposed more and more environmental rules, that has changed. Huge trading outfits with deep pockets and resources like Glencore, Vitol and Trafigura have walked away from California, said Dolores Santos, who traded fuel for nearly 40 years in the state before joining the Oil Price Information Service. Today, only a handful of gasoline traders are left.

There is a saying among traders: Buy on the rumors and sell on the facts. And the rumor in July 2015 was that the Exxon Mobil refinery in Torrance, California, just outside LA, was about to come back on line.

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Exxon Mobil’s Torrance refinery damaged by an explosion in February 2015. (Source: LA Times)

The Torrance refinery produces 1.8 billion gallons of gasoline per year, or about 8 percent of the state’s supply. A massive explosion had ripped through the refinery in February, instantly cutting off critical supplies of gasoline. The resulting shortage had sent Southern California prices soaring in successive waves.

To make up for the lost supply, traders had been buying up gas from refineries in Singapore or India, shipping it to California, and selling it on what is known as the “spot” market. A cargo full of gas had been arriving in the Port of Los Angeles every three days on average. That had helped alleviate some of the strain.

But the rumor making its way around California’s small gas trading community was that the big Exxon Mobil refinery would resume operations July 15. That would alleviate the strains in Southern California’s gas market. There would be no need for imports.

Except it wasn’t true. The Exxon Mobil refinery would not resume operations until September.

The rumor carried the day, however, not the facts. It chased away cargoes of gasoline even the spot price at the time was good enough to attract imports.

Supplies were pretty tight in Southern California around the Fourth of July. And that’s when some big gas refiners stepped in to do something that drove prices even higher.

Two big oil companies had gone out and bought every barrel of gasoline available on the spot market,  Bob Van der Valk told the Petroleum Market Advisory Committee this month. Van der Valk, who got the story from gas traders he knows from years of covering the energy business,  wouldn’t say which companies were responsible.

“The last desperate step for a major is to go out in the spot market,” he said. “They know full well when they do they’ll drive up prices.”

If this is true, then it confirms all the bad things that people say about oil companies.  Consumer advocates have long believed believe that the players in the state’s gas market have used “market power” to drive up prices by curtailing supply in times of shortage. That’s exactly what happened in July.

The gas price spike allows refiners to make extraordinary profits but they don’t last long enough to prompt changes in demand. If gas remained at $5 or higher year after year, you would see a rise in the use of public transportation, fewer cars on the road, and higher sales of more efficient vehicles. But gas price spikes don’t last much longer than a few weeks, so all people can do is shake their fists and hand over their wallets.

There are two factors that give refiners enormous leverage in California:

  1. California’s gas market is isolated from the rest of the country. (See my previous post on Why Gas Prices Are So High in California – Part I)
  2. Whether you are rich or poor, whether gas is cheap or expensive, people still buy the same amount of gas.

There are nearly 29 million cars in California. Most people have to drive to get where they are going. In economic terms, it’s “inelastic” demand.

California’s gas market is an oligopoly, dominated by a few firms. Two companies produce half the gasoline in the entire state. In San Diego, where I live, Tesoro — through its USA Stations, Arco and some Shell stations — controls 40 percent of the market.

2014_gasoline_marketshare

If I had to guess which company bought up the available spot supply in July, my money would be on Tesoro.

Keith Casey, Tesoro’s executive vice president of operations, told analysts and investors on Dec. 9 that the company had made millions on LA gas price spikes in 2015:

…in 2015 we had very strong product demand in California, and we move about 50,000 barrels a day of intermediates and blendstocks across our system, and through our movements of octane to support that demand in southern California from the rest of our system, we made about $15 million to $20 million being able to supply that and optimizing from the entire system.

Here Tesoro is effectively saying that we able to make $15 to $20 million selling gas quickly in Southern California during times of shortages. And of course the July shortage may have been made worse by the oil companies themselves.

Tesoro has built a business around these price spikes in Southern California. The company can quickly switch between gasoline and diesel production to take advantage of volatility:

And that’s why we believe flexibility and agility are really the key for competitive advantage. Importantly, our swing capability, which we have driven this 10% capability of our production to swing, is incredibly agile. We can often execute that in less than one 12-hour operating shift to meet the market demands.

Since 2010, this volatility has earned Tesoro $8 a barrel on average. During extreme price spikes Tesoro can earn as much as $60 a barrel, according to Casey. Since there are 42 gallons a barrel, this means Tesoro is earning as much as $1.42 per gallon of gasoline sold. That’s huge.

Whether Tesoro is artificially raising prices in California isn’t clear, but the company is certainly rewarded if it does. As Tesoro’s CEO Greg Goff put it, 2015 was “somewhat of an exceptional year, particularly in California.”